American Oil and Gas Reporter - December 2016 - 70

SpecialReport: Insurance And HS&E Update

What is the insurance sector's general outlook on U.S.
oil and gas activity in 2017? To what degree do insurers anticipate drilling and completion activity will increase over
the next 12-18 months? What do those expectations imply about
general upstream insurance trends?
BOQUIST: Based on conversations with our customers, there
is reason for optimism. Drilling activity is returning slowly. The
oil and gas industry is trying to find the "new normal" where oil
field activity returns to a steady pace. This slow period has allowed the industry to reduce operational costs and decrease well
completion times. This trend may allow for a more immediate
effect on overall U.S. production.
The insurance industry for oil and gas has remained flexible
and nimble in adjusting to the volatile shifts in production. We
have been working closely with companies to prepare them for
the next upturn in oil and gas prices, and subsequent increase in
field activity. This includes helping to manage the life cycle of
employees and workers' compensation costs.
While some oil and gas companies already have good programs
in place, insurers should be working continually with their customers to identify gaps in their programs, regardless of whether
they are experiencing increased or decreased activity in the field.

Oil and gas companies' insurance needs change constantly in reaction to business conditions. In what ways has
the downturn impacted the dynamics of oil and gas risk management? What business demands are being placed on insurers themselves, and how are they responding to help operators mitigate
risk?
BOQUIST: The downturn has given everyone in the industry, including insurers, the chance to focus on being more efficient. We have spent a substantial amount of time helping our customers by educating them about exposures they may not consider when production levels are higher. For example, we met with
more than 350 agents and existing and potential customers this
year to share perspectives from claims professionals on how to
handle contractual risk transfer issues.
Increased use of automation has helped efficiency during the
downturn. While this has reduced workers' exposure to injury,
the dangers of working in this business persist. Technology improvements have created a new type of threat: complacency. Companies occasionally confuse a reduction in risk with immunity
to risk, and as a result, may fail to monitor safety processes as
closely as they should. Better technology cannot fully eliminate
safety risks, no matter the economic conditions.

What should producers expect in terms of coverage availability in 2017? Are there any particular coverage or policy areas of concern to oil and gas companies in the year ahead?
70 THE AMERICAN OIL & GAS REPORTER

BOQUIST: Our expectation is that coverage availability will
remain consistent in the coming year.
In addition to an annual review of exposures for property, liability and contract liabilities, oil and gas companies need to start
thinking about cyber exposure. According to the U.S. Department
of Homeland Security, the energy sector (46 reported incidents)
was second only to critical manufacturing (97 reported incidents)
in cyber attacks in 2015. In 2014, the energy sector led all industries with 79 reported incidents.
In the past, many considered the traditional upstream systems in oil and gas to be relatively immune from cyber risks
because they were isolated. However, the industry's growing
use of technology and the demands for real-time data have introduced new risks. Security efforts related to upstream
drilling infrastructure are focused on physical assets, rather than
information. The oil and gas industry faces unique threats, including attacks by activists and environmental groups, and theft
of intellectual property and data, along with theft of employee information.
Working closely with an agent or broker to annually review
his insurance program helps an operator address and manage the
business's unique risks and financial responsibilities.

Domestic activity is concentrating in unconventional
plays. What does this focused activity, and the operational procedures and practices that come with horizontal resource
plays, mean to insurers? From an insurance perspective, do risk
profiles differ from one resource play to another?
BOQUIST: One of the exposures we are seeing is a well that
is drilled, but uncompleted (DUC). According to the U.S Energy Information Administration, there were 5,031 DUCs at the end
of August. That included 4,117 wells in the oil-prone Bakken, Niobrara, Permian and Eagle Ford, and 914 in the gas-prone Marcellus, Utica and Haynesville.
DUC counts have been decreasing in recent months in both
oil and gas plays. However, in 2014, the ratio of DUCs-to-completions was about 2-to-1 for oil plays and 4-to-1 in gas plays.
At the end of August this year, it was closer to 9-to-1 and 7-to1, respectively.
There are always some DUCs, because there always will be
times when drillers need to postpone completing some percentage of horizontal wells because of operational, infrastructure, economic and other factors. When we evaluate individual risks, we
look at which properties are producing, which are undeveloped,
which have DUC exposure, etc.
That said, insurance coverage is fairly well-defined and the
product does not change with geography. It is more about the purchasing decision as customers buy different limits for different
loss scenarios. For example, some parts of the country that produce more liquids can have more environmental exposures versus areas that produce mostly dry gas.

American Oil and Gas Reporter - December 2016

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