The energy industry, as any other industry or individual, uses insurance programs to protect itself from general liabilities. The common types of policies for field operations are almost as old as the industry itself, and include, among others, blow-out policies, environmental policies, and plugging and abandonment policies. In addition to general liabilities, the energy industry has always been concerned with minimizing the risk associated with its investments (exploration for oil and gas reserves). In the last several years, the insurance industry has responded to this challenge by offering a variety of risk minimization programs. These are policies that insure financial conditions. However, many were ill conceived and proved a disappointment to policy holders, and in some cases, a disaster to the policy issuers. Not all insurance programs have to be offered by insurance companies. For example, turnkey drilling may be considered insurance against cost overruns. Mesa Petroleum's famous presale of production insured a locked-in level of gross revenue.
Based on the success of the crude futures market and the volatility of oil prices, several groups are now offering programs that insure reservoir production, reserve volume, and/or product price. This paper reviews some of the types of reserve and price insurance programs from the point of view of producers and financial institutions. The interest in these policies is growing among producers as a means of obtaining higher loan value from financial institutions. Do the owners of the policies get more than piece of mind?