Energy source

Global Special Risks brings skill and savvy to the complex oil and gas market

By Elisabeth Boone, CPCU

Global Special Risks executives (left to right) are: Sam Veltri, Senior Broker; Rick Burns, President; and Matthew Begnaud, Senior Broker.

Some of us remember a time when no one seemed to worry about energy: its sources, its cost, or its availability. Most ordinary Americans had a "what, me worry?" attitude about energy and assumed that the supply would always be plentiful and cheap.

That dream was shattered in December 1973 when OPEC (the Arab-dominated Organization of Petroleum Exporting Countries) imposed a full oil embargo against the United States and other countries that had provided support to Israel in the Yom Kippur war of October 1973.

OPEC's move spurred a full-blown energy crisis in the United States and Europe. As OPEC cut production and raised prices, people in western nations were forced to endure gasoline shortages, rationing, and price gouging.

The embargo was lifted in March of 1974, by which time oil prices had quadrupled. By the 1980s OPEC's influence on oil prices had dwindled, and Middle Eastern oil was once again readily available—at 10 times what it had cost before the embargo. Americans no longer had to wait in miles-long lines to buy three gallons of gas, but they did have to adjust to the "new normal" that came to be known as "pain at the pump."

Forty years later, pain at the pump is now endemic, with gasoline prices seesawing wildly from day to day for reasons most Americans don't understand. Since the embargo, the United States has been keenly focused on discovering and exploiting domestic energy sources, with operators using sophisticated techniques to extract oil and natural gas from locations that previously could not be tapped.

Risky business

Sophisticated techniques notwithstanding, oil and gas exploration, extraction, transport, and processing are extremely risky operations. For the entities that engage in these and related activities, every day carries the potential for a wellhead fire, a refinery explosion, or a catastrophic oil spill like the Exxon Valdez in 1989 and the huge BP event in 2010.

Identifying and managing these risks is a complex specialty that demands a high level of technical expertise and strong relationships with stable markets that specialize in energy risks.

Bringing those vital qualities to the table is Global Special Risks, LLC (GSR), a managing general agency and wholesale broker that provides insurance and risk management services to energy, marine, and specialty risks. Ryan Specialty Group, LLC (RSG), acquired GSR last year from Willis North America and now operates it as a unit of RSG Underwriting Managers, LLC. GSR has offices in four major energy centers: Dallas, Houston, New Orleans, and Calgary.

Established in 1979 as a London market coverholder, GSR continues to work with the London market. Through these underwriters, GSR places a range of products that include well control, comprehensive general liability, professional liability, excess liability, contractors equipment, business interruption, cargo, and maritime employers liability.

Oil and gas operations are classified as upstream, downstream, or midstream. Global Special Risks specializes in underwriting exposures associated with upstream operations: exploration, recovery, and production. Midstream operations consist of gathering at the wellhead, transporting to the processing plant, and processing itself. Midstream operations are often included in downstream activities, which involve the refining, sale, and distribution of oil and gas products.

Challenge and change

"This is an exciting time to be in our end of the energy business," says Rick Burns, president of Global Special Risks and a 27-year veteran of the energy insurance industry. "There are a lot of challenges and issues that are new to us and that we did not contemplate five years ago. These involve the pursuit of oil and gas in the shale formations that are found in certain parts of the country."

The key to success in this pursuit is the drilling technique known as hydraulic fracturing. Known colloquially as "fracking," this is a method that allows operators to extract fuel from shale that is known to be rich in oil or gas but that was uneconomical to access until the development of modern hydraulic fracturing. The technique involves the creation of fractures in a rock layer by the injection of highly pressurized hydraulic fracturing fluid. The new channels in the rock can increase the rates of extraction for oil, gas, and other hydrocarbons.

"This new technology is bringing a lot of changes to the oil and gas industry," Burns remarks, "and we on the insurance side are having to respond to it. We're going through our own research and development process to find solutions for the exposures created by hydraulic fracturing and other new extraction methods.

"On the insurance side, we've seen increased loss activity that we're not used to seeing in the completion phase on wells," Burns observes. "Normally we deal with risks during the drilling phase. Fracturing is not a new process; it's used in every well that's drilled. It's how operators are applying that technology that is affecting exposures. Fracturing is done in several stages—as many as 30 in a well, whereas previously it was done in a single stage," Burns explains. "The pressures go up as high as 10,000 pounds, and they're applied 15 to 30 times at a well depending on the particular shale formation. Twenty years ago, the completion phase involved only nominal risk, whereas today drilling is less of a risk than the completion phase."

Burns points to another change in energy exploration and drilling that is significantly changing the risk picture. "In the past, it was rare to see a drilling rig within city limits. Today rigs are located close to residential subdivisions and commercial properties. This trend started at the Barnett shale in Forth Worth, and wells now are being drilled at the Dallas-Forth Worth airport property," he says. With rigs situated in the heart of some communities, insurers and intermediaries are challenged to develop strategies for exponentially increased risk, especially on the liability side.

Although viewed as a positive development for the energy industry and for consumers who will benefit from lower prices, hydraulic fracturing is criticized in some quarters based on claims that the technique's byproducts contaminate groundwater, soil, and air as well as causing illness in humans and animals. In some instances, Burns remarks, the technique has been blamed for causing minor earthquakes in drilling areas. In response to the concerns of environmentalists and people who live on or near land where hydraulic fracturing is conducted, the technique has come under scrutiny by regulators and legislators in some states.

Without doubt, Burns says, "The environmentalists have made an impact, and it's caused the oil and gas companies to look closely at their practices and how they apply this new technology. The companies are committed to getting the technology right," he asserts. "That's a good thing for the companies, for consumers and local residents, and also for insurers," he says, noting that the heightened focus is helping to clarify the exposures associated with new drilling technologies.

The blowout risk

Although Global Special Risks has the expertise and markets to address a variety of energy-related risks, it focuses principally on insuring blowout exposures, Burns says. When a blowout occurs, the rig operators lose control of the well because of fire, explosion, or both.

"Blowouts are of two different types: above ground and underground," Burns explains. "Both are equally dangerous and damaging, but the environmental damage in an above-ground blowout far exceeds that from an underground event." In a major above-ground blowout, workers may be injured or killed and property damage can be severe to the point of destruction.

In terms of blowout incidents, Burns remarks, 2012 was a good year for the energy industry. "We saw some events, but none were catastrophic, and the industry seems to be doing a good job of policing itself."

From an insurance perspective, Burns says, "The oil and gas insurance community is small, and many of the coverage forms are similar. Today most forms still focus on risks during the drilling phase as opposed to the completion phase, and coverage must evolve to address the increased risks associated with completion. I believe the market is aware of this need and is moving in that direction. As I mentioned earlier, we on the insurance side are in the research and development phase as the risk picture changes in light of new technologies."

Exclusive programs

The majority of GSR's upstream oil and gas coverage is placed through exclusive programs in London markets with which GSR has long-standing relationships.

Global Special Risks offers two operators extra expense programs for independent oil and gas lease operators.

"The operators extra expense coverage has three main components," Burns says. "First, in the event of a blowout it pays the cost of bringing in firefighters to control the well. Second, it pays to re-drill the well or restore it to the condition that existed just prior to the blowout. The third main component is coverage for seepage and pollution."

Both programs combine insurance and loss prevention and mitigation services in one product. Both programs provide operators extra expense, commercial general liability, umbrella, and physical damage coverage.

Through an exclusive alliance with Boots & Coots Services, a leading well pressure control company, insureds receive an integrated suite of loss control and prevention services; in the event of a loss, Boots & Coots provides emergency response services and general contracting.

The Wellsure® Program is designed for land-based oil and gas lease operators worldwide with both onshore and offshore exposures. Coverage is placed through Lloyd's with limits of up to $50 million for operators extra expense. Additional limits are available if requested.

The Upstream Solutions Energy Program is designed for energy exploration and production risks with operations based in North and South America. The program targets primarily operations based on land but can provide coverage for certain wet locations. Also placed at Lloyd's, coverage is available with limits of $35 million for operators extra expense.

Jonathan Smyth, GSR's executive vice president, explains why the firm offers two operators extra expense programs. "Upstream Solutions is aimed primarily at North American operations and is targeted to risks that are considered to be at the lower end of the hazard continuum based on the characteristics of the geological formation in which they will be drilling," he explains. "The Wellsure program is for operations that involve a higher level of risk, including offshore operations and wells that will be drilled under high pressures and high temperatures—risks where the costs of a loss will be much higher than is the case for the operations we target with Upstream Solutions."

Its exclusive relationship with Boots & Coots, Smyth observes, gives Global Special Risks a significant advantage in the marketplace. "After a well has blown out, our policy has unique wording. Instead of the traditional 'indemnification' wording, which is used in all of our competitors' policies, our policy says: 'Underwriters will pay on behalf of the insured.' Under an indemnity policy, the insured has to handle the loss the best way it can, employing the necessary contractors and subcontractors," Smyth explains. "They have to pay those contractors, and at that point they seek reimbursement from their insurer.

"For our insureds, Boots & Coots acts as the general contractor when a well blows out," he says. "The insured still has the ability to make all the pertinent decisions about its well, but it receives guidance from people who are the foremost experts in this kind of situation. After a complex blowout, there may be more than 200 different kinds of contractors on the site, and handling their invoices is a massive logistical challenge. Boots & Coots manages the process, organizing the invoices according to coverage under the policy and then presenting them to the adjuster. Once approved, the invoices are paid directly by the underwriters to the contractors and subcontractors," Smyth continues.

"This is a huge advantage for the insured, because most insureds have never had a loss and have no idea how to deal with one: what contractors to hire, what equipment to lease, how to deal with regulatory authorities, and how to manage cash flow. A major loss is an overwhelming challenge, and through Boots & Coots we're able to offer our insureds the assurance that all phases of recovery and adjustment will be expertly handled," Smyth remarks.

More on the menu

Other GSR programs are a subsea facility for underwater equipment, a general equipment facility for onshore equipment, and facilities for cargo and rig physical damage. A marine package facility provides general and professional liability coverages to energy consultants such as engineers, surveyors, geologists, and loss adjusters.

"We've recently re-launched this product to focus on the engineers and consultants who work in the shale drilling area," Burns says. "Our New Orleans office did a great job of identifying this need. We're confident that shale drilling will be a vital part of the U.S. energy scene for many years to come."

An upstream/midstream property facility at Lloyd's provides insurance and reinsurance for real and personal onshore property, including drilling rigs as well as owned and rented equipment and related property. In addition to physical damage, coverage includes extra expense, expediting expenses, business interruption, loss of hire/earnings, terrorism, and removal of wreck or debris. Limits to $30 million are available, and higher limits can be provided if required.

A maritime employers liability program provides coverage for most soft and hard energy and marine risks where duties do not involve acting as captain or crew of a specific vessel. Eligible classes include marine construction, drilling contractors, pipeline construction and repair, seismic work, and oil lease work by a contractor. Written through a domestic carrier, the program offers limits to $1 million with higher limits available.

Gaining an edge

When it comes to competitive advantages, one that ranks high is being part of the Ryan Specialty Group. A passionate advocate for the MGA/MGU segment of the specialty market, Patrick Ryan is renowned for his keen judgment and his scrupulous attention to the details of due diligence.

That said, Burns points to two further advantages that Global Specialty Risks enjoys in the marketplace. "First, we have many employees of long tenure who have depth of knowledge of the industry we insure," he says. "For example, Jon Smyth has been involved in the energy insurance field since 1978, and I began my career in 1985. Our vice presidents, Debbie Maddox and Ken Francis, who are based in our Dallas office, both have more than 30 years of experience in the oil and gas industry. Our secretary-treasurer and chief administrative officer, Helene Cerise, CPA, in the New Orleans office, began her career in 1984 and has been with GSR since 1989."

GSR's second key advantage, Burns says, "is our policy issuance and claims handling system. We're very proud of the processes we have in place. Our underwriters look to us for guidance, especially during this challenging period of change in the energy industry, and our clients count on us to give them products to address the risks they face in this evolving market."

For more information:

Global Special Risks, LLC

Web site: www.globalspecialrisks.com