Stacking of Drilling Rigs – Considerations for Underwriters
Today’s low oil prices are having a significant impact on various aspects of that industry’s business. I recently attended the Lillehammer Energy Claims Conference and learned a bit more about the stacking of jack-up rigs,1 a practice that has a direct impact on marine insurance. In the current environment, oil rig operators require fewer fully operational rigs, so they are taking older jack-ups out of production, “stacking” and storing them.
According to James Vavasour, President of the risk assessment company MatthewsDaniel’s Americas Region, 55% of jack-ups in use today were built before the 1990s. These older rigs are now being taken out of production and stacked as they can’t compete with the newer versions built after 2010. The stacking locations depend on whether or not the operator thinks they will be used again.
If future contract prospects are good, these rigs will remain in an area where they can be quickly mobilized. If not, unoccupied blocks without leaseholders may be chosen for stacking locations. Rigs might sit alone or be “nested” with other rigs in order to lower the costs of manning and maintaining them.
There are a number of things for Marine underwriters to consider in evaluating the risks involved with stacking:
- The Tow:
- Distance and type of tow to location: While often cheaper, wet tows can be riskier than dry transports on heavy lift vessels.
- Wet tow:
- If unmanned, no one will be on board to reattach a tow line and the loss severity could be much higher, as a tow line parting is a relatively normal occurrence.
- Geographical location of final destination:
- Do you have any information on the soil foundation? Legs could punch through, possibly creating a severe loss.
- What about the Cat exposure? What is the minimum “air gap” for the area?
- Type of stack:
- Will the rigs be nested? If so, then you need to consider damage from other vessels, the fire accumulation, damage from toppling vessels in a storm and proximity to property owned by others that could be damaged as well.
- Other considerations:
- Always request marine surveys to assist in assessing Condition, Valuation and Reactivation.
- What resources are nearby to respond in case of a casualty?
- Remember, a rig that will never see action again is worth only scrap value - if that. Consider the moral hazard involved here.
It is worth noting that many cold stacked rigs will eventually be scrapped, if the owner can afford to get it to a scrap yard. China and India have the largest yards; the U.S. has no active scrapyards. The scrap value of a jack-up could range from USD1 million to USD3 million, depending on the size of the rig. But a tow taking 25 days or more to arrive at the yard could exceed USD2.5 million. That means we may see stacking locations become graveyards in the future. Who will want to take on that risk?
The underwriting of risks associated with stacking are complex and varied, and insurers need to understand the motivation and long-term needs of a client.
Stacked: Condition of being idle
Warm/Hot/Ready Stacked: Fully crewed, actively marketed, ready for work
Cold Stacked/Mothballed: Not deployable, little/no crew, contract prospects bleak
Contact your local Gen Re underwriter to discuss how to best manage these volatile risks.
- Exploratory oil drilling platforms that have movable legs for raising the hull above the surface of the sea