Geothermal Risk and Insurance Management – Special Program

In supporting the Indonesian goverment’s policy to boost up the development of Geothermal Energy, L&G as the professional insurance broker and consultant in energy industry has took an initiative to set a comprehensive insurance program to enable all parties involved to mitigate and manage their risk exposures.

In general, from insurance point of view, geothermal is considered to be an high risks industry. Therefore, only limited insurance companies that have appetite on the business and create capacity to provide the coverage. To enable to bind insurance support we need to approach international resinsurers. Through our international connections and partnerships we L&G have a better access to get a full capacity from reinsurance market arround the globe.

With the Director of Geothermal of ESDM Dept. Republic of Indonesia

This program is set up based on our long time experience in handling oil and gas risks. By nature, geothermal and and oil and gas risks have some similarities. The main differences are in the location and the characteristics of the drilling. Oil and gas are mostly located in sedimental areas near shore and offshore whilst geothermal mostly are located in mountainous and highland areas. Both bring different character of risks. In Indonesia Oil and Gas already has a standard insurance mannual as set up under the SKK Migas regulations.

In geothermal, L&G has gained experiences in handling various geothermal projects in Indonesia including Sarulla North Sumatera, Batu Raden Central Java and Tulehu, Ambon. In addition, our CEO has also attended special workshop on technical drilling of geothermal, seminars, expo and site visit.

We understand that the uncertainties surrounding the inital development drilling for geothermal are high and difficult to finance. We hope this program can be an assistance to overcome all of the burdens. Below are the main intention of the program:

To encourage the investor to finance the development stages of geothermal reservoirs
To enable project developer to recover the losses due to accidents
To protect the contractors and all parties from any misfortunes
To ensure that projects meet the time schedule

Our pragram is known as Owner Control Insurance Program (OCIP). OCIP is a wrap-up under which a project owner provides various insurance coverages to contractors, subcontractors and all parties. OCIP comprises about 90% of the wrap-up insurance programs they are usually needed for the projects.

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As the appointed insurance broker and consultant our main roles are as below:

Risk analyze including identifying and checking the insurability of risks arising from contractual commitments with recommendations and suggested formulations regarding the drafting of insurance clauses in national and international supply and service contract.
Review of contracts works, participation in contract negotiations on the issues of liability, risk, warranty, insurance obligations (clauses), and country risks
Act as in house consultant and provide risk and insurance management – from the project preparation/construction to the operation
Design of international standard project insurance coverage that satisfies all parties, in particular taking into account contractual supply agreements and the requirements of investors and international banking consortium
Placing to local and international insurance markets with high standard financial reputation
Provide risk and insurance risk management report
Assistance and speed up settlement of claims, including the necessary reports for investors/financing banks

To enable us to present a comprehensive proposal, we need full details of the project. Details of location, drilling plans, drilling contractors, permints, consultants, engineers and more.

Owner Control Insurance Program –In Geothermal Industry

Why OCIPs Now?

The use of OCIPs is becoming more important as a result of several factors:

The number of large capital projects undertaken for this particular project
The typical projects that needs special expertise
The growth and expansion of high-tech businesses.
The implementation of lessstringent insurance regulations.

Defining an OCIP

An OCIP is a wrap-up under which a project owner provides various insurance coverages to contractors and subcontractors. OCIPs can potentially reduce an owner’s project costs compared to traditional, fragmented insurance programs.

Who & What is Included

For large construction projects, the most common duration is two to five years. And, the OCIP normally applies to all contractors and subcontractors performing work at the project jobsite. This jobsite is defined to include drilling site, the enginnering, procurment and construction site, all on-site fabrication shops, and associated material storage and laydown yards.

The insurance coverages most commonly included in an OCIP are financial risks, drilling risks, exploration risks, construction/erection all risks, marine cargo insurance, workers’ compensation (workers’ comp), employers liability, commercial general liability (CGL), and excess/umbrella liability and as well as subcontractor default liability policies into the OCIP mix as an alternative to, contra bank guarantee, surety bonds.

The Advantages for Owners and Contractors

OCIPs hold advantages for both the owner, developers and the contractors performing the works.

Advantages to owners include:

1. The ability to obtain broader insurance coverage with higher dedicated limits for contractors, which ultimately provides better protection for an owner.

2. Potentially lower construction costs resulting from volume discounts on insurance purchases and reduced losses from more effective, comprehensive, safety and loss-control programs.

3. Improved quality of risk management services (e.g., claim handling, loss control).

4. Substantial reduction in the amount of time required for obtaining certificates/policies of insurance from contractors.

5. Insurance requirements no longer an obstacle for contractors bidding work.

OCIP offers a number of pluses to participating contractors, including:

· The ability to obtain broader coverage with higher liability limits.

· More effective safety, loss control, and risk management programs.

· Coordinated claims handling/adjusting procedures and claims management services.

· Elimination of coverage disputes and subrogation between contractor and insurers.

· OCIP claims not counted as part of the contractor’s own aggregate limit.

Potential Savings to the Owner/Developer

Savings are derived when contractors and subcontractors remove insurance costs from their bids because these bid reductions lower the contract price. The owner’s cost for providing land rig insurance, down hole equipment, wells control, CAR/EAR workers’compensation, Comprehensive general liability, and excess liability coverage on behalf of contractors and subcontractors will likely be substantially less than the deduction received from the contractors and subcontractors. The potential savings is the difference between the bid reductions and the owner’s cost of contractor and subcontractor-provided insurance coverages.

OCIP Costs/Benefits

On an OCIP, the bid packages issued to contractors and subcontractors will contain an “Instructions to Bidders” section specifically stating that bids are to be submitted with and without insurance. However, the cost of insurance is to be included with their bids, as either an alternate/add or an alternate/deduct.

By combining the cost for all of the contractors’ and subcontractors’ owner-furnished insurance coverages into an OCIP, an owner creates substantial leverage in the insurance market. That’s why owners are able to purchase insurance at a lower rate than individual contractors.

What are the risks that threatens geothermal industry?

· Natural perils i.e. earthquake, volcanic eruption, landslide, landslip, flood, typoon and storm

· Fire,exploitation, cratering

· Human errors

· Riot, strike and malicous damage

· Machinery breakdown

· Well controls

· Equipment failures

· Short circuit

· Financial risks

· Business risks

Type of Insurance covers related for Geothermal Erection and Construction Plant

Geothermal Drilling Risk Well output Insurance
Surety Bond and Bank Guarantee (gurantee of WKP to ESDM, gurantee IPP to PLN, performance, payment and more)
Land Rig Insurance
Down Hole Equipment Insurance
Wells control Insurance
Third Party Liability
Workmen’s compensation Assurance
Construction/Ereaction All Risks
Marine Cargo Insurance
Others

Below are brief information about the insurance coverages:

Geothermal Drilling Risk Well output Insurance

The policy will cover a pre-determined number of wells with a pre-agreed drilling and testing schedule. The coverage:

Insured value will be the lower of agreed and actual well drilling costs on
unsuccessful wells under the drilling programme after adjusting for any agreed
salvage, subject to a pre agreed aggregate limit (likely to equate to the cost of
drilling 4 wells in a 5 well programme).
Threshold for an insured payment is based upon successful wells where the aggregate capacity achieved for the insured drilled wells is below the pre-agreed aggregate capacity insured success level.
Budgeted well drilling costs will be pre-agreed with project developers and will
incorporate a budget for possible well remediation costs.

Please note that there are a number of items to be considered in determining the availability and
applicability of the Geothermal Well Output insurance, including prior drilling experience in
the geothermal field(s) under consideration, and the nature of the wells to be drilled.

Surety Bond, Bank Gurantee and Contra Bank Guarantee

Although a surety bond is normally issued by an insurance company, a bond is not the same as an insurance policy as risk is not transferred from the principal to the surety. The latter has a legal right to seek reimbursement from the former, usually via a counter indemnity. However, like an insurance policy the bond does protect the beneficiary against an unwanted event, e.g. non-completion of a contract by guaranteeing that money will be available, thereby giving similar peace of mind.

A counter indemnity is a written agreement signed by the principal entitling a surety to reimbursement if it has to pay claims under any surety bonds it has issued. Such agreements maybe very complex and can vary with each surety. They range from standard documents to indemnities incorporating undertakings and financial covenants.

Surety bonds offer an alternative to bank guarantees with surety bonds offering a number of benefits to Contractors as they do not reduce the working capital of the Contractor or restrict its borrowing capability. They are ‘conditionally worded’, which gives the protection of the underlying contract conditions. Surety companies rely on a counter indemnity, whereas banks often and additionally require a charge over the principal’s assets. Banks usually issue guarantees, which are payable on first demand and independent of the contract conditions, which means that the Employer does not have to establish any breach of contract.

A Bank Guarantee on the other hand is an undertaking from a bank or similar financial institution to the beneficiary normally on demand. Again the guarantee specifies a maximum sum which the bank guarantees to pay to the beneficiary. Instead of a premium as in the case of a surety bond the bank normally requires financial security from the principle in an equal amount to the maximum guaranteed sum. Depending on the arrangement between the bank and principle the sum may be invested to earn interest or similar, but the capital will be tied up until the banks obligations under the bank guarantee have ceased.

L&G offers a combination between surety bond and bank guarantee that is called Contra Bank Guarantee. Where the guarantee document is issued by a bank but the financial security to provided by insurance company instead of by contractor. It will help to ease the contractor’s capital involving in the project.

Land Rig and Contractor Equipment and Plant insurance

Damage or loss of expensive machinery like Land Rig could be a catastrophe because these machines represent such a large investment. Contractor plant and machinery insurance protects contractors’ business from these losses. Understand the options and limitations of this type of insurance to determine whether your business needs to be covered. The typical risks for land rig insurance are blow out and cratering.

Land Rig and CPM insurance covers all physical damage done to a contractor’s machinery that is not specifically excluded by the policy. This includes accidents not due to gross negligence and acts of God, such as earthquake, volcanic eruption, storm damage. The payments cover the cost to repair or replace the affected machinery, which is covered at work or rest, while on any job site owned by a third party and even when dismantled or reassembled for maintenance. The unique of CPM for this project that the equipment mostly to be operated offshore where many insurers not keen to accept.

The typical risks for land rig insurance are blowout and cratering during the drilling.

Down hole equipment insurance

Directional and horizontal drilling operations require the use of specialized tools attached

to the drill stem and include the following:

a) Mud motors or rotary steerable systems

b) Custom drill collars

c) Bottom hole orientation subs

d) Stabilizers

e) Logging tools

f) Extra heavy and wired drill pipe

g) Telemetry - electronic, pulse and repeater communication tools

All of these tools make drilling more efficient, reducing drilling costs, maximizing oil and gas recovery on each well, and driving profits

to operators.

Down hole tools are owned and operated by specialist directional drilling contractors and due to high demand for their services they can require that the well owner/operator assume risk of loss or damage while the tools are in the hole. Usually project owners take initiative to insurance the down hole equipment.

Well control Insurance

The triggers of the risks due to the following:

a) Lack of knowledge and experience of rig personnel

b) Lack of well control data in the area

c) Improper work practices

d) Lack of well control training

e) Lack of application of policies, procedures, and standards

f) Inadequate risk management

g) Defective, improperly installed or inadequate equipment

Control of Well Insurance covers expenses incurred in regaining control of a well after ‘blowout’, and may include:

a) Re-drilling Expense (covers the expense incurred in the restoring or the re-drilling of a well after a blowout to the original depth and comparable condition prior to the loss.)

b) Cost and expenses incurred for cleanup and surface remediation expenses following a well out of control.

c) Legal and/or contractual liability for pollution damages to third parties resulting from a well out of control including defense expenses.

d) Cost to control an underground blowout including resulting restoration and redrilling expenses

e) Sudden and Accidental Seepage and Pollution

f) Evacuation Expense

g) Deliberate Well Firing

h) Care Custody and Control (loss of in-hole equipment due to well out of control or all-risk

Third Party Liability

Geothermal, oil and gas project contractor become involved in presents new and unique challenges when it comes to potential liabilities. As a contractor in geothermal, the oil and gas sector you have unique insurance needs. Off-the-shelf insurance coverage simply isn’t adequate in an industry where work is routinely conducted in perilous environments.Because each contract requires different coverage than the one before, or the one after, you need an insurance partner with deep oil and gas experience and knowledgeable industry.

Workmen’s Compensation Assurance

All workers and employees to be involved in this project are susceptible to various accidents that cause injury and death. Employers should provide WCA insurance. The standard WCA insurance is BPJSTK a compulsory program managed by authority. The benefits are good enough but for a better benefits we suggest that the contractors should buy extra coverage with higher benefits. Personal Accident (PA) is the appropriate cover. BJSTK to be arranged directly by contractor and PA can be arranged through L&G as the broker and consultant.

For expatriates they should be covered under a special program arranged by international insurance company.

Construction Erection All Risk, Delay in Start Up (CAR/EAR/DSU) and Third Party Liability Insurance

This is the cover for damage to the project prior to full commercial operation. There are numerous different approaches to policies; ranging from basic insurer policy forms which generally restrict coverage (and sometimes virtually remove cover) to fully tailored policies that are designed to respond to the unique needs of the project. The key issues to determine the most appropriate cover are the contract conditions and stakeholder risk appetite. Contractually, one would generally expect the care of the works to be the responsibility of the main contractor for risk of loss or damage to the project until it reaches completion. There are generally some major carve outs in contractual conditions which may transfer the risk of damage back to the contractors. Some of which are insurable. Generally this is done with Force Majeure provisions, which normally include perils such as earthquakes or storms. Inadvertently, the Employer may be responsible unless they consider what CAR/EAR insurance covers is acceptable to them too. Supply contract exposures also need to be considered where major items with long lead replacement times are being procured – such Land Rigs equipment, compressor, cranes and others. The interaction between Cargo and CAR/EAR insurances when delivery occurs is another project risk which needs to be considered with insurance designed to reflect the project and contract requirement.

It will generally be a requirement of financing parties that DSU is purchased when loans are made against a project to cover, as a minimum, the cost of debt servicing should revenue commencement/project operations become delayed due to damage during construction. The main reason for this requirement is that the debt servicing cost risk is secured against the revenue stream, which will pay for the debt servicing. Therefore, as a minimum, lenders require the scheduled debt repayments to be insured. It is quite common for requirements to extend to include fixed costs as well. Equity parties/investors may ultimately decide to insure for a greater level up to full gross revenue (minus variable costs). There is an immediate overlap here. In that in the event of delay, unless contractual time extension provisions are triggered, any delay will usually result in liquidated and ascertained damages becoming payable by the main contractor. This will often be limited in amount, and there may be other contracts that create a delay exposure which have differing conditions or exposures – such as delivery of Land Rigs and cranes. The model on how to insure is rarely the same from project to project, so careful consideration in partnership with trusted advisors is needed to ensure that the risk is evaluated and insured appropriately. DSU is not an area where shortcuts should be looked for as in the event of a claim, scrutiny over all details will be intense.

Marine Cargo Insurance (Open Cover)

It is automatically cover all shipment of cargo from overseas and in inter island. Contractors to purchase a longer-term contract, with lower premiums. This is because the insurer does not have to spend time on repetitive negotiations, and because the insurer benefits from a having a guaranteed premium over a longer period of time. Open cover insurance often involves the use of certificates that are filled out by the insured to track the value of the cargo, with the aggregate value of the cargo over the policy period only being covered up to the policy limit.

The Necessary Groundwork

As the appointed insurance broker, L&G should proceed through the following steps prior to implementation of insurance:

Conduct a Feasibility Study. This critical first step evaluates the advantages and disadvantages, statutory and regulatory impediments, cost savings, timing, and other key issues.
Letter of Appointment to L&G as Insurance Broker. Assuming an OCIP is feasible, proposals should be obtained from brokers and/or OCIP administrators. In many cases, the broker is the OCIP administrator; however, an owner’s representative or L&G insurance brokers should be appointed to enable them to approach various insurers.

Work Together for Insurance Placement. The L&G insurance brokers should work with the owner and the GC (if selected at this time) to compile underwriting information and

How does an OCIP benefit an owner?

The primary advantage of an OCIP is increased control (hence, the name Owner-Controlled Insurance Program). But, an owner benefits in many other ways:

1. Cost savings

2. More efficient project management and administration

3. More effective safety and loss control programs

4. More opportunities to hire contractors and subs

5. Direct control of insurance coverage exclusions

6. Ability to obtain higher insurance limits and mitigate claims disputes

Other benefits include a lower cost of risk (resulting from cost reductions) and protection from catastrophic loss by obtaining higher limits of liability insurance coverage.

After the feasibility has been determined, owners should structure the OCIP carefully, with the help of a competent of L&G insurance brokers and risk management professional. Because, like everything else in the construction industry, careful planning and administration are key components of any successful OCIP.

Insurance Premium indications:

Since we do not have a full detail about the project, just for purpose of insurance cost estimates, below are indicative premium rates for your consideration.

No.	Type of Insurance	Indicative Premium %/USD	Remarks
1	Geothermal Drilling Risk Well output Insurance	tba	Very limited insurance capacity
2.	Surety bond bank Guarantee	tba	Depends on the length of contract, collateral and recommended banks
3	Down Hole Equipment Insurance	tba	From the the value of down hole equipment
4	Marine Open Policy (Marine com)	tba	Depends on the type of vessels
5	Worker’s Compensation and Employees Liability plus JAMSOSTEK	tba	For workers JAMSOSTEK is adequate but for project expatriates, managers and staff extra cover of WCA/PA is needed
6	Construction Plant and Equipment	tba	All risk coverage. Rate of premium depends on the type of equipments. Mobile equipment is always higher than fixed equipment
7	Land Rig Insurance	tba	Of total rigs value
8	Performance Bond	tba	Upon the completion of the project within the time limit i.e. COD
9	Cost overrun Bank Gurantee	tba	Upon the request of the bank
10	Payment Gurantee	tba	Advance payment and others

Once we have the full detail about this project, we certainly could provide with full insurance terms and conditions supported by qualified and specialists insurance companies. We would also consider seeking for the reinsurance support by good reputation reinsurance companies.

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