The law relating to insurance of offshore petroleum exploration and production risks

Abstract

These are all serious incidents which inevitably make the headlines of world news. However they also serve to highlight the multifarious hazards which constantly threaten offshore petroleum exploration and production operations. This in turn leads one to consider the problem of the insurance of such operations which forms the subject of this thesis. The first patent for marine drilling equipment was filed in 1869. The first oil well in inland waters was drilled in 1911. The first well to be drilled in Lake Maracaibo was in 1924. The big offshore oil industry really got its start in the lakes and swamD waters of Louisiana near the Gulf of Mexico during the 1930's. Drilling units were mounted on barges, towed to location and sufficiently flooded until they settled firmly on the bottom. In search of more oil, these operations moved out into the Gulf from platforms connected to the shore by wooden walkways. The first well to be drilled out of sight of land was in 1947. With the constant demand for oil and gas, the search has spread during the last 25 years from the Gulf of Mexico and Venezuela to the Persian Gulf, the Mediterranean, Africa, Alaska, the Far East, Australia, the Continental Shelf of Europe and, of course, the North Sea. The industry has moved into every kind of environment, all kinds of depths, tremendous tides, from the simple early days of swampy waters in Louisiana. The insurance of oil risks is in a class of its own. If insurance is a business designed to absorb the risks of others, it is worth remembering that risk is inherent in the search for oil and its production. Oil companies are huge commercial risk-takers and will allocate hundreds of millions of pounds to search for a non-repeatable asset which we will consume without thinking. Offshore oil insurance is not just a matter having large sums of money fully at risk. It is much more that of exposing such sums of money on pieces of equipment which are totally new in design and on operations which have never been carried oat before. Huge investments in time and resources are required in all aspects of the search, development and production of oil within the marine environment. The potential for catastrophe is always present, awaiting the unwary or unfortunate. Technology constantly strives for ways to minimize the problems, and in many ways has succeeded. But protection against the hazards to which the offshore industry is exposed remains a vital factor in its growth. Exploration and extraction of oil or gas from under the sea-bed are specialised activities, and the terms and conditions of the insurances thereof, which are no less specialised, are drafted in recognition of the hazards involved. Licences to explore for or develop '"the getting of petroleum" can be granted to a single entity or to a consortium, and in the latter case the joint venture agreement will regulate the responsibility for, interalia, risk and insurance. The same will be true of contracts made between the operator of a concession (i.e. the single entity or particular consortium members) and third parties providing operational or support facilities. The lawyer has not generally been involved at all in shaping the relationshin between the oil industry and the underwriters. Insurance arrangements are worked out in·a very informal manner by insurance specialists; brokers, adjust.ors; surveyors and various insurance specialists in the oil companies. The problem is that the insurance arrangements generally lack precision. Consequently, the lawyer should be brought into the picture to provide this much needed precision, in an area where imprecision could literally cost either party millions of pounds.