A Typical Loss of Production Income (LOPI) claim - IMUA

HYDROFRACKING 

The scope and magnitude of the process, 

inland marine exposures/issues, 

and community impact. 

MatthewsDaniel 

Houston

Personal Background 

Daniel C. “Dan” Mason 

• Bachelor of Science in Petroleum Engineering, The University of Texas, 1986 

• 26 years of oil & gas experience 

• 12+ years of oil & gas well operations experience in 

• Drilling planning and execution; 

• Production management and well workover; and, 

• Facility maintenance and construction. 

• 13+ years of onshore and offshore energy claims adjusting experience 

• Well control / underground crossflow; 

• Offshore structures; 

• Property / oilfield equipment; 

• Upstream facilities; and, 

• Handy with power tools. 

HYDROFRACKING – The scope and magnitude of the process, inland marine exposures/issues and community impact. Slide No. 2

Company Background 

MatthewsDaniel is an international energy (onshore, offshore 

& marine) insurance claim adjusting & surveying company. 

I work in the Loss Department, adjusting claims. 

Claims we are typically assigned to review include: 

• Physical Damage / “Hull & Machinery” / Cargo 

• Operator’s Extra Expense 

• General Liability 

• Business Interruption 

• Loss of Production Income 

• Loss of Hire 

We will briefly describe each of these claim types. 


OBJECTIVES 

‣ To discuss energy claims which may arise for the Inland 

Marine Insurer, with emphasis on 

• Physical Damage / Hull & Machinery 

• Operator’s Extra Expense 

• Drilling Operations 

• Onshore Drilling 

• Hydraulic Fracturing Process 

• Concerns 

• MatDan Claims Experience 

‣ To address your questions 


Energy Insurance Adjusting / Surveying 

Energy Claims 


Houston 



Physical Damage / Hull & Machinery 

Typically, we receive claims for Named Peril or “All Risks” 

coverage 

• Named Peril requires transpiry of a peril named in Policy 

• “All Risks” provides cover, except where excluded in Policy. 

• Replacement Value v. Actual Cash Value (ACV). 

• Limits per Scheduled Value in Policy for assets. 

• Subject to a “per incident” Deductible/Retention/Excess. 

• Named Windstorm coverage available . 

When a major Gulf of Mexico hurricane makes landfall in 

Mississippi, Louisiana or Texas, we usually get very busy! 

Offshore, inland marine and onshore assets are all at risk 

during the passage of a hurricane. 


Collapse of an Offshore Production Platform 


Fire Damage to MODU Drilling Package 


Barge / Tug Allision with Pipeline 


Barge / Tug Allision with Pipeline 


Operator’s Extra Expense 

…or Control of Well insurance. Provides a package of 

coverage for well operation control incidents. 

• Provides cover for the following costs: 

• Control of Well – control a “well out of control” per provisions 

• Restoration / Redrill – resulting from “well out of control” 

• Seepage & Pollution – resulting from a “well out of control” 

• Possible Endorsements: Care, Custody & Control, Evacuation 

Expenses, Turnkey Drilling, Making Wells Safe 

• Limit(s) as described in the Declarations, per incident. 

• Subject to a “per incident” Deductible/Retention/Excess. 

• Subject to “Due Diligence”, “Warranty”, and “Exclusions” 

provisions in the Policy. 


Well Control / Barge Rig Damage 


General Liability 

• Separate insurance policy to protect the Operator or ship 

owner from claims (and/or lawsuits) from third parties. 

• When a liability claim is made, the insurance carrier has 

the duty (and right) to defend the insured. 

• We do not frequently receive these claims, but are well 

suited to provide valuable technical assistance to Insurers. 


Oil spill containment boom 


Business Interruption (BI) 

Provides compensation to the Operator / Vessel Owner for a 

shortfall in the ability of the asset / facility to earn income, as a 

result of a Named Peril (i.e. Physical Damage, etc.) 

• Typically subject to a “Waiting Period” number of days 

before BI cover will commence. 

• BI coverage specifies a Limit value. 

• Expediting / Mitigation Costs may be applicable. 

• Typically a very complex calculation which evaluates preincident 

& post-incident costs and income. 

The Adjuster (and / or a forensic accounting firm) will typically 

review the circumstances, calculate costs and income, and 

apply Policy provisions to calculate a potential claim amount. 



Loss of Production Income (LOPI) 

Provides compensation to the Operator of a well if the well is 

not able to produce as a result of a Named Peril. 

• Typically subject to a “Waiting Period” number of days 

before LOPI cover will commence. 

• LOPI coverage typically provides an agreed upon value 

(per unit) for the production shortfall, for a specified Limit 

of days. 


The Adjuster will typically review the production data, 

calculate the production shortfall, apply Policy waiting periods 

and agreed unit values to arrive at potential claim. 


A Typical Loss of Production Income (LOPI) claim 

Damage to the production facilities resulting from a Physical Damage claim has left 

the well incapable of production for an extended period. 

Considerations: Could some other operations restore production sooner to 

decrease (or prevent) the LOPI claim? Due diligence to restore operations ASAP? 

Loss of Production Income (LOPI) coverage is subject to a 30-day Waiting Period 

with a Daily Amount not to exceed US$ 30,000 per day for a maximum duration of 

360 days. There was no partial production. 

The well was not able to be produced for 78 days. Hence, the Loss of Production 

Income claim would be calculated to be US$ 1,440,000, as follows: 

Gross Loss of Production Income Claim (78 days @ US$ 30,000/day) US$ 2,340,000 

Less: Waiting Period (30 days @ US$ 30,000/day) (900,000) 

Calculated Net Loss of Production Income Claim US$ 1,440,000 


Well Intervention Operations, Inland Waters 


Loss of Hire (LoH) 

Provides compensation to the Operator / Vessel Owner if the asset is not 

able to earn it’s daily rate, as a result of a Named Peril (i.e. Physical 

Damage, for example) 

• Typically subject to a “Waiting Period” number of days before LoH 

cover will commence. 

• LOPI coverage typically provides an agreed upon daily rate, for a 

specified Limit of days. 


• A LoH claim is possible even if the Physical Damage claim is nil. 

The Adjuster will typically review the circumstances, calculate the days out 

of service excess of the Policy waiting period, apply daily rates per Policy 

to arrive at the potential claim. 


A Typical Loss of Hire (LoH) claim 

Severe damage to the pedestal crane located on the barge rig has suffered 

significant damage. The duration of repairs to the crane will make the rig incapable 

of returning to work for an extended period. 

Considerations: Could some other operations restore rig operations sooner to 

decrease the LoH claim? Could another crane be rented? Due diligence to restore 

operations ASAP? Consult with the Insuring Conditions and Exclusions in Policy. 

Loss of Hire (LoH) coverage, in this instance, is subject to a 30-day Waiting Period 

with a Daily Amount not to exceed US$50,000 per day for a maximum duration of 

360 days. 

The well was not able to be produced for 35 days. Hence, the Loss of Production 

Income claim would be calculated to be US$ 250,000, as follows: 

Gross Loss of Hire Claim (35 days @ US$ 50,000/day) US$ 1,750,000 

Less: Waiting Period (30 days @ US$ 50,000/day) (1,500,000) 

Calculated Net Loss of Hire Claim US$ 250,000 


Lift Boat Capsize 


We note… 

In each of the above situations, we evaluate the 

situation, closely review Policies and Schedules 

applicable to the property in question, and quantify 

the potential claim, subject to Insurer’s coverage 

determination. 

Coverage determinations are reserved only for 

Insurers. 


Shale Drilling / Fracking 

Now we focus on shale drilling in the United States, 

and how that might involve an Operator’s Extra 

Expense Policy. 

We have been the Adjuster on claims where Inland 

Marine Underwriters formed part of the Policy 

Security. 


Shale Horizontal Drilling 

Incidents with Shale Wells 


Houston 


Case #1: Wellhead leaking during hydraulic fracture treatments 

A leak developed between flanges of the tubinghead and lower master valve during 

the hydraulic fracture treatment. Once the leak started, there was no way to shut 

off the flow with surface equipment. 

Actions 

Environmental 

Tighten the leaking flange bolts. 

Pump “gunk” squeezes. 

Stop the well flow to change-out wellhead equipment, using: 

Mechanical plug; and / or, 

Kill mud / cement plug. 

Frac water leaked from the well and flowed from the wellsite pad. 

Frac water crossed a cattle pasture, then to a creek and river. 

Potential Gross Cost 

US$ 15,300,000 (100%), of that > US$ 6,000,000 (100%) may be environmental 

(much environmental sampling, reporting to Agencies, Attorneys, etc.) 


Case #2: Casing failure during hydraulic fracture treatments 

The intermediate casing burst near the surface of the well during the hydraulic 

fracture treatment. Treating pressure increased unexpectedly during the fracking 

operation. The flow from the intermediate casing eroded a hole through the 

surface casing, then the flow came to the surface near the well. 

Actions 

Environmental 

Shut down pumps; mobilize coiled tubing to the location. 

Circulate kill mud within the wellbore; set mechanical or cement plug(s). 

Evaluate the casing condition; repair or plug and abandon the wellbore. 

Underground breech transpired at a depth near potable water formations. 

Soil samples were evaluated; contaminated soil removed to off-site remediation. 

Water monitoring wells were drilled, per agreement with the regulatory authorities; 

the sampling regimen was decided and implemented. 


US$ 6,700,000 (100%), of that US$ 750,000 (100%) was environmental related. 

* approx US$ 2,200,000 Restoration adjusted – damage prior to incident. 


Case #3: Casing failure during production / flowback 

The production casing in a well was installed and a multi-stage hydraulic fracture 

treatment was completed. During flowback operations, the production casing 

burst within the well and flow traveled to surface between intermediate and 

production casings, then, through a casing head valve. Well control specialists 

were dispatched to assist. The well flow eventually bridged. 

Actions 

Environmental 

Identify depth of damaged casing; evaluate condition, then 

Repair damaged casing by back-off and install new from surface, or install patch. 

Or, plug and abandon the well. 

Spray / mist of light hydrocarbons ejected from well; liquids contained to the well 

pad site / reserve pit. 

Water/oil mixture collected on the well site for disposal. 



(claim involved restoration of existing well, abandonment, drilling of new well) 


Case #4: Behind-pipe crossflow discovered during drilling operation 

The production casing in a well was installed but the hydraulic fracture treatment 

had not been performed. The drilling rig was “skidded-over” to commence a new 

well. While drilling in the new well at a very shallow depth, the “new” well began to 

flow fresh water and gas. Well control specialists were dispatched. Diagnostics 

indicated flow origin from the other “completed” well. Wireline operations indicated 

flow from a potentially productive interval behind the intermediate casing. 

Actions 

Environmental 

Identify depths from where crossflow is transpiring; pump mud & cement to control: 

Repair damaged casing by back-off and install new from surface, install patch, 

or, plug and abandon the well / redrill. 

Fresh water with gas ejected from well. 

Water collected on the wellsite; fluid vacuumed; new rock added. 



Claim involved abandonment of completed well, redrill of well, redrill of another to 

depth of incident. 



Common OEE Incident Characteristics? 

Each incident is different, with different cost combinations coming into play. 

‣ Well control (relief well possible) 

‣ Restoration, redrill, or possibly both. 

‣ Environmental clean-up, damages, and monitoring operations. 

‣ Care, custody & control. 

‣ Evacuation of nearby residents? 

‣ Other costs? 



Well Control Preventative Measures… 

• Prevent wellhead failures during hydraulic fracture treatments 

‣ Attention to new/used wellhead equipment condition / testing regimen… 

• Prevent casing ruptures during the fracture treatment or production 

‣ Attention to casing condition prior to performing fracture treatments, then 

‣ Attention to casing condition prior to flowback / production operations. 

‣ Monitor casing condition by use of multifinger caliper …or ultrasonic or 

electromagnetic logs? (Casing Inspection Logs) 

• Inspect cement sheath quality behind casing to prevent behind-pipe flow 

‣ Attention to cement condition prior to performing fracture treatments… 

‣ Attained by use of cement bond log …or noise/temperature log 

Be prepared! Remember Murphy’s Law! 



Other Concerns & Considerations 

• Green completions? Can they be done effectively? 

• Earthquake claims? Are they really a concern? 

• Contamination of potable water table? Have you performed baselines? 

• Availability of equipment and supplies? Sometimes equipment and 

materials can be hard to locate… and expensive. 

• Project economics? Is all this going to make me money? 

• Applicability of the incident to OEE Policy wording / provisions / intent? 

• Wellsite / pad size? Sufficient for possible well control needs? 


References – for self study 

Other Shale Fracking Resources 

Making Sense of the ‘Overnight’ Shale Gas Revolution; JPT Online; 16Feb12 

http://www.jptonline.org/index.php?id=1525 

Hydraulic Fracturing 101; Journal of Petroleum Technology – April 2012; SPE 152596 

http://www.kgs.ku.edu/PRS/Fracturing/Frac_Paper_SPE_152596.pdf 

Shale Gas: Promising Prospects Worldwide; JPT Special Section – Shale; Jul11; pp. 37-39 

http://www.spe.org/jpt/print/archives/2011/07/11SpecialSection.pdf 

Hydraulic Fracturing Operations—Well Construction and Integrity Guidelines (API Document HF1) 

http://www.shalegas.energy.gov/resources/HF1.pdf First Edition, October 2009 

DOI / BLM Proposed Rules regarding Well Stimulation on Federal & Indian Lands 

http://www.doi.gov/news/pressreleases/loader.cfm?csModule=security/getfile&pageid=293916 May 4, 2012 


Thank you for your attention! 

www.matdan.com 

Dan Mason 

danmason@matdan.com 


Houston 


Trusted. Globally. 

www.matdan.com

A Typical Loss of Production Income (LOPI) claim - IMUA

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