Lloyd's Report Sums Up Deepwater Challenges

The "Drilling in Extreme Environments" report says insurers must fully understand the risks of these operations in order to hold realistic levels of capital and reserves.

Lloyd's market quickly paid $270 million as part of a $560 million total loss settlement to cover the loss of the Deepwater Horizon semi-submersible drilling rig after the April 2010 explosion that sank it, triggering a major oil spill in the Gulf of Mexico. The insurance industry's ability to cover losses from deepwater drilling operations, and the increasing complexity of those exploration and production operations around the world -– and potentially above the Arctic Circle as several governments vie to drill there –- are candidly discussed in a new "Drilling in Extreme Environments" report from the Class of Business and Exposure Management departments of Lloyd's Performance Management Directorate.

The report was posted Sept. 22, about a week after the U.S. Bureau of Ocean Energy Management, Regulation and Enforcement's investigating panel issued its final report blaming the explosion on multiple failures while finding BP bears most of the blame. The Lloyd's authors discuss how such deep wells raise costs exponentially and are so challenging that the technology for both drilling them and stopping spills if they occur may not be keeping up.

"With expected downhole pressures of over 35,000 psi and temperatures above 450 [degrees] C in future planned deepwater wells, this is a clear example of technology struggling to keep pace with industry requirements," says a section of the report in which the ratings of measurement while drilling tools are discussed. Blowout preventer (BOP) reliability also is "a known concern within the industry," they write, noting that almost all deepwater BOPs used today are rated at 15,000 psi and only one manufacturer produces a 20,000 psi BOP, yet the industry has identified a need for 25,000 psi BOPs for ultra-deepwater, high pressure/high temperature wells.

The report mentions a fact almost forgotten by now: the Macondo well was not a producing well when the explosion and blowout occurred. "Occasionally conditions mean that a well cannot be safely drilled to a planned depth. It is not generally known, for example, that the drilling of the Macondo well was stopped early due to the very narrow window between pore pressure and fracture gradient which prevented drilling ahead. The blowout actually occurred during work to temporarily abandon the well while awaiting planned future completion operations."

About 14,000 deepwater wells had been drilled worldwide before the April 2010 spill became the first involving a deepwater well, authors Andrew Rees and David Sharp write in their report. They include charts showing the estimated reserves in deepwater zones around the world, including the Arctic region, and list six issues the insurance industry must address about these operations. "[T]he range of risks and, in particular, the instability of deepwater wells present very real challenges which both insurers and insureds need to face up to and prepare for," they write. "It is important that the energy industry adopts standards that ensure safety and reliability in the design and execution of drilling in extreme environments and restores confidence."

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