LOST IN HOLE (LIH) versus DOWNHOLE TOOL INSURANCE


What’s the Risk?

This coverage is for specialty drilling/logging equipment that might become stuck, lost or damaged while below the surface of the ground.

Operations that are Eligible for Coverage

  • Vertical/Directional/Horizontal Drilling
  • Wireline Logging
  • Coiled Tubing
  • Pipeline Inspection
eligible

Causes of Downhole Claims

    1. 55% Mechanical Sticking
    2. 26% Differential Sticking
    3. 17% Tool Failure
    4. 1% Fire
    5. 1% Blowout

Who’s at Risk?

The owner of the tools, or anyone legally liable for the tools while downhole. Which could include the following:

    1. Oil & Gas Operators
    2. Directional Drilling Contractors
    3. Wireline/Coiled Tubing Contractors
    4. Tool Rental Companies
    5. Tool Manufacturers

What Type of Tools Can Be Covered?

The owner of the tools, or anyone legally liable for the tools while downhole. Which could include the following:

    1. Rotary Steerable (RSS)
    2. MWD
    3. Motor
    4. Wireline Logging Tools
    5. Coiled Tubing
    6. Drill Collar
    7. Stabilizer
    8. Sub
    9. Jars
    10. Drill Pipe
    11. Bit

What is a Bottom Hole Assembly (BHA)?

A Bottom Hole Assembly (BHA) is the lowest part of the drill string, extending from the bit to the drill pipe.

The BHA is a collection of tools. Some examples of what might be included in a BHA are motor, MWD, collars, jars, etc.

BHA includes the high end specialized equipment used for logging and steering drilling tools.

There can be multiple BHAs on a single well with different values for each BHA.

Does the Control of Well policy provide coverage?

  • Under the Care, Custody, and Control Endorsement (CCC)
    • The Replacement Cost Of Leased Or Rented Equipment For Which The Assured Is Liable By Contract
      • Third-party Owned In-Hole Equipment
      • Rented downhole tools such as Measure-While-Drilling
      • Third-party Owned Surface Equipment
    • ONLY ACTIVATED IN THE EVENT OF A BLOWOUT

Does the Commercial General Liability (CGL) Policy provide coverage?

  • CGL Policy
    • Underground resources and equipment coverage is frequently part of energy industry general liability policies.
  • Exclusion: Underground Resources and Equipment Hazard - Section B
    • “3. Any Casing, pipe, bit, tool, pump, or other drilling or well servicing machinery or equipment located beneath the surface of the earth in any such well or hole or beneath the surface of any body of water.”
  • As a rule equipment below ground is not covered. Have seen some exceptions with low limits.
  • Owned equipment is always excluded.

What is Lost In Hole (LIH)?

  • Contractor may offer to reduce the amount for which the operator is liable if tools become lost downhole. This is not insurance.
  • For an additional day rate charge the operator’s contractual liability is reduced.
    • Example: Replacement cost of tool is $500,000, but for an additional day rate of $900 the contractual liability can be reduced by 50%.
  • Contractor LIH generally reduces the amount of liability by 40-60% of tool value for some downhole tools.
  • Contractor LIH often only applies to MWD and Motors leaving the operator liable for 100% of remaining tools on the drilling assembly.

Day Rate Contract

This is a sample of a breakdown for a BHA that an operator would see in their contract.

BHA 1 (Build)+450 Tool Value Tool Value w/ LIH LIH Day Rate Charge Operator Remaining Liability
MWD $500,000 $250,000 $900 $250,000
Sub $125,000 N/A N/A $125,000
Motor $450,000 $225,000 $750 $225,000
Collars $90,000 N/A N/A $90,000
Total $1,165,000   $1,650 $690,000

Questions to ask Contractor Regarding LIH

Make sure you receive an equipment schedule for each BHA that includes values for each tool.

How many fishing attempts must be made to be eligible for LIH?

Does LIH cover the costs to repair damaged tools?

What is Downhole Tool Insurance?

Downhole Tool Insurance is coverage for specialty drilling/logging equipment that might become stuck, lost or damaged while below the surface of the ground.

Main keypoints

  • Offered by Insurance Company
  • Perils Insured: All Risk
  • Covers tools at scheduled or replacement costs
  • Insurance Policy will be issued when coverage is bound
  • 10% Deductible

What is not Covered?

  • Loss of Well
  • Fishing Costs
  • Unscheduled tools
  • Anything that happens to tools above ground

New Well Scenario:
ABC Exploration and Top Notch Directional

  • ABC Operator signs contract with Top Notch Directional Drilling to run their directional drilling tools in the operator’s next well.
  • The contract makes operator liable for $1,000,000 BHA if lost in hole.

Coverage Options

eligible


Pros and Cons

Lost in Hole (LIH)
  • Day rate can be less expensive than insurance
  • Reduces potential loss but can leave significant exposure
Downhole Tool Insurance
  • Reduces exposure to significant unbudgeted item expenses
  • Provides more reliable cost budgeting for AFE
  • Eliminates need for additional cash calls to partners
  • Eliminate need for Letter of Credit
  Downhole Tool Insurance Lost In Hole (LIH)
Coverage Limit Value of Scheduled Tools 50% of select tools
Insured Exposure 10% Deductible 50%
Pricing Day Rate Day Rate
Fishing Requirements Must make an attempt 3 Attempts must be made
(Usual Wording)
Damage Tools Covered Not typically covered
Are all Tools in BHA
Covered
Yes if scheduled No
Covers Tools from
Multiple Companies
Yes if scheduled No
Covers Operator Owned Tools Yes if scheduled No

Next Steps

  • What is the size of the Drilling Program?
  • What is the risk tolerance?
  • What is the impact to future drilling program if tools are lost?