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Control of Well Limits How Much is Enough? Presented by: Special Thanks to: and Control of Well Limits How Much is Enough? Presented by: Special Thanks to: and G. S. Bryan & Associates, Inc.

COST OF CONTROL How does it work? 1 COST OF CONTROL How does it work? 1

Overview of Well Control Policy and Main Policy Sections § What and who does Overview of Well Control Policy and Main Policy Sections § What and who does the policy cover? § Unregulated forms; they all vary slightly – but generally the same § Sections – Well out of Control – S&P – Redrill – Sub limit for Care, Custody, & Control, 3 rd Party Equipment on Well site, including rig legal liability, sound location. 2

What Affects Losses? As product prices rise, then it is incentive to drill. So What Affects Losses? As product prices rise, then it is incentive to drill. So Operators drill more wells, So they can sell more product, So they can make more money, So they can hire more rigs, So they can drill more wells, Which requires still more rigs, Which “thins out” crews, and Wears out rigs………… All of which leads to more losses – And they are more costly than ever! 3

Blowout! 4 Blowout! 4

Scenario 1 – “Typical” Claim: Exploratory Well #1 TVD: 10, 000 Feet AFE: $1, Scenario 1 – “Typical” Claim: Exploratory Well #1 TVD: 10, 000 Feet AFE: $1, 000 Dry Hole Cost 100% Working Interest Insured by Operator Client (Insured) Rate: $0. 50 pfd = $5, 000 Premium Policy Limit $3 MM Each Occurrence (For 100% Interest) CCC Limit $500, 000 $100, 000 Retention Insured will pay costs related to Well Control. 5

WEEKS ONE and TWO: Expenses after the Blowout A Snubbing crew arrives, then after WEEKS ONE and TWO: Expenses after the Blowout A Snubbing crew arrives, then after three days, operator hires a Well Control Contractor. Total bills already $500, 000 in the first two weeks. Policy Limit $3 MM Each Occurrence Retention: $100, 000 (For 100% Interest) CCC Limit $500, 000 $500 k Costs of Control Fighting the Fire 6

WEEKS THREE & FOUR: Expenses after the Blowout An environmental remediation contractor is hired WEEKS THREE & FOUR: Expenses after the Blowout An environmental remediation contractor is hired to clean up Farmer Brown’s cattle tanks, fishing creek, and Hog pens. The invoice totals $350, 000. $350 k Policy Limit $3 MM Each Occurrence Retention: $100, 000 (For 100% Interest) CCC Limit $500, 000 $500 k Seepage & Pollution Costs of Control Fighting the Fire 7

 WEEKS FIVE through TEN: Expenses after the Blowout Well is under control. TX WEEKS FIVE through TEN: Expenses after the Blowout Well is under control. TX RRC leaves the operator alone, but the joint venture partners want the operator to replace the well to get whatever blew it out in the first place. After fishing and sidetracking for ten days the operator gives up, skids the rig over and starts over –another $1, 800, 000 to reach T. D. $1. 8 m $350 k Policy Limit $3 MM Each Occurrence Retention: $100, 000 (For 100% Interest) CCC Limit $500, 000 $500 k Costs of Control Fighting the Fire Restoration Redrill Seepage & Pollution 8

WEEK ELEVEN: Expenses after the Blowout Well achieves TD. Rental tool companies and various WEEK ELEVEN: Expenses after the Blowout Well achieves TD. Rental tool companies and various vendors to the original well ask the operator to pay for their equipment that was never recovered. “CCC” endorsement pays because the CGL won’t - $450, 000. Policy Limit $3 MM Each Occurrence Retention: $100, 000 (For 100% Interest) CCC Limit $500, 000 $500 k Costs of Control Fighting the Fire $350 k Seepage & Pollution $1. 8 m Restoration Redrill $450 k Care, Custody & Control 9

CCC – 3 rd Party Equipment on Site 10 CCC – 3 rd Party Equipment on Site 10

What Insured Paid Versus What Insured Got Paid: COST: Premium Paid for this Well: What Insured Paid Versus What Insured Got Paid: COST: Premium Paid for this Well: $ 5, 000 Retention born by Insured: $ 100, 000 Total Costs: $ 105, 000 RECOVERY: Costs of Well Control: $ 500, 000 Seepage and Pollution / Clean-up and Containment: $ 350, 000 Sidetrack, Restoration, Redrilling Expenses: $ 1, 800, 000 $ 2, 650, 000 Care, Custody, & Control (CCC): $ 450, 000 Less CCC Deductible: $ (50, 000) TOTAL RECOVERY: $ 3, 050, 000 [Policy Limit was $3, 000 excess of the Retention] [CCC Limit was $500, 000] 11

Scenario 2 – “Non-Typical” Claim: Well #2 TVD: 8, 000 Feet TMD: 8, 911 Scenario 2 – “Non-Typical” Claim: Well #2 TVD: 8, 000 Feet TMD: 8, 911 Feet AFE: $1, 850, 000 Dry Hole Cost 100% Working Interest Insured by Operator Policy Limit $15 MM Each Occurrence (For 100% Interest) CCC Limit $1, 000 $250, 000 Retention $100, 000 in respect of CCC. 12

Scenario 2 – “Non-Typical” Claim Day 1 -5 Well out of control below ground. Scenario 2 – “Non-Typical” Claim Day 1 -5 Well out of control below ground. Day 5 -9 Well out of control above ground. Day 10 -15 Fishing under pressure from the well. Day 16 -45 Rig Released, more fishing with snubbing unit. Day 46 -48 Operations suspended due to hurricane. Day 49 -77 Cement plugging, well pressure required multiple attempts. Well pressure required full plug and abandonment without salvaging original well bore. 13

Scenario 2 – “Non-Typical” Claim Day 50 -57 Spud Redrill Well, Set Surface Casing Scenario 2 – “Non-Typical” Claim Day 50 -57 Spud Redrill Well, Set Surface Casing @ 2719’. Day 58 -60 Drill to 7197’. Day 61 -73 Circulate well flow, open hole squeeze to counter lost circulation, no further progress drilling. Day 74 -79 Run 7 5/8’ int. casing to 6668’, cement, nipple up B. O. P’s, change out drill pipe, normal operations. Day 80 -88 Drill out of int. casing lose full returns, squeeze cement and kick off plug @ 6775’, all abnormal operations. Day 89 -93 Circulate gas cut mud, drill to 7873’, non routine drilling. 14

Scenario 2 – “Non-Typical” Claim Day 94 -96 Run 5 ½’ int. liner casing Scenario 2 – “Non-Typical” Claim Day 94 -96 Run 5 ½’ int. liner casing and cement same, varies from original well plan but required for hole stability and pressure integrity. Day 97 Drill out of liner casing, shoe test failed, squeeze cement liner casing seat. Day 98 Reinitiated drilling & encountered problems with liner hanger seal assembly. Day 133 Finally remedied & drilled to original loss depth 19 weeks after original loss date. 15

RECOVERY: Costs of Well Control: $ 8, 139, 000 Seepage and Pollution / Clean-up RECOVERY: Costs of Well Control: $ 8, 139, 000 Seepage and Pollution / Clean-up and Containment: $ Sidetrack, Restoration, Redrilling Expenses: $ 4, 443, 000 -0 - $ 12, 582, 000 [Policy Limit $15, 000 excess of Retention] Care, Custody, & Control (CCC): $ [CCC Limit was $1, 000] TOTAL RECOVERY: $ 13, 332, 000 750, 000 [Original AFE was $1, 850, 000] 16

Scenario 3 – “Non-Typical” Claim: Well #3 TVD: 21, 000 Feet TMD: 21, 900 Scenario 3 – “Non-Typical” Claim: Well #3 TVD: 21, 000 Feet TMD: 21, 900 Feet AFE: $28, 740, 000 Dry Hole Cost 100% Working Interest Insured by Operator Policy Limit $75 MM Each Occurrence (For 100% Interest) CCC Limit $1, 000 $750, 000 Retention $100, 000 in respect of CCC. 17

Scenario 3 – “Non-Typical” Claim Day 1 Well out of control above ground. Well Scenario 3 – “Non-Typical” Claim Day 1 Well out of control above ground. Well was at 20, 406’ depth. Day 2 -26 Extensive well control effort. Day 26 -40 Move rig off location, a side track of the original well. Day 41 -52 Rig up snubbing unit on another barge. Day 52 -94 Snubbing operation. Day 95 -289 Fishing operations. At this point, $72, 500, 000 had been expended in Control of Well costs. The Insured approached Underwriters to reinstate the policy limits prior to the redrill. 18

Scenario 3 – “Non-Typical” Claim Day 290 -430 Redrill to original loss depth. Redrill Scenario 3 – “Non-Typical” Claim Day 290 -430 Redrill to original loss depth. Redrill began 9 ½ months after original loss. This Redrill cost $21, 700, 00. Day 477 While redrilling below the 1 st redrill depth, the redrill well lost control. Second occurrence. Day 586 Second loss depth reached. Overall, the Redrill involved 2 sidetracks. 19

RECOVERY: 1 st Costs of Well Control: $ 72, 500, 000 Seepage and Pollution RECOVERY: 1 st Costs of Well Control: $ 72, 500, 000 Seepage and Pollution / Clean-up and Containment: $ -0 - Sidetrack, Restoration, Redrilling Expenses: $ 21, 700, 000 1 st OEE Claim: $ 94, 200, 000 2 nd Cost of Control / Redrill : $ 22, 685, 000 Care, Custody, & Control (CCC): $ 1, 900, 000 TOTAL RECOVERY: $ [Policy Limit $75, 000 excess of Retention] 23, 585, 000 [Policy Limit $75, 000 excess of Retention. Contained in 1 st layer] 20

Limits – How Much? ? ? § What is an “AFE” and how is Limits – How Much? ? ? § What is an “AFE” and how is it used to establish a Well Control Limit? § Other considerations for determining a limit. – Location – Well Pressure – Depth – Offset Well Data § Intangibles 21

“Anything that can go wrong, will go wrong. ” - Murphy’s Law Oilman = “Anything that can go wrong, will go wrong. ” - Murphy’s Law Oilman = Optimist Underwriter = Pessimist Hopes for the best Expects the worst Plan, Design, Plan Some More 22