This document outlines an upcoming RIMS conference session on oil and gas industry issues, including discussions on anti-indemnity statutes, owner controlled insurance programs, rating agencies, and drilling contract issues. The session will feature presentations from various industry professionals and include a roundtable discussion on current topics impacting the oil and gas industry. Attendees are asked to complete an evaluation form to provide feedback on the session.

1. IND 910
Energy Resources
Oil & Gas Industry
April 21, 2009
9:00 am – 11:30 am

2. Welcome to RIMS 2009 Annual
Conference & Exhibition
Familiarize yourself with the Emergency Exits
Silence Cell Phone/Blackberry
Your Feedback is very important to RIMS and to the Speaker(s). Please
complete the session evaluation form and return to the door Monitor.
(For (IND) industry sessions, please give the completed form to the moderator of the session.)
Here’s to a greener meeting! To support RIMS Green Initiative, there
are no printed handouts. Visit www.RIMS.org/Handouts to download
available handouts. Printing on Demand stations are available in Lobby A of the
Orange County Convention Center, as well as in RIMS cyber stations located in booths
#431 and #1759 in the Exhibit Hall.

3. IND 910
Energy Resources
Oil & Gas Industry
April 21, 2009
9:00 am – 11:30 am

4. RIMS Oil & Gas Industry Session History
• Upstream & Downstream Insurance Market Overview
• Construction Risk Issues
• Ergonomic Loss Control
• Risk Manager’s Roundtable
• Lloyd’s – State of the Market
• War & Terrorism Update
• OIL – Mutual Insurance
• Offshore Construction Insurance Update

5. 2009 RIMS Oil & Gas Industry Session
1. Anti‐Indemnity Statutes – Risk Allocation in Oilfield
Contracts
2. Owner Controlled Insurance Program – A cost
effective alternative?
3. Rating Agencies 101 – A Primer
4. Drilling Contract Issues
5. “Roundtable” Discussion of Current Issues

6. Coordinator
Gabriel Lugo
Taylor Risk Consulting
Speakers
0
William W. Pugh
Liskow & Lewis
Steve Davis
McGriff, Siebels & Williams
Mohammed Ashab
Signal Administration

7. Anti-Indemnity Statutes
Risk Allocation in Oilfield Contracts –
Maximizing Indemnity and Insurance
Protection
William W. Pugh
Attorney at Law
Liskow & Lewis

8. Basic Indemnity Issues
• Must have valid “magic language” to obtain indemnity
for one’s own negligence
• Indemnity (and “magic language”) must be broad
enough to extend to all intended beneficiaries
• Anticipate and address possible restrictions on
indemnity
• Be aware of any issues relating to the scope of the
indemnity

9. “Magic Language” –
Reference to Negligence Should Be As
Clear and As Broad As Possible
• Include sole or concurrent negligence of indemnified
Group
• Include reference to strict liability, unseaworthiness,
and pre‐existing conditions
• Consider whether to address gross negligence and/or
punitive damages
• Include "release" and "defend" and a specific
reference to attorney's fees
• Be aware of “conspicuousness” requirements

10. Vessel Operations Present
Special Issues
• Beware Lanasse v. Travelers Ins. Co.
– include “loading and unloading of cargo” ‐ Gaspard
v. Offshore Crane and Equipment
– include “ingress and egress”
• Be sure that insurance provisions address
Lanasse issues as well

11. Drilling Contract is Often the Key –
Anticipating the Broad Reciprocal
• Drilling contractor will want indemnity for Company’s
people and property and people and property of
Company’s other contractors
• With broad reciprocal indemnity, Company will owe
indemnity to drilling contractor every time there is an
accident involving anyone other than the drilling
contractor

12. Effect of Different “Reciprocal”
Indemnity Provisions
• Narrow – each party responsible for its own employees
and property (simple; doesn’t require reliance on what’s
in other contracts)
• Broad reciprocal – includes contractors and
subcontractors (creates extensive potential liability for
Company; without a “pass‐through” provision, there may
be no back‐up indemnity)
• Variations – modified reciprocal; fault‐based reciprocal,
hybrid

13. Broad Reciprocal in Drilling Contracts
Necessitates a “Pass-Through” Provision
• Indemnity scheme in drilling contract (and other major
contracts) affects all underlying contracts (with common
workplace)
• Company must have “pass‐through” provisions in its underlying
contracts (to pass indemnity from other contractors to the
drilling contractor)
• Indemnity without a pass‐through provision won’t solve the
problem
• Be aware of enforceability issues

14. Operator Contractor
Other
Contractors Subcontractors

15. Operator Drilling
Subs, if any
Mud Log Wireline Vessel Casing Helicopter

16. Drilling
Wireline Mud Log
Operator
Helicopter Vessel
Casing

17. Drilling
Wireline Mud Log
Operator
Helicopter Vessel
Casing

18. What Happens Without a Pass-
Through Provision
• Indemnity obligation from contractor X generally will
not cover Company’s contractual liability to others
(such as drilling contractor)
• If indemnity received by Company does not extend
(or pass‐through) to those Company owes,
Company’s stuck with the liability
• For every instance in which Company owes a broad
reciprocal indemnity, but the underlying contract has
no pass‐through provision, Company has no recourse

19. Foreman v. Exxon - Contractual Situation
(Indemnity)
Diamond M Exxon
y)
nit
m
de
(In
Caterer Offshore Wireline Vessel
Contractor (Charter)
Employee

20. Foreman v. Exxon - Contractual Situation
(Indemnity)
Diamond M Exxon
(55%) (10%)
)
ity
mn
de
(In
Offshore Wireline Vessel
Caterer
(35%) Contractor (Charter)
Employee

21. Foreman v. Exxon - Result
Diamond (Indemnity) Exxon
M (15%)
(85%) (10%)
(55%)
)
ity
mn
de
(I n
Caterer Offshore Wireline Vessel
(35%) Contractor (Charter)
Employee

22. Foreman v. Exxon - Result
Exxon (Indemnity) Offshore
(85%) (15%)
(55%) (10%)
)
ty
ni
m
de
(I n
Caterer Offshore Wireline Vessel
(35%) Contractor (Charter)
Employee

23. Wireline
Roughneck
Drilling
Contractor
Blowout
Operator Supplier
Vessel –
M/V Work Horse

24. Wireline
Roughneck
Drilling
Contractor
Operator
Vessel –
M/V Work Horse

25. Wireline
Roughneck
Drilling
Contractor
Operator
Vessel –
M/V Work Horse

26. Diamond
Drilling
Offshore
Mud Log
Casing
Exxon
Helicopter Vessel
Casing

27. COMPANY CONTRACTOR
OTHER CONTRACTORS SUBCONTRACTOR

28. Mud Logging
Company
Contractor
Subs, if any
Drilling Wireline Vessel Casing Helicopter

29. Drilling
Wireline Mud Logging
Company
Helicopter Vessel
Casing

30. Drilling
16 2/3 %
Wireline Mud Logging
16 2/3 % 16 2/3 %
Company
16 2/3 % 16 2/3 %
Helicopter Vessel
16 2/3 %
Casing

31. What Happens Without a Pass-Through
Provision
• Indemnity obligation from contractor X generally will not cover
Company’s contractual liability to others (such as drilling
contractor)
• If indemnity received by Company does not extend (or pass‐
through) to those Company owes, Company’s stuck with the
liability
• For every instance in which Company owes a broad reciprocal
indemnity, but the underlying contract has no pass‐through
provision, Company has no recourse

32. Foreman v. Exxon - Contractual Situation
(Indemnity)
Diamond M Exxon
(55%) (10%)
)
ty
ni
m
de
(I n
Offshore Wireline Vessel
Caterer
(35%) Contractor (Charter)
Employee

33. Foreman v. Exxon - Result
Exxon (84.6%) (Indemnity) Offshore
Diamond M (15.4%)
(55%) Exxon (10%)
)
ty
ni
m
de
(I n
Caterer Offshore Wireline Vessel
(35%) Contractor (Charter)
Employee

34. Wireline
Roughneck
Rowatan
Drilling
Blowout
Big Oil Supplier
Vessel –
M/V Work Horse

35. Wireline
Roughneck
Rowatan
Drilling
Big Oil
Vessel –
M/V Work Horse

36. Wireline
Roughneck
Rowatan
Drilling
Big Oil
Vessel –
M/V Work Horse

37. Basic Insurance Protections
• Waiver of subrogation
• Additional insured
• Coverage should be primary, at least for risks assumed
– see Hodgen v. Forest Oil Corp.
• Insurance requirements should dovetail with indemnity
provisions
• Extend all protection to “Company Group”
• Consider using your own insurance certificate form

38. Specific Insurance Pitfalls
• State that minimum limits are not a limitation or
restriction on indemnity
• Comply with Texas insurance requirements if
applicable
• Include critical maritime insurance extensions
– Lanasse endorsement
– limitation of liability endorsement
• Be aware of benefits of Getty and Marcel

39. Depending on Applicable Law, Insurance
May Provide More Protection Than
Indemnity
• Texas ‐ Getty and Oryx
• Louisiana ‐ consider application of Marcel
• LHWCA ‐ insurance protection is enforceable even if
indemnity is invalid under § 905(b)

40. Interplay of Indemnity, Insurance, and
Applicable Law
• Applicable law will be critical
• Multiple laws may be potentially applicable
• Type of contract may determine risk and
enforceability
• Protection available in existing contracts determines
flexibility

41. Effect of Applicable Law
• Maritime law ‐ indemnity and insurance generally fully
enforceable
– drilling contract for jack‐up is maritime
– be aware of § 905(b) of LHWCA
• Texas, Louisiana, New Mexico, and Wyoming law –
significant restrictions

42. Louisiana Oilfield Indemnity Act
(“LOIA”)
• Restricts indemnity and insurance
• LOIA only applies to contracts relating to a well
– different analysis depending on whether onshore or
offshore
• Applies to personal injury/death, not property damage
• No insurance exception unless company pays contractor’s
insurance premium under Marcel v. Placid Oil Co.
• Compare Amoco Prod. Co. v. Lexington and Rogers v. Samedan

43. Louisiana Statutory Employer
Protection
• Applies where work is an integral part of the Company’s
business or essential to Company’s ability to generate its goods
or services
• Statutory employer relationship must be recognized in the
contract
• Provides Company with tort immunity in return for secondary
obligation to pay worker’s compensation (and Company is
entitled to indemnity)

44. Texas Anti-Indemnity Act
• Applies to property damage and personal injury/death
• Exceptions for indemnity supported by insurance
– unilateral indemnity ($500,000)
– mutual indemnity (up to amount of insurance obtained “for
the benefit of the other party as indemnitee”) – no longer
required to specify equal amounts)
• Act does not apply to insurance that does not directly
support the indemnity – Getty & Oryx cases

45. New Mexico Law
• New Mexico anti‐indemnity act same scope as
Texas (property and personal injury/death)
• Different as respects exceptions
– no unilateral or mutual indemnity exceptions
– no effective insurance exception

46. Wyoming
• Wyoming anti‐indemnity act is similar to Texas in
basic scope (property damage & personal
injury/death)
• No unilateral or mutual exceptions such as Texas
• Provides “shall not affect the validity of any insurance
contract” but True Oil case may negate insurance
• Cases have been relatively restrictive in applying Act
insofar as requiring a relation to drilling

47. Maritime Law Restrictions
• Indemnities generally fully enforceable
– except § 905(b) of LHWCA (no indemnity for a
“vessel” from employer of a longshoreman), but
insurance is enforceable and there is an exception
under § 905(c) for reciprocal indemnity on OCS
• Insurance protection is enforceable
– but beware Lanasse

48. Determining Applicable Law
• Contract for vessel (including drilling contract on jack‐
up) is maritime
• Contracts for services on a vessel may or may not be
maritime
– casing contract on jack‐up rig – maritime
– wireline contract – may be non‐maritime (even on
jack‐up)

49. Determining Applicable Law
(cont’d)
• OCSLA applies law of adjacent state if maritime law is
not applicable on its own
– contracts for work on fixed platforms are governed by
state law
– TLP and a SPAR are not considered to be vessels, so
OCSLA is applicable, as on a platform
• OCSLA is considered a mandatory choice of law
provision; reverse is not true

50. Choice of Law Issues
• Choice of law clause generally upheld if reasonable
connection unless application of chosen law would violate
public policy
• Anti‐indemnity statutes are based on public policy, and
choice of law clause will not be enforced contrary to anti‐
indemnity statute (subject to some possible exceptions)
• Reverse is not true ‐ if Louisiana law is chosen, LOIA will
apply even if provisions would have been enforceable

51. Drilling Contracts
• Include pass through provision
• Avoid broad “magic” language
– “floating” – IADC contracts
– sound location provision
• Beware of assuming liability for damage to the drilling rig
• Wreck removal can be important

52. Drilling Contracts
(cont’d)
• Beware of broad consequential damage provisions
• Commercial and other provisions may be dangerous
– uncapped exposure for paying day rate during
repairs
– uncapped exposure for paying standby rate
– liability for contractors hired by drilling contractor

53. MSAs
• Building block for risk allocation program
• Get a pass through provision – start a company policy
• Anticipate other contracts and potential hurdles
• Think through choice of indemnity structure
• Consider approach to consequential damages
• Learn when MSAs should not be used

54. Construction Contracts
• Biggest issue may be allocation of liability for
loss or damage to the work
• Insurance too expensive to be the answer
every time
• Offshore policy form (WELCAR) has significant
pitfalls
– provides various sublimits
– additional insured coverage is restricted

55. Construction Contracts
(cont’d)
• WELCAR sets condition precedent
– Requires QA/QC requirements in contract
– Makes additional insured coverage and waiver of
subrogation dependent on compliance
– Puts Company in a very precarious position
• May request amendments but have to ask
• Warranty protection now even more important and
default provisions may be critical
• Still need pass through provision

56. Master Time Charters
• Still need pass through provision
• Vessel will try for a broad reciprocal indemnity
– creates significant risk, particularly in conjunction with
MSA carve out for transportation and/or drilling
contract carve out for damage to drilling rig
– consider matching carve out
• Maritime endorsements are critical
• Dovetailing of insurance is essential – 905(b)

57. Flight Service Agreements
• Historically largely fault‐ based; now seeking
reciprocal
• Fault‐based more accurate from a risk standpoint, but
won’t fit with drilling contract or other broad
reciprocal indemnities
• Ideal would be to graft the two together and still
require pass through protection

58. Conclusion
• Consider the big picture and the need for all contracts to
fit together
• Understand basic rules of indemnity and insurance
• Anticipate the drilling contract obligations and design a
risk allocation program accordingly
• Understand the need for pass‐through protection and the
impact of different reciprocal risk allocation provisions
• Company’s ability to agree to any broad reciprocal
depends on its underlying contracts

59. Conclusion
(cont’d)
• Different contracts have different drivers
• Company policy can help negotiations – consider setting
definition of Company Group and refusing to vary
• Work arounds can be found for special situations – but
options may depend on understanding existing and future
contracts
• Include your broker and let your insurance be a safety net
and a possible solution

60. Owner Controlled Insurance
Programs
An Effective Alternative?
Steve Davis
Senior Vice President
McGriff, Seibels & Williams, Inc.

61. Why Do A Wrap?
ADVANTAGES
• Provides broadened uniform coverages among participants
• Reduces ultimate cost by “bulk purchasing” of insurance and
elimination of contractor overheads
• Ensures substantial limits
• Promotes safety by utilization of site safety programs. Safety
dividends are returned to the owner and/or contractors
• Facilitates use of disadvantaged businesses
• Allows for pre‐negotiated and pre‐planned Medical Care Paths
which provides prompt treatment of injured employees at an agreed
rate
• May be the only alternative to contractor exclusions:
i.e.. residential projects

62. What Coverages Are Included In An
OCIP?
COVERAGES
Coverages typically offered in a wrap‐up program may include:
• Workers’ Compensation and Employers Liability
• Commercial General Liability
• Umbrella / Excess Liability
• Builders’ Risk
• Professional (OPPI/CPPI) Liability
• Environment or Pollution Liability

63. Are Contractors Still Required To
Provide Some Coverages?
Owner Contractor
• Worker’s Compensation and • Worker’s Compensation and
Employers’ Liability Employers’ Liability – Offsite
• Commercial General Liability • Commercial General Liability –
• Umbrella / Excess Liability Offsite
• Builder’s Risk • Umbrella / Excess Liability –
Offsite
• Professional
• Automobile Liability –
• Environmental / Pollution Certificated
Liability
• Contractor’s Equipment –
Certificated
• Vendors & Suppliers –
Certificated

64. When Should A Project Be Considered
For An OCIP?
• Term of Project – Markets are responding to longer-term
projects; i.e. P3s
• State Workers’ Compensation Rates – states with high rates
(e.g. Florida) would support smaller projects
• Type of Work Performed – high rate classification (Concrete,
Steel) generate a greater pool of insurance costs for savings
• Project Labor Content – projects that are comprised of a large
percentage of equipment installation may not generate savings
necessary
• Number of Contractors – a project with fewer contractors may
generate greater savings and less administration
than average

65. The Secret to Project Success
• The selection of the project or project (s)
– State
– Legal climate
– Size and Scope
– Lump Sum versus Negotiated
– Maximize time before project term
• Formal Feasibility Analysis
– Cost Models
– Best Practice Loss Rate
– Economics

66. The Secret to Project Success
• Project Financing
– Lead Lender
– Credit Ratings
• Response time on critical issues
• Claims Management & Protocols
• Integration of Builder’s Risk
– Professional

67. The Secret to Project Success
• Contractor Selection
– Cooperation / support
– Safety Management
– Loss Rates
– Best Practices
• Insurance / Service Specifications
– Coverage & Terms
– Administration
– Limits
– Underwriter knowledge

68. The Secret to Project Success
• Systems, enrollments, data collections & reporting
– Larger the project more sensitive to IT
– Longer the project more sensitive to IT
– Over $500 million
– Can make up mistakes with manual operations
• Letter of credit management & close out options

69. Rating Agencies 101:
A Primer
Mohammed Ashab
Vice President
Signal Administration, Inc.

70. Who Are The Major Rating Agencies?
• Standard & Poor’s Ratings Services (“S&P”)
• Moody’s Investors Service (“Moody’s”)
• A.M. Best Company (“A.M. Best”)
• Fitch Ratings (“Fitch”)

71. What Is A Rating?
• “… opinion on the general creditworthiness of an obligor, or the
creditworthiness of an obligor with respect to a particular debt
security or other financial obligation.”
• Globally consistent against a standard scale
• Measure of default
• Applied to entities and securities
• Assigned in local and foreign currencies

72. What Is NOT A Rating?
• A recommendation to buy or sell investments
• A way to define good or bad companies
• An audit

73. Rating Fundamentals
• Ratings are forward looking
– Medium term time horizon 3‐5 years
• Stability objective
– Ratings should not necessarily reflect market volatility
• Risk measured is probability of default
– Not trading loss or loss given default
• Financial strength ratings (FSR) measures ability of insurers to pay
policyholders according to policy and contract terms

74. Sample S&P Rating Definitions
Rating Meaning
AAA Extremely Strong
Investment AA Very Strong
Grade
A Strong
BBB Good
BB Marginal
Non- Investment
Grade B Weak
CC Extremely Weak
R Regulatory Action
N.R. Not Rated

75. Some Rating Terminology
• Notching (“+” or “‐”): Relative standing within major rating categories
• Outlook: Potential direction of rating over intermediate to long‐term
– “Positive”: Rating may be raised
– “Negative”: Rating may be lowered
– “Stable”: Rating is not likely to change
– “Developing”: Rating may be raised or lowered
– “N.M.”: Not meaningful
• CreditWatch: Highlights potential direction of a rating
– Positive
– Negative
– Developing

76. S&P Rating Process
• Insurer sends written request for an interactive rating
– Rating agency sends agreement letter outlining terms, fees, etc.
– Insurer signs and returns letter listing primary contact
• Primary analyst assigned and coordinates through primary contact:
– Date of management meeting (usually full day)
– Format / structure of meeting(s)
– Complying with information request list
• Conduct management meeting:
– Company: Senior executives (e.g., CFO, etc.)
– S&P: At least 2 analysts plus any other specialized analysts

77. S&P Rating Process
• Actions taken at conclusion of management meeting:
– Primary analyst conducts detailed analysis (public and nonpublic data)
– Primary analyst presents analysis at rating committee (generally 3
weeks after management meeting)
• Rating committee:
– Consists of an odd number of experienced analysts (1 person, 1 vote)
– 8 different rating criteria scored to derive rating
– Analyzed within context of “peer group” if exists
• Rating decision:
– Communicated to company by analyst
– Key rating factors driving rating plus future expectations

78. S&P Rating Criteria
• Management & Corporate Strategy
• Competitive Position
• Operational Performance
• Capitalization
• Investments
• Liquidity
• Financial Flexibility
• Enterprise Risk Management

79. Management & Corporate Strategy
• Assessment of “human element”
• Most subjective rating criteria
• Involves evaluating:
– Strategic positioning
– Operational effectiveness
– Financial risk tolerance
– Organization structure, management breadth and experience
• Includes Accounting & Financial Reporting analysis

80. Competitive Position
• Substantially subjective assessment
• Identify sources of sustainable competitive advantage
– Allow insurer to compete more effectively vs. peers
– Improve ability to write more business or earn higher margins
• Often a precursor to satisfactory operating performance
• Involves evaluating:
– Distribution
– Market Advantages / Market Share
– Product Diversification
– Geographic Diversification

81. Operating Performance
• Earnings is a function of corporate strategy and competitive position
• Key driver of earnings = Profit margin on operating revenues
• Return on Revenue (ROR) vs. Return on Equity (ROE)
– ROR captures both sources of earnings (i.e., underwriting, investment)
– Evaluate earnings before tax and capital gains
– ROE can be distorted by capital structure (i.e., leverage)
• Underwriting performance important to overall operating performance
– Loss ratios, expense ratios, combined ratio, premium growth
• Competitive advantages lead to increased margins

82. Capitalization
• Measured by S&P’s capital model
• Covers losses from disparate risks in excess of expected losses
– BBB: 97.2%
– A: 99.4%
– AA: 99.7%
– AAA: 99.9%
• Risk variables stressed (e.g., assets, reserves, pricing, credit, etc.)
• Total Adjusted Capital (TAC) vs. Required capital for targeted rating
• Other important factors in assessing capital adequacy
– Reserve adequacy
– Ability to generate capital through earnings
– Potential calls on capital (i.e., parent, affiliate, subsidiary)
– Capital support (i.e., parent, affiliate, subsidiary)

83. Investments
• Assess insurer’s asset allocation strategy
– Bonds, mortgages, common stock, etc.
– Higher risk assets have higher expected returns
• Assess diversification of investment portfolio
– Review unusual concentrations (e.g., asset type, industry sector, company)
– Review existing correlations (e.g., real estate)
• Assess asset credit quality
• Interest rate risk (not a big concern for P&C companies)

84. Liquidity
• Operating cash flows
– Cash flow from underwriting
– Cash inflows (i.e., premiums) to cash outflow (i.e., losses, expenses)
• Investment portfolio
– Absolute level vs. ratio to total invested assets
– Key considerations (e.g., public vs. private, short‐term vs. long‐term, MBS
(percent, duration, type), equity (percent, type, quality))
• External sources (e.g., bank credit lines, CP programs)
• Significant catastrophe exposure

85. Financial Flexibility
• Capital Requirements: Factors that may result in an exceptionally large
need for long‐term capital or short‐term liquidity
• Capital Sources: Ability to access an unusually large amount of short‐term
and long‐term capital
– Multiple types of capital markets (e.g., long‐term public debt, CP market, etc.)
• Reinsurance
– Reinsurance leverage (e.g., NPW vs. GWP, net reserves vs. gross reserves)
– Credit quality of reinsurers
– Review Schedule F

86. Enterprise Risk Management
• Separate rating category since October 2005
• Analyze across 5 key areas:
– Risk Culture
– Risk Controls
– Emerging Risk Management
– Risk Models
– Strategic Risk Management
• Evaluated in one of 4 buckets:
– Weak
– Adequate
– Strong
– Excellent

87. A.M. Best On ERM
• Natural extension of sound risk management
• Increasingly important part of sound risk management
– Establish risk‐aware culture
– Use of sophisticated tools to manage (measure) risk correlations
• Foundation of any risk management framework:
– Credit Risk (e.g., counterparty credit risk)
– Market Risk (e.g., interest rate risk, investment risk)
– Underwriting Risk (e.g., pricing, reserves)
– Operational Risk (e.g., fraud, data security)
– Strategic Risk (e.g., adverse business decisions)
• What’s New: “E” in ERM

88. S&P vs. A.M. Best
S&P A.M. Best
• Widely recognized overseas in • Highly regarded for U.S. insurance
areas other than insurance ratings
• Mostly rates medium to large • Rates small to large companies
public companies (public and private)
• Income statement focus (i.e., • Balance sheet focus (i.e., capital
earnings) adequacy)
• ERM formal rating category; • ERM becoming more important
published in press releases and noted in press releases

89. Criticisms of Rating Agencies
• Slow to react in issuing downgrades
• Relationships with company management
• Creation of “death spiral”
• Barriers to entry
• Judgment errors in rating structured products

90. In The Spotlight: Rating Agencies
• Credit Rating Agency Reform Act of 2006
– Passed by Congress (Fall 2006)
– SEC authorized to supervise rating agencies (i.e., NRSROs)
– Promote accountability, transparency and competition
• Implementation of the Act (effective June 2007) by SEC
– Conducted 10 mo. extensive investigation of 3 rating agencies
– Adopted several rulemakings and proposals to promote Act’s objectives

91. SEC Roundtable (April 15, 2009)
• Purpose: To examine oversight of credit rating agencies
• Participants include industry leaders: investors, rating agencies,
financial services associations, gov’t agencies and academics
• 4 panels formed to discuss:
– Perspective of current NRSROs: What went wrong and what corrective
steps is the industry taking?
– Competition Issues: What are current barriers to entering the credit
rating agency industry?
– Users’ perspectives of credit ratings
– Approaches to improve rating agency oversight

92. Thank You!

93. Drilling Contract Issues:
A Contractor’s Perspective
William W. Pugh
Attorney at Law
Liskow & Lewis

94. Drilling Contracts - Indemnity
• Beware of “floating” magic language
– Paragraph 501/IADC Offshore Daywork
– Preamble and Subparagraph 14.13 of IADC
Onshore Daywork
– Preamble and Subparagraph 19.19 of IADC
Onshore Footage
– Preamble and Subparagraph 18.17 of IADC
Onshore Turnkey

95. 501. Contractor’s Standard of Performance
Contractor shall carry out all operations hereunder
on a daywork basis. For purposes hereof the term
“daywork basis” means Contractor shall furnish
equipment, labor, and perform services as herein
provided, for a specified sum per day under the
direction and supervision of Operator (inclusive of
any employee, agent, consultant or subcontractor
engaged by Operator to direct drilling operations).
When operating on a daywork basis, Contractor shall
be fully paid at the applicable rates of payment and
assumes only the obligations and liabilities stated
herein.

96. 501. Contractor’s Standard of Performance
(cont’d)
Except for such obligations and liabilities specifically assumed by
Contractor, Operator shall be solely responsible and assumes liability for
all consequences of operations by both parties while on a daywork basis,
including results and all other risks or liabilities incurred in or incident to
such operations, notwithstanding any breach of representation or
warranty, either expressed or implied, or the negligence or fault of
Contractor, its employees, subcontractors, consultants, agents or
servants, including sole, concurrent or gross negligence, either active or
passive, latent defects or unseaworthiness of any vessel or vessels,
including the Drilling Unit, (whether or not preexisting) and any liability
based on any theory of tort, breach of contract, breach of duty (whether
statutory, contractual or otherwise), regulatory or statutory liability, or
strict liability, including defect or ruin of premises, either latent or
patent.

97. 503. Compliance with Operator’s Instructions
Contractor shall comply with all instructions of Operator
consistent with the provisions of this Contract, including, without
limitation, drilling, well control and safety instructions. Such
instructions shall, if Contractor so requires, be confirmed in
writing by the authorized representative of Operator. However,
Operator shall not issue any instructions which would be
inconsistent with Contractor’s rules, policies or procedures
pertaining to the safety of its personnel, equipment or the Drilling
Unit, or require Contractor to exceed the rated capacities of
Contractor’s Items or the minimum or maximum water depths or
maximum well depth set forth in Appendix A.

98. 601. Equipment and Personnel
. . . When, at Operator’s request and with Contractor’s
agreement, the Contractor furnishes or subcontracts for
certain items which Operator is required herein to provide,
for purposes of this Contract said items or services shall be
deemed to be Operator furnished items or services. Any
subcontractors so hired shall be deemed to be Operator’s
contractor, and Operator shall not be relieved of any of its
liabilities in connection therewith. For furnishing said items
and services, Operator shall reimburse Contractor its entire
cost plus a handling charge as specified in Appendix A.

99. 605. Drilling Site and Access
Notwithstanding any other provision of this Contract, should there be any
obstructions, impediments, faulty bottom conditions or hazards to
operations at or within the area of the drilling location, including the anchor
pattern, and these obstructions, impediments, faulty bottom conditions or
hazards to operations damage Contractor’s Items, or Contractor’s Items
damage these obstructions or impediments, or if seabed conditions prove
unsatisfactory to properly support or moor the Drilling Unit during
operations hereunder, Operator will be responsible for and hold harmless
and indemnify Contractor for all resulting damage, including payment of the
Standby Rate during required repairs, but Operator will receive credit for any
physical damage insurance proceeds received by Contractor as a result of
any damage to the Drilling Unit. All expenses associated with improvements
to the seabed and repositioning of the Drilling Unit at the drilling location
under this Paragraph 605 shall be for Operator’s account.

100. 901. Equipment and Property
(a) Except as specifically provided herein to the contrary,
Contractor shall at all times be responsible for and hold harmless
and indemnify Operator from and against damage to or loss of
Contractor’s property, Contractor’s Items, and the property,
equipment, material and services of Contractor’s Affiliated
Companies, partnerships, and limited liability companies, and its
and all of their co‐owners, partners, co‐venturers, joint owners,
and its contractors and subcontractors of any tier and the officers,
directors, employees, agents, assigns, representatives, managers,
consultants, insurers and subrogees of each of the
foregoing. Except to the extent that the proceeds from
Contractor’s insurance as made available to Contractor do not
compensate Contractor therefore,

101. 901. Equipment and Property
(a)(4) Operator shall be responsible for and
hold harmless and indemnify Contractor for
damage to or loss of the Drilling Unit caused
by Operator furnished helicopters, tugs,
supply or service vessels.

102. 905. Pollution and Contamination
Notwithstanding anything to the contrary contained herein, the
responsibility for pollution or contamination shall be as follows:
(a) Contractor shall be responsible for and hold harmless and
indemnify Operator for control and removal of pollution or
contamination which originates above the surface of the water
from spills of fuels, lubricants, motor oils, normal water base
drilling fluid and attendant cuttings, pipe dope, paints, solvents,
ballast, bilge and garbage wholly in Contractor’s possession and
control and directly associated with Contractor’s equipment and
facilities. For purposes hereof the term “normal water base
drilling fluid” means drilling fluid which does not exceed toxicity
limits specified for offshore discharges by the environmental
protection entity having jurisdiction over the Operating Area.

103. 905. Pollution and Contamination
(b) Operator shall be responsible for and hold harmless and indemnify
Contractor against all claims. demands, and causes of action of every
kind and character (including control and removal of the pollutant
involved) arising directly or indirectly from all pollution or
contamination (including radioactive contamination), other than that
described in Paragraph 905(a) above, which may occur as a result of
operations hereunder, including, but not limited to, that which may
result from fire, blowout, cratering, seepage or any other uncontrolled
flow of oil, gas, water or other substance. as well as the use of or
disposition of radioactive sources, lost circulation and fish recovery
materials and fluids, oil emulsion, oil base or chemically treated drilling
fluids and attendant cuttings, and drilling fluids other than “normal
water base drilling fluid” defined in Paragraph 905(a) above.

104. 906. Debris Removal and Cost of
Control
Operator shall be responsible for and hold
harmless and indemnify Contractor for the cost of
removal of debris (including Contractor’s Items)
to the extent that proceeds from Contractor’s
insurance as made available to Contractor do not
compensate Contractor therefor. Operator shall
be responsible for and hold harmless and
indemnify Contractor for the cost of regaining
control of any wild well.

105. 909. Consequential Damages
Subject to and without affecting the provisions of this Contract
regarding the payment of rights and obligations of the parties or the
risk of loss, release and indemnity rights and obligations of the parties,
each party shall at all times be responsible for and hold harmless and
indemnify the other party from and against its own special, indirect, or
consequential damages, and the parties agree that special, indirect or
consequential damages shall be deemed to include, without limitation,
the following: loss of profit or revenue; costs and expenses resulting
from business interruptions; loss or delay in production; loss of or
damage to the leasehold; loss of or delay in drilling or operating rights;
cost of or loss of use of property, equipment, materials and services,
including without limitation those provided by contractors or
subcontractors of every tier or by third parties.

106. 909. Consequential Damages
(cont’d)
Operator shall at all times be responsible for and
hold harmless and indemnify Contractor from and
against all claims, demands and causes of action of
every kind and character in connection with such
special, indirect or consequential damages suffered
by Operator’s co‐owners, co‐venturers, co‐lessees,
farmors, farmees, partners and joint owners.

107. 911. Indemnity Obligations
a) The parties intend and agree that the phrase “be responsible for and
hold harmless and indemnify” in Paragraphs 605, 606, 805 and 901 through
910 hereof means that the indemnifying party shall release, indemnify, hold
harmless and defend (including payment of reasonable attorney’s fees and
costs of litigation) the indemnified party from and against any and all claims,
demands, causes of action damages, judgments and awards of any kind or
character, without limit and without regard to the cause or causes thereof,
including preexisting conditions, whether such conditions be patent or latent,
the unseaworthiness of any vessel or vessels. breach of representation or
warranty (express or implied), strict liability, tort, breach of contract,
regulatory or statutory liability or the negligence of any person or persons,
including that of the indemnified party, whether such negligence be sole joint
or concurrent, active, passive or gross, or any other theory of legal liability.

108. 911. Indemnity Obligations
(b) An indemnifying party’s obligations contained in this Contract
shall extend to the indemnified party and its Affiliated Companies
and the officers, directors, employees, agents, owners,
shareholders and insurers of each and to actions against the
Drilling Unit, its legal and beneficial owners, whether in rem or in
personam.
(c) The terms and provisions of Paragraphs 605, 606, 805 and
901 through 910 shall have no application to claims or causes of
action asserted against Operator or Contractor which arise solely
by reason of any agreement of indemnity with a person or entity
not a party hereto. Nothing contained herein shall confer any
rights upon any third party beneficiary.

109. 1003. Subrogation
For liabilities assumed hereunder by Contractor, its insurance
shall be endorsed to provide that the underwriters waive their
right of subrogation against Operator, its Affiliated Companies
and their co‐owners, co‐venturers, co‐lessees, farmors, farmees,
and joint owners and the officers, directors, stockholders,
partners, managers, representatives, employees, consultants,
agents, servants and insurers of each. Operator will, as well,
cause its insurer to waive subrogation against Contractor and
Contractor’s Affiliated Companies and their co‐owners, and the
officers, directors, stockholders, partners, managers,
representatives, employees, consultants, agents, servants and
insurers of each for liabilities it assumes.

110. 1004. Additional Insured
Contractor shall name Operator as additional
insured, where permitted, under its policies of
insurance, but only with respect to and to the
extent of the liabilities specifically assumed by
Contractor under this Contract. Operator shall
name Contractor as additional insured, where
permitted, under its policies of insurance, but only
with respect to and to the extent of the liabilities
specifically assumed by Operator under this
Contract.

111. 1005. Primary

112. Appendix E
VI. Marine Insurance
1. Hull and Machinery Insurance (including collision liability)
shall be provided for the Drilling Unit owned or chartered by
Contractor and utilized in the performance of this Contract in an
amount equal to the declared value of the Drilling Unit, subject to
a deductible determined by Contractor.
2. Protection and Indemnity Insurance or equivalent
comprehensive general liability insurance, with watercraft
exclusion deleted, shall be provided with a combined single limit of
U.S. $_______________ per occurrence or the value of the Drilling
Unit, whichever is greater.

113. Interplay Between Drilling Contract,
MSA and Vessel Charter
• Assume broad reciprocal in the drilling contract
• Operator will owe indemnity to the Drilling
Contractor each time there is an accident involving
anyone other than a member of the Drilling
Contractor Group
• Be careful of carve out for damage caused by a
vessel

114. Damage to Rig Wireline
by Vessel
Roughneck
Rowatan
Drilling
Big Oil
Vessel –
M/V Work Horse

115. Broad Reciprocal in Any Contract
Necessitates a “Pass Through”
Provision
• Company must have “pass‐through” provision in other
contracts ‐ MSA, Vessel Charters, and Flight Service
Agreements
• Always be aware of enforceability issues
– Maritime Law might govern the Drilling Contract – if so,
indemnities are generally enforceable
– State Law might govern the MSA; if so, the indemnity
provisions might be void based on LOIA or TOAIA

116. Follow Up Issues
• Get MSAs and other contracts in place
• Make sure they fit with Drilling Contract
– Charter indemnity may depend on drilling
contract carve out (901(a)(4))
– If using broad reciprocal in charter, exclude
liability for damage to rig up to amount of
carve out

117. Follow Up Issues (cont’d)
• Consider Marcel provision if possible LOIA
– consider how to handle Marcel issues in your
standard MSA
– if not done generally, may want to consider
Marcel provision for specific vendors
• Get Risk Management Dept and broker
involved in reviewing the Drilling Contract and
related contracts

118. Onshore IADC Contracts
• Preamble – same as 501 of Offshore Daywork, but
no “magic language”
• Indemnity provision (¶ 14.13, 19.19, or 18.17 in
different contracts) adds “magic language”
– “all releases, indemnity obligations, and liabilities assumed
by such parties under terms of this Contract, including,
without limitation, Subparagraphs [force majeure, sound
location, etc. and indemnity provisions] be without limit
[notwithstanding breach of warranty or sole or gross
negligence, or other liability of Contractor or its subs]”

119. Selected Commercial Terms
• Be sure that Repair Rate provision reflects
parties’ intent
– Operator should be sure it goes to zero at some
point
– length of time is negotiable
• Be sure there is a time limit on the force
majeure rate and on the standby rate
(particularly if it can be triggered without fault
of Operator)

120. Conclusion
• Drilling contracts are high risk
• IADC contracts are tricky and can have
unanticipated consequences
• Critically important to understand drilling
contract issues and relationship with other
contracts

121. Open Discussion