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Editor’s Note: The past year has been as challenging as any in recent memory for U.S. independent oil and gas producers, as well as their allied service and supply companies. While oil and gas producers are at the mercy of commodity prices, they can exert control over their operations to manage risks inherent in exploration, drilling, completion and production workflows.
In a business where a single mistake can lead to disastrous consequences, risk management is a fundamental business necessity–regardless of whether the industry is experiencing good economic times or bad. How is the downturn impacting overall upstream risk profiles and oil- and gas-specific insurance coverages? What should oil and gas companies be doing to enhance their insurance programs and improve safety performance so they are better positioned for tomorrow’s inevitable upturn?
To find out, AOGR presented a series of questions to oil and gas insurance and industry training experts. Panelists are Eric Boquist, president, Travelers Oil & Gas; Matt Waters, chief underwriting officer, national insurance specialty-energy operation at Liberty Mutual Insurance; Leon Lagneaux, senior vice president of safety operations at Amerisafe Inc.; and Bill Mahler, executive vice president and general manager of Wild Well Control.
Questions are in italics, followed by the panelists’ responses.
Travelers Oil & Gas
Q: What are the defining trends in the upstream insurance market as a tumultuous 2015 comes to a close? What are your general expectations for 2016 with respect to coverage availability in the oil and gas industry? Are there any policy areas of concern that oil and gas companies should be aware of?
BOQUIST: The oil patch landscape has shifted greatly. With low oil and gas prices, there has not been as much investment in drilling activity, which means the exposure base has contracted. Payrolls are down, numbers of hours worked are down, and the number of wells drilled is down.
The oil and gas industry is a dynamic segment of the economy–technologies are always developing and changing, companies shift geographies to pursue new opportunities, and commodity price swings put pressure on companies to expand or contract operations to meet fluctuating demand.
As the industry alters, coverage needs may alter as well. The insurance industry has become remarkably adaptive over the years, and even more so in the oil and gas space. We are confident that as energy companies face new challenges, the insurance market will find ways to respond accordingly.
Q: What can operators expect in regard to insurance pricing in 2016? What types of coverages are expected to see declining costs? Are there policy areas or specific coverages where costs are increasing? What factors outside the industry could impact oil and gas insurance costs and coverages in the year ahead?
BOQUIST: While the oil and gas insurance industry remains competitive, the pricing environment appears to be stable. We believe each company we engage with is unique in how it operates, and that we serve each company best by taking a risk-by-risk approach to rating insurance costs. That means taking a granular view of each line of coverage to adjust our thinking and approach according to each insured’s risk characteristics.
One of the biggest factors outside the industry that is impacting the oil and gas insurance market is the increasing cost of medical care. Healthcare costs make up a major portion of the expenditures in the U.S. economy, and they are projected to grow from about 18 percent of gross domestic product to almost 20 percent in 2021.
This growth will be driven, in part, by the aging population. Baby boomers are getting older. More than 10,000 people are expected to turn 65 each day over the next 19 years, and the percentage of the population eligible for Medicare is growing from 10 percent in 2010 to 20 percent in 2020.
At the same time, the birth rate is down. The effects of these two forces–a larger elderly population and fewer young people–will result in far fewer individuals to contribute to Medicare and support the demands the older generation is placing on the system. Pressure from increased demand on the U.S. healthcare system is likely to have a number of adverse effects, including an increase in medical costs as demand exceeds supply.
For insurers, medical is frequently the largest single casualty loss-cost driver. Medical also is the most dynamic of the property/casualty cost drivers, since it is impacted by so many environmental factors (federal and state legislation, changing demographics, the changing healthcare delivery system, etc.).
In addition, the aging workforce, overuse of pain medications, and the regulatory environment all impact workers’ compensation medical costs. With workers’ comp and general liability being long-tail lines of business, they are particularly sensitive to future medical costs and the factors that impact them, which have to be taken into account in pricing.
It is critical to partner with an insurance carrier focused on strategic management of these issues–a carrier with the resources to innovate and develop new strategies to manage this growing and evolving driver of costs to the customers’ businesses. We understand the importance companies place on effectively managing the medical component of workers’ compensation and other property and casualty claims. Travelers manages more than 250,000 workers’ comp claims a year and employs more than 500 nurses in 21 full-service claim centers.
One of the ways we are helping to manage the cost of a company’s workers’ comp program and to ensure the company’s injured employees are able to return to work as soon as medically appropriate is through our ConceirgeCLAIM™ nurse program. This program provides personal assistance to injured workers to help them through the workers’ comp process, and has helped to reduce the amount of time for workers to return to work by 40 percent. We have doubled our number of sites to more than 60 locations across the country.
Q: Oil and gas insurers have developed comprehensive programs to specifically address the additional risks in multiple-well pad operations. Low commodity prices obviously have diminished activity, but the complexities of pad operations are only increasing, with longer laterals, tighter spacing, more condensed activity within “high-graded” sweet spots, greater emphasis on efficiency (tighter scheduling and concurrent activities), etc. What are the biggest risk factors in pad operations? How are insurers responding to the needs of pad operators in the context of the current business environment?
BOQUIST: Multiwell pad operations bring several of these hazards onto the well site at the same time. Some of the biggest risk factors we see include well spacing and design, the concentration of property and assets, improper maintenance and inspection programs, poorly coordinated job sites, and inadequate emergency response planning.
Greater well spacing can give emergency response crews more room to operate in the event of a fire or blowout during drilling/completing and production phases at a multiwell site. Installing remote shut-off valves on producing wells can mitigate the possibility of an incident spreading to neighboring wells.
The risk at poorly designed sites is considerably higher because of the “domino effect” that can exist during a blowout scenario. It is important to keep the incident from cascading to adjacent wells. Managing the domino effect from one well to another in close proximity is essential to mitigating risk in any multiwell incident.
Significant property damage can occur on poorly managed multiwell pad operations with improper site design and maintenance. That is because multiwell pads generally have a higher concentration of assets than traditional single-well sites during both drilling and completion. The accumulation of equipment such as frac tanks, trucks, pumps and equipment can resemble a crowded city and be worth tens of millions of dollars. Even a small incident on these sites can spread easily to other assets and quickly escalate to a large-scale event.
In addition, if equipment is not maintained well and inspected regularly, the likelihood of an incident occurring increases the potential for damage to the multiwell pad and nearby equipment. This means it is even more critical to inspect piping, valves and any other equipment in use at a multiwell pad operation.
Contractors and operators should institute rigorous inspection programs with written record keeping to note inspection frequency, and comprehensive equipment maintenance to help avoid breakdowns and potentially dangerous situations. Access to spare or replacement parts for key machinery is recommended also to limit possible business interruptions.
Site coordination is a critical component of any multiwell pad installation. The operator should have a detailed written plan explaining the execution of the site. Coordinating all facets of well construction and completion is critical to a successful project.
The responsibility for effective communication is in the hands of the operator. Every contractor on site should be well aware of the stage of construction the job is in and its responsibilities. Safety on a multiwell pad requires that all groups communicate and know the hazards of work occurring next to them or nearby, and coordinate accordingly. A lack of adequate communication can lead to significant loss, including damage to equipment and potential loss of life.
Finally, one of the most important safety items is the multiwell pad site’s emergency response plan. This is especially true if many smaller contractors are involved. The plan ensures that each contractor does not react independently, which could create additional confusion and increase the danger to themselves and others. Without centralized oversight of contractors, the potential for a communication breakdown is even greater.
Insurers are responding by getting involved in the early stages of planning to help identify potential problems at the outset and provide solutions in the event of an incident. With the shifts to the production process and hydraulic fracturing over the past decade, and the increasing value of on-site equipment, insurers are working closely with operators and contractors to review their exposures for property, liability and contract liabilities against existing coverages and limits to help ensure they have the proper coverages in place.
Q: By necessity, oil and gas companies are focused on improving the efficiencies and cost structures of all aspects of their operations. As operators set their 2016 capital budgets, how can they better tailor insurance programs to meet the particular needs of their planned activities?
BOQUIST: When forced to make the tough calls, such as deciding where to cut costs and figuring out how to make sound business decisions, it helps to have access to as much good advice as possible. Working with a skilled insurance agent and carrier that specializes in the oil and gas industry–and understands how changing cycles affect business operations–can greatly support a company’s efforts to maintain strong operations in the face of financial challenges. After all, the more informed a company is, the better decisions it will make.
Be selective about partners; no company operates entirely on its own. Managers can help direct their companies toward partnerships that add value through specialized services. For example, look for an insurance partner that provides training for employees, access to advice, and in-house expertise on how to help an oil and gas operation run as effectively and efficiently as possible. Most importantly, know who you are doing business with.
Despite the financial pressures, owners and operators have an opportunity to take advantage of the “lull” in activity to make investments in the future by:
Managing risk is a key underpinning for financial success and sustainability. By taking steps to access training, audit safety and prepare for emergencies, an oil and gas operation has the best chance to not only survive, but thrive in the future.
Liberty Mutual Insurance
Q: Insurers continue to respond to the needs of evolving drilling and completion practices, technology innovations, and the broader business climate. How would you characterize the state of the oil and gas insurance market? How it is being impacted by the downturn in upstream activity? Are there new insurance products or policy changes of particular importance to independent oil and gas companies?
WATERS: I would characterize the oil and gas insurance market as soft, and would draw a parallel to what is going on in the oil and gas market itself. Both industries are dealing with oversupply–insurance with capacity, and oil and gas with hydrocarbons.
For oil and gas producers, this has led to job cuts, reduced hours worked and lowered revenues, all of which–combined with insurance capacity–has lowered insurance premiums. It is interesting to note, however, that insurers are keeping roughly the same level of risk, but with reduced premiums, since output has remained generally where it was.
Innovation in the energy insurance market is seen most clearly in underwriting risk, rather than in new products. There always has been a wide range of coverages and value-added loss prevention services. Innovation comes in the way an insurer partners with brokers and energy buyers to translate the carrier’s broad energy experience, coverages and services to develop a custom plan aimed at better managing the specific account’s total cost of insurance.
For example, consider a hydraulic fracturing contractor with a large fleet. If the company is not running all its units, the insured likely is paying for coverage it may not need, since pumps, trucks and other vehicles are idle and producing no real over-the-road exposure. The broker, buyer and insurer should develop an insurance program focused on the account’s actual needs. In this case, perhaps the commercial auto policy could reflect miles driven, rather than units operated.
I do not believe all buyers and brokers fully realize the value available from carriers. Some offer loss control services that can help prevent general liability, commercial auto, workers’ compensation and other claims by proactively improving safety. While always important, these margin-protecting services become even more critical as revenue falls.
Q: The catalyst for U.S. onshore activity has been growth in horizontal shale plays. However, with lower commodity prices, conventional vertical targets are getting renewed attention, and many independents are looking at the potential of applying drilling and completion methods pioneered in shale plays to conventional geologic settings. How do the risk profiles differ for horizontal unconventional and vertical conventional projects onshore, and what are the implications for insurance coverages? How does adopting “shale play techniques” (such as multistage completions in vertical wells) change insurance requirements in conventional plays?
WATERS: The big difference is that horizontal unconventional projects require higher pressure, more water, longer wellbores, more perforations, and other techniques that increase the margin of error, and therefore, potential risk exposure. Consider a multistage fracture that requires several perforating zones. This increases the handling of explosives and presents more opportunities to perf the wrong zone, both of which potentially could lead to insurance-triggering events.
The activities linked to fracturing have created controversy and public concern. The scientific accuracy of much of the alleged “dangers” of fracturing reported in the press is in question, given the depth of wells and the way shale formations between lateral strata and aquifers act as impermeable buffers. However, if an exploration, drilling and production company moves up the wellbore, bringing it closer to aquifers, and applies more perfs and higher pressure, these concerns potentially may become more valid.
The impact on insurance likely would be seen in the contracts between the operator and the contractor. As techniques developed for horizontal plays are used in more traditional vertical wells, there likely will be changes in risk transfer and ownership, particularly within a contract. This will impact underwriting and risk-mitigating best practices.
Applying horizontal techniques to vertical wells also may result in busier drilling sites and the need to reinforce the casing of existing wells to meet the higher pressures involved in fracturing. Both of these will present unique insurance challenges that should be reflected in the operator’s risk management program.
Q: As companies strive to reduce costs and improve capital efficiency, what advice would you offer operators to streamline their insurance costs while ensuring adequate protection and avoiding potential coverage gaps? What steps can insurers take to help operators improve their risk management programs?
WATERS: Developing effective and efficient insurance programs requires focusing on value; that is, better managing the total cost of insurance. This is best achieved when buyers, brokers and insurers partner to identify all the risks an oil and gas company faces, given its specific operations and market conditions, and then develop a plan to manage and mitigate those exposures.
Buyers should look for insurers that offer a range of services, coverages and industry experience to help better manage total insurance costs. Liberty Mutual Specialty Energy, for example, provides loss control on all accounts, from fracturing checklists to driver selection tools, to help improve safety and prevent general liability, commercial auto, workers’ compensation and other accidents that needlessly harm individuals and the bottom line.
In addition, buyers should make sure brokers and insurers fully understand the firm’s commitment to safety and its safety program. Such transparency helps underwriters assess and price risk, potentially leading to better pricing and faster quotes. When an insurer encounters a prospect that is not clear about its safety program or interested in value-added safety services, it likely raises concerns and questions about the risk.
One of the most impressive submissions I have seen was from a fracturing contractor in North Dakota. The company opened the door to underwriters and the public so each key constituent could see the entire process and ask questions. That company was very confident in its operations and risks, and that was reflected in the underwriting process.
Q: How is the decline in upstream activity affecting the workers’ compensation insurance market for small- to midsized companies? What are the overall trends in worker safety incidents in exploration, drilling and production operations? What do you expect for the workers’ comp market in the year ahead, especially in regard to pricing?
LAGNEAUX: Since a workers’ comp premium is a direct product of payroll, the downturn has had a negative impact on carriers that write this coverage. While there is a decline in premiums, there also is a decrease in claims with fewer people working. If the oil and gas industry has managed to keep its more tenured, experienced workers employed, the reduction in claims should be greater than the decrease in premium on a relative basis. Experienced workers tend to have fewer claims than inexperienced employees.
As far as injury trends, we find that the nature of the accidents hasn’t changed very much. We continue to see vehicle accidents as the leading cause of loss, followed closely by the manual handling of materials.
Most observers of the workers’ compensation industry expect pricing to trend downward over the next 12-24 months. There are two principle driving forces in play. First, the underlying loss costs approved by regulators are trending down, following several years of improving loss frequency and moderating medical cost inflation. Since these loss costs are the building blocks of premium rates, lower loss costs will mean lower rates.
Second, the contraction of the workforce coincides with an increase of available capital in the workers’ comp industry. It is a straightforward case of excess supply and limited demand.
Partially offsetting these downward pressures are two factors. First, insurance companies are very dependent on investment income. Low interest rates put pressure on carriers’ financial resources. Second, underwriters may be hesitant to write policies in a sector of the economy that is experiencing reduced employment, fearing an increase in claims duration as in the recent recession.
Q: By the nature of its operations, the location of its work sites, and the numbers of contracting parties on site, the oil and gas industry presents unique insurance risks. How are workers’ comp risk profiles changing? What specific industry activities present the highest general risks? How do relatively new practices such as multiwell pad drilling and completion impact the risk profile?
LAGNEAUX: In order to be competitive and remain a preferred vendor with an acceptable experience modifier for operators, service companies have put more emphasis on training their workers and changing their safety cultures to increase employee involvement and ownership in the safety process. Supervisors must be better trained to recognize at-risk behaviors that can cause accidents, and be held more accountable for the results at the crew level. Companies should allocate more in their budgets for safety training and give safety directors more decision-making authority.
While all this is positive, accidents still happen. We often find that accidents happen when employees are performing tasks that bring them out of their “comfort zone.” An example would be rigging down and up, and moving the equipment.
Multiwell pad drilling not only makes the operator more efficient by reducing many costs associated with drilling, but also reduces the exposures found in rigging down and moving. Employee turnover is decreased as roughnecks often decline to follow a rig to a new location when distance is an issue. Service companies can perform the well site work with fewer employees, since they are not as spread out.
Q: The service sector certainly is feeling the impact of low oil prices. What advice would you offer service companies with regard to their workers’ comp programs in the prevailing business environment? What can the operator and his allied service companies do both individually and collectively to optimize safety on the well site?
LAGNEAUX: As service companies struggle to remain profitable, it is inevitable that cost containment becomes a priority. Unfortunately, companies that choose to cut their safety budgets will pay heavily for that decision down the road. My advice would be to recognize safety as an inherent value and cost saver rather than an expense.
Any downtime should be used to provide refresher training and equipment inspections. Companies should make sure their decision makers are visibly supporting their safety efforts so that all employees understand their importance. Any incentive program should be structured to prevent accidents and their causes from being purposely unreported in order to win a prize.
Q: The influx of new hires into the industry obviously has slowed in step with activity levels, but U.S. Department of Labor statistics show that oil and gas employment expanded by 40 percent between 2005 and 2015. What do the data indicate about the correlation between workers’ comp claims and employee experience? How can companies ensure that new hires can perform their duties safely and effectively?
LAGNEAUX: Our records clearly show that new hires in their first year of employment have more injuries that those with more tenure. In fact, most of the first-year injuries occur in the first three months of employment.
I think companies not only need to emphasize and review their new-hire orientation processes, but also should set up “buddy systems” that pair new workers with more experienced employees for several months to ensure the new hires are familiar with their job tasks and can perform them safely. Most accidents happen because of at-risk behavior, rather than a dangerous condition. Watching a safety film and being released unsupervised to perform dangerous work is clearly not enough.
Wild Well Control
Q: The industry has put forth considerable effort to develop and standardize rig and well site safety training programs. What major lessons have been learned through this process, and what are the trends and challenges in equipping the next generation of oil and gas operating personnel with the knowledge and skills they need to safely handle situations encountered in the field?
MAHLER: All of us together are smarter than one of us alone. By creating a synergy of thought, concept, practice, protocol and training, the industry is working diligently to develop a more comprehensive training matrix that produces a student who is better prepared and skilled to resolve a well control problem.
The new and improved WellSHARP™ well control certification program from the International Association of Drilling Contractors is an example of the efforts being made to enhance the learning/training experience. In addition to educating students, the goal is more importantly to gain proficiency in job skills as they relate to well control and other safety aspects at the well site.
One of the largest challenges going forward will be to develop curriculum/methodologies that must be incorporated to enhance the training of a younger and more diversified workforce. In recognition of these challenges, Wild Well is implementing the most modern, effective training methodologies and classroom learning technologies, such as virtual equipment modeling. By blending this technology with proven training methods into a new format that incorporates stimulating techniques such as hands-on simulations of real well scenarios, we will build a better skill set in the new workforce.
Q: Technology has significantly impacted delivery methods for all types of training. How do you see technology impacting the ways in which training courses are taught and certification is updated and verified? How big a role should hands-on, face-to-face instruction play in drilling and well control training? How about computerized drilling and workover simulations?
MAHLER: New instructional technology affords the instructor a multitude of methods to facilitate a class. Consider that material is best absorbed and retained when it combines visual, auditory and kinesthetic learning devices. By using animations and virtual models, students are able to see, hear and manipulate a virtual blowout preventer, providing them with a better understanding of its purpose and function.
IADC’s WellSHARP well control certification process tests the student, provides the certificate for passing students, assists the instruction provider with analytics, and tracks student certification. It also provides a report identifying skill sets that may be lacking or need additional training by the student.
For instructors, the training analysis provides feedback to assist them in identifying weak points in the students’ knowledge that can be reinforced. This access to analysis has been a tremendous asset that aids in both student and instructor development.
Today’s well control students like to control their educational process, and they generally learn best with hands-on applications. This “Xbox™ generation” learned to manipulate virtual environments at an early age, so harnessing that seemingly innate ability to enhance well control training makes sense.
To maximize the learning and skill-building process, these students learn best with a facilitated discovery process. Instead of lecture, students are encouraged to realize the concepts taught through using simulations. While well control simulations provide visual references and help students learn concepts, students must be able to gain additional training at the well site with a true hands-on or on-the-job training approach, linking the concept to the skill.
To complete the best training available for today’s students, we must make qualified mentors available at the well site to complete the training cycle. While well-designed virtual modeling/simulations work in the classroom, training must be continued at the well site to provide the best model for learning.
Q: How is well control curriculum being updated and developed to meet the industry’s changing needs? For example, how are multiwell horizontal pad drilling onshore or high-pressure/high-temperature operations offshore influencing well control training and equipment requirements? In addition to certification courses for new employees, what types of specialty courses are available for experienced industry personnel interested in further developing core expertise or focusing on a specific discipline?
MAHLER: For the majority of our students, we must focus on the basics of well control. For drillers, our goal is to teach them to recognize kicks or other problems in the wellbore and then simply shut in the well. As oil field workers’ careers progress, the level of training intensifies to learning the more complex well kill methods, recognizing and mitigating risks associated with well control, resolving issues while drilling ahead, and maintaining a safe work environment.
Proficiency and skill sets improve constantly when working at the well site. As the career progresses, the individual requires more advanced well control training, usually in a very specific drilling environment such as high-pressure/high-temperature, managed pressure drilling, dual gradient, etc.
Wild Well has developed advanced curriculums that address specific drilling environments. We also have had our well control engineering group work with our training group to develop “drill well on paper” training, using simulation exercises based on the planned drilling task.
But to answer the question, yes, we must address new technology advances in the rig’s capabilities, the drilling plans, the well’s environment, and so forth. We also must address specific well control risks and challenges no matter what changes happen.
The students taking the advanced curricula in well control are expecting to learn something new in each class. You have to be prepared to address the needs of the two-year, five-year, and 15-year experienced personnel–all in the same classroom setting. It is in these advanced curricula that students must analyze the situation, determine the root cause of the challenge, and propose a reasonable best practice solution.
Q: After a sustained period of expansion, drilling and workover activity is in the midst of a severe contraction. How are these business conditions impacting the readiness of industry personnel, and what are the implications for the future? Should companies utilize the activity downturn to make sure their employees are properly trained?
MAHLER: The answer is a resounding yes! Training costs dollars. Accidents cost more. Risk evaluation and mitigation are at the forefront of many operators’ well planning sessions. Having a properly trained and skilled workforce greatly enhances the mitigation of risks associated with drilling oil and gas wells.
The one thing we have learned is that training–specifically well control training–is never completed. There always will be new technology and new challenges that must be addressed, and training provided for, in order to have a well-trained workforce.
One concern going forward is identifying drilling and operational personnel who can become well control instructors. We know the industry will come back at some point, and we foresee a large increase in demand for well control and advanced training when it does. This increase will be from the new workforce that will be employed to work in the offices and at well sites.
We must be prepared with experienced and trained well control instructors. Teaching well control is not simply giving a lecture; it requires much more in today’s teaching environment of the younger workforce.