ENERGY LIABILITY INSURANCE Mike Newsom Davis Head of International Liability Willis London

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CONTENTS

Why is Liability important ?

Key Energy Liability Exposures

How much limit should I buy ?

Latin American Liability issues

State of the Liability Market

Conclusion

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WHY IS LIABILITY IMPORTANT ?

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ENERGY INSURANCE BY CLASS

Upstream Downstream Liability

Prem

ium

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ENERGY INSURANCE BY CLASS

Upstream Downstream Liability

Prem

ium

Justin Blackmore

Chris Dear

Mike Newsom Davis

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LIABILITY LOSSES CAN BE LARGER THAN PROPERTY LOSSES…

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MACONDO OIL WELL BLOWOUT

POTENTIAL LOSS AMOUNT Property Value of Transocean Rig : USD 560 m Potential Liability: USD 40 Billion est. Date of Loss: 20 April 2010

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AZF PLANT, TOULOUSE, FRANCE

LOSS AMOUNT Property/BI: USD 492 m Liability: USD 2,700 m est. (Liability policy limit: USD 700 m) • Insured: Total Elf Fina • Date: 21 Sept 2001 • Explosion of Ammonium Nitrate 30 people killed 2,240 wounded Extensive third party property damage

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LOSS AMOUNT

Property/BI: £ 208m (USD 0. 335 bln) Liability: £ 700m (USD 1.12 bln) • Insured: Total, Chevron/Texaco JV

• Date: 11 December 2005 • Vapour Cloud Explosion at Oil Storage depot

Extensive third party property damage and business interruption.

• 43 injured. No fatalities

BUNCEFIELD OIL TERMINAL, UK

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WHAT ARE MY KEY ENERGY LIABILITY EXPOSURES?

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POTENTIAL CATASTROPHE LIABILITY EXPOSURES

Public: • Explosion at Refinery or Storage facilities • Pollution from pipelines / wells • Gas pipeline explosion • Vessel damage at marine terminal Products: • Defective Fuel / Petrochem products Employers Liability: • Aggregation of employees on Oil Rigs / Mines Charterers Liability: • Unsafe port

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EXAMPLES OF MAJOR LIABILITY EXPOSURES:

PUBLIC LIABILITY

REFINERY EXPLOSION AMUAY, VENEZUELA

Insured: PDVSA

Loss Date: 25th August 2012

Retention: USD 30m

Potential Loss: USD 40m - 70m

Event details:

• UVCE event at Venezuela’s largest refinery

• Build-up of Olefins from a leaking pump created a vapour cloud that ignited.

• 48 people killed. More than 200 injured. More than 200 homes damaged

• Most of the dead were in buildings located outside the perimeter of the refinery but still within blast radius of liquefied-gas tanks

• Raises plant maintenance & design issues

LOSS AMOUNT Liability: USD 2 billion + • Insured: BP

• Date: 23 March 2005

• Vapour Cloud Explosion at the second

largest refinery in Texas.

• Overfilling of the raffinate splitter lead to vapour cloud, which was ignited by a contractors truck leading to extensive third party property damage and business interruption.

• 15 fatalities. 170 injured.

TEXAS CITY REFINERY TEXAS, USA

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PRODUCTS LIABILITY • Petrochemical company

manufactured Polyethylene pellets for blow moulding plastic containers

• Cracks found in storage tanks

made from the plastic

• Legal action lasting 6 years

• Potential products liability claim of USD 320m

POLLUTION LIABILITY: OIL PIPELINE

Insured: Enbridge Energy Partners

Date: 26 July 2010

Pipeline ruptured releasing 890,000 gallons of crude oil into the Kalamazoo river in Michigan, USA

Pollution Loss: USD 700 - 800 million

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EMPLOYERS LIABILITY

• Offshore Rigs are a classic Employers Liability aggregation exposure

• A total of 167 workers

died in the Piper Alpha disaster in 1988

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CHARTERERS LIABILITY

• Vessel Chartered to unload fuel at client’s terminal

• Fire occurred at terminal

during unloading process • Claim subject to US jurisdiction

• Charter party being sued for

USD 1 billion

• Even if not liable, potential to incur significant legal defence costs

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TERMINAL OPERATORS LIABILITY

• Potential for damage to a vessel during loading and unloading

• This is often the highest Liability exposure for an LNG operation

• Vessel values can reach USD 400m - USD 500m

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SOME LIABILITY LOSSES ARE LESS OBVIOUS..

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POLLUTION RESULTING FROM PIG STUCK IN PIPELINE

Standard Pig Intelligent Pig

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LESSONS?

Cover should be as wide as possible not just for key exposures Jurisdiction: Worldwide (To protect against US lawsuits) Geographical Limits: Worldwide (To cover exports, visits etc) Broad policy definitions (Personal Injury, Not Bodily injury) Purchase Sufficient Limit

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UMBRELLA Difference in Limits

Difference in Conditions

LIABILITY PROGRAM DESIGN

Marine Liability Offshore

E&P

Onshore Liability Employers

Liability Auto

Liability

Aviation Fuelling

Self Insured Retention

Lim

it of

Inde

mni

ty

Type of Cover

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BENCHMARKING BY REFINING CAPACITY

200

800

600

400

1000

<150k 150-300k 300-500k 500-1,000k >1,000k

Refining Capacity (BPD)

USD m

Liability Limit

Source: Ace Bermuda

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BENCHMARKING BY TURNOVER Account Situation Activity Business Description Turnover Limit (USD) Insured 1 Europe Utility Power 65,345,280,000 1,280,000,000 Insured 2 Europe Utility Power/Water 53,120,000,000 640,000,000 Insured 3 Europe / Worldwide Energy Petrochemical 8,611,840,000 640,000,000 Insured 4 South Africa Energy Petrochemical 8,291,700,000 600,000,000 Insured 5 Europe Energy Petrochemical 17,787,179,487 512,820,513 Insured 6 South America Energy Petrochemical 50,000,000,000 350,000,000 Insured 7 Australia Utility Power 357,000,000 300,000,000 Insured 8 South America Energy Petrochemical 6,243,000,000 250,000,000 Insured 9 Far East Energy LNG 2,200,000,000 247,500,000 Insured 10 Africa Energy LNG 2,090,000,000 200,000,000 Insured 11 Middle East Energy Petrochemical 477,287,000 200,000,000 Insured 12 Europe Energy Petrochemical 13,547,100,000 192,307,692 Insured 13 Middle East Energy Chemicals 422,488,000 150,000,000 Insured 14 Far East Utility Power 5,015,920,000 149,500,000 Insured 15 Europe Utility Power 241,999,770 127,000,000 Insured 16 Carribean Energy Petrochemical 3,462,853,000 125,000,000 Insured 17 Europe Energy Petrochemical 7,742,170,328 120,000,000 Insured 18 Middle East Energy Petrochemical 3,588,000,000 100,000,000 Insured 19 Middle East Energy Petrochemical 2,072,000,000 100,000,000 Insured 20 South America Energy Petrochemical 1,490,000,000 100,000,000 Insured 21 Middle East Energy Petrochemical 593,000,000 100,000,000 Insured 22 UK Utility Power 31,290,100,000 93,000,000 Insured 23 UK Utility Power 317,896,320 93,000,000 Insured 24 UK Utility Power 295,304,760 93,000,000 Insured 25 UK Utility Power 227,504,040 93,000,000 Insured 26 Russia Energy Petrochemical 1,500,000,000 75,000,000 Insured 27 Australia Utility Power 164,169,000 56,250,000 Insured 28 Middle East Energy Petrochemical 869,843,874 50,000,000 Insured 29 Phillipines Utility Power 227,678,000 50,000,000 Insured 30 Carribean Energy Chemicals 191,000,000 50,000,000 Insured 31 South America Energy Petrochemical 69,748,070 50,000,000 Insured 32 South America Utility Power 655,143,229 30,000,000 Insured 33 Romania Energy Petrochemical 1,355,000,000 25,000,000 Insured 34 Caribbean Utility Power 1,173,000,000 15,000,000

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LATIN AMERICAN LIABILITY ISSUES

Strict Liability (The Polluter Pays) eg: Force Majeur Liability in Bolivia

Daňos “Moral”/ Mental Anguish (Brazil, Chile)

Nationalisation of assets (Venezuela, Argentina)

Increasing Employers Liability (Chile)

Protectionist policies eg: local quotas, currency restrictions (Argentina, Brazil)

Recent Energy Losses

LATIN AMERICAN LIABILITY ISSUES A series of Latin American Energy Losses:

PDVSA: 2 losses in past year • Pollution from Parallel pipe break. Liability loss est: USD 60m • Amuay Refinery explosion. Liability Loss est: USD 40m - 70m

PEMEX: 3 explosions in the past month

= Increased underwriting focus on Maintenance Issues and Pipelines

= Aegis totally re-evaluating all Latin American pipeline exposures

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“LATIN LITIGATION OLYMPICS”

SILVER (MEDIUM) Colombia, Brazil, Mexico,

BRONZE (LOW) Peru, Bolivia, Uruguay, Paraguay

GOLD (HIGH) Argentina, Puerto Rico, Chile, Venezuela

LIABILITY MARKET REVIEW

Global Liability Capacity

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

US

D b

illion

s

1994199519961997199819992000200120022003200420052006200720082009201020112012

THEORY, REALISTIC, REALLY…

Onshore/Offshore Follow form

Capacity: $ 500 m

Realistic Onshore/Offshore

Capacity:

$ 800 million – $ 1.0 billion

Realistic Onshore Capacity:

$1.2 - 1.5 billion

Theoretical Capacity:

$ 2.5 billion

NB: Supply and Demand conditions operate: The greater the limit required, the greater the pressure on price, as the most economic capacity used up first.

LIABILITY MARKET OVERVIEW Total market capacity remains stable at USD 2.5 bln

This disguises significant capacity movements: • Excess Liability markets cutting back on line sizes significantly • A number of new entrants (Amlin, Catlin, WR Berkley, Mitsui)

No market changing liability losses

Market is still strongly segmented

Strong focus on quality of risk management information, particularly Pipelines and Fracking

Markets are watching aggregations much more closely

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WORLDS APART

Liability market conditions for International Onshore, North American and Offshore sectors

International Onshore Liability

North American Liability

Offshore Liability

ONSHORE LIABILITY

Market condition hard to generalise: Very much dependent on size and complexity of risk

Strong competition exists for small limit, non-complex business Complex and capacity driven risks have a different market dynamic:

• Some premium increases where exposures/throughputs have

significantly grown • Excess Bermuda/Dublin “Capacity Markets” seeking to drive price

increases

= Upwards price pressure for buyers of large limits

But generally relatively benign conditions (for Non US risks)

OFFSHORE LIABILITY

Offshore Energy Liability Rates continue to harden

Why?? Macondo was in April 2010

Full extent of losses from Macondo slow to feed through to the market Eg: Transocean’s full liability tower now likely to be blown (USD 1 bln)

Tom Bolt’s review of the Lloyds Energy liability market highlighted the “inadequacy” of Liability priced in Energy package programmes

Market capacity reduced: Aggregation with P&I clubs/Contractors/Other parties

Terms tightened (eg: First party removal of wreck, Scaling for interest)

CURRENT LIABILITY MARKET ISSUES

FRACKING

Fracking operations remain a market concern due to pollution and alleged earthquake causation issues

Liability markets are underwriting the risk rather than applying blanket exclusions

Coverage depends on quality of risk management: • How is waste water disposed of? • Quality of pipe casings • How many times is the well fracked? • New well or redrilling old well? • Nature and concentration of fracking fluid used

Hydraulic fracturing or “fracking” is a method of extracting natural gas that involves blasting underground shale rock with a cocktail of sand, water and chemicals

PIPELINES

Major losses have focused liability insurers on integrity issues: • Enbridge: Operational issues, pipeline integrity • PG&E: High Consequence Areas (HCA’s)

Scrutiny on:

• Age • Integrity • Risk mitigation measures • High Consequence Areas, Water crossings, environmentally

sensitive areas

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IN SUMMARY.. Liability catastrophe losses can be greater than property losses Liability losses are not always predictable Liability awards are growing Insurers placing greater focus on pipelines and maintenance issues in Latin America

Conclusions: • Ensure Limits and Coverage are sufficient (Benchmarking, Wording

analysis) • Comprehensive renewal information will pay dividends

BRAZILIAN PORTUGESE PROVERB:

“Um porco de crédito faz um bom inverno e uma mola ruim”

English translation:

A pig on credit makes a good winter and a bad spring

Risk managers translation:

Short terms savings lead to long term costs

Moral:

Never economise on Maintenance, Limits or Coverage

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MUITO OBRIGADO

MUCHAS GRACIAS