Investment in safety pays off

Costs down, profits up. This simplistic view of the road to corporate success does not always hold true, as any experienced business person knows. Often an investment in safety or training upfront pays off eventually in lower outlays for accidents, more productivity from limiting work stoppages, and a better outcome financially.

Such is the case with oil well drilling — but it would be difficult to discern from the pervasive mindset at most operations. Work fast, bury your mistakes, and expect the insurance people to pick up the tab when calamity strikes. That has long been the standard thought process in the US land—based oil industry.

Now, however, insurers are beginning to combine expertise, incentives, and a documented record of financial savings to convince owners and operators that safety and training are as important as having the right equipment, the best workers, and favorable geology. Those who specialize in oil and gas financial matters can add their weight on the side of fiscal responsibility by underscoring the advantages of accessing the services insurers are offering.

Tending to the bottom line

Typically, one out of every 1,000 wells drilled will begin kicking and then transition to a full blowout unless properly handled. Decades ago, when all of the oil coverage was written out of London, insurers were far removed, in both distance and involvement. A well went bad, the operator plugged it with cement, and the insurer sent a check to cover drilling a new well. The operator shrugged and went on with business.

Today, the model is far different. For one thing, the cost involved in covering claims is much higher. A blowout means coping with regulators, pollution abatement, lawsuits, and much more. The consequences of a blowout can generate a bill for millions, not just hundreds of thousands of dollars.

Deductibles are also generally higher, as owners and operators choose to keep insurance premiums down by shouldering more of the risk themselves. That means disasters are never cost free. Not that they ever were; a huge claim one year has always had an impact on premium costs in future years. In addition, there has always been a cost to the work delays and project disruption that accompany the aftermath of a blowout, let alone the devastation of any injuries and property damage. And there are inevitably some costs that are simply not covered by policies, a direct hit on the pocketbook of owners and operators.

On the positive side, the insurance model no longer relies on a distant company with little interest in what an owner or operator is up to. As insurance companies in the United States have moved into covering the business, the model has evolved in a consultative direction, with proximity leading to a closer alignment and partnership between insurers and the oil industry. Insurers are pushing the relationship away from simply writing checks, instead providing entrée to three services that can help owners and operators control costs: effective training, expert risk control advice, and emergency response planning.

Training

Drilling wells has always been a risky business. Regulators long ago decided offshore drilling had to be handled carefully because of the huge potential for environmental disaster at sea. As a result, no one mans an offshore rig who has not been sent through special training and certified.

But in a surprising anomaly, no training or certification is required for land operations. This means that even though the oil industry in the United States drills more land wells than the entire rest of the world put together — 59,000 wells in 2007 alone — a person can work at a grocery store one day and hire on at an oil well site the next without any prior experience or training.

To address this, training programs have been created that give people the information they need and then put them in the virtual position that allows them to use their new knowledge. With computerized simulators, a person can be faced with the readings of depth, mud pressure, etc., that tell the story of a well about to blow. They then can make choices that either avert the disaster or make it worse.

One three—day course, re—taken for certification every two years, covers the necessary lessons to bring a blowout under control. Another two days added on provide intensive instruction in drilling and well maintenance.

Because such courses represent an expensive investment, as well as take time away from the always—hectic oil fields, many owners and operators may see them as a frill that they can do without. However, as insurers have begun to document the savings that come from having a well—trained workforce, the logic has become more compelling. One insurance company estimates it saved $16.2 million in 2006 alone from wells that were stopped from blowing, an amount that does not include the savings for the owners and operators from averting problems in the field.

To entice more participation, some insurers with a strong stake in the safe operation of oil fields underwrite the cost of the training for key personnel of drilling contractors and operators. This includes drilling managers, engineers and superintendents, as well as drillers and other tool pushers. The curriculum has even been bundled into suitcase—size modules that can be taken out to the field to eliminate travel time and inconvenience.

Risk control

In addition to training, risk control expertise that is credible, timely, and economical is a critical factor in reducing oil well blowouts. Every catastrophe in an oil field begins long before a well erupts, and almost every case that goes bad can be traced to human error, either in the beginning when the problem is just starting or near the end when no steps, or the wrong ones, are taken to avert the situation.

An oil operator’s workers may not always know what to do but they can be trained to read the signs of a well that is starting to break away from an operator’s control. At that point, it is invaluable to have a relationship with an insurer that offers 24—hour consulting with experienced oil field experts. When a drill manager knows he is talking to someone with decades of experience in dealing with wild wells, the necessary trust is established for working together to stop problems before they worsen.

To make using such consulting services more attractive, insurers provide them for free. In fact, one even reimburses up to $25,000 in blowout prevention expenses incurred by its customers who follow the prescribed process and call for help in a timely manner — even if a problem is averted and a blowout never occurs.

Insurers also send risk control experts to the field to do safety audits and provide advice for reducing claims across the span of operation, not just for the actual drilling of wells. This includes ways to reduce worker compensation injuries, vehicle accidents, and property damage, among other business operational issues.

Another advantage of tapping into an insurer’s risk control experts is the ability to control costs in the event that a blowout does occur. Since these experts have wide experience in dealing both with wells and the companies that provide oil—well—related services, they are able to provide advice and offer sound judgment about the appropriate level of response and whether a contractor is pricing services competitively.

Advanced preparation

A third area where insurers partner with oil owners and operators is in preparing in advance for dealing with emergencies.

At one time, a blowout might have been most likely to happen in the middle of nowhere, with no impact to people and little concern about the aftermath. Today, drilling often occurs in urban areas and sensitive environments. An owner or operator has to be prepared to deal not only with the well itself, but also with regulators, nearby neighbors, media and lawyers, to name a few.

By creating an emergency response plan, a company can chart a clear path of doing the right thing from the beginning — not as an afterthought, but as a careful planned response that will leave the owner or operator in a good position to get back to business once the well is controlled. Insurers, who have long experience in coping with disasters, can provide a template for an emergency response plan that can be customized to fit an owner or operator’s needs.

The right time

In 2008, as a barrel of oil pushed past the $100 mark and stayed there for several months, there was tremendous pressure to drill. Rigs were scarce and leasing prices high, so everyone in the field was consumed with working to beat the calendar.

Now that prices have dropped and the economy has slowed, owners and operators have a rare opportunity to prepare for the future. Now is the time to:

• Keep the best workers in the midst of any layoffs, build their confidence and loyalty by sending them to training, and position your workforce to be safe and productive.
• Adopt a mindset of working not just quickly but also safely as the smartest way to control costs and improve profits.
• Seek out insurers who will partner with you by providing expertise, incentives and services that help you run a tight operation.

Managing risk is a key underpinning for financial success. By taking steps to access training, audit safety and prepare for emergencies, an oil operation has the best chance to not only survive but also thrive in the future.

About the author

Brian Krause is vice president and global practice leader for the Travelers Oil & Gas division. In his position at Travelers, Krause provides 24/7 emergency response services on oil well fires and blowouts to Travelers policy holders, conducts loss prevention training, and has developed a comprehensive emergency response and disaster recovery plan. Prior to joining Travelers, he worked for the Red Adair Company and served as president of Boots & Coots and is a world renowned firefighter and well control expert with more than 25 years’ experience in the field. Krause also served as a consultant to the US military in Operation Iraqi Freedom and Operation Desert Storm, playing an instrumental role in getting hundreds of well fires under control in Kuwait and Iraq.