2025 UK Budget & North Sea “Tie-Back” Insurance Coverage Considerations

In conjunction with the 2025 budget, the UK government has announced amendments to plans to end oil & gas exploration in the North Sea. In particular, within set parameters, the government is due to allow the development of blocks of acreage which are part of, or adjacent to, existing oil & gas fields. The government anticipates such areas should already be well-understood and will therefore not require any exploration activity.

Subject to forthcoming legislation and interpretation of the proposed amendments, the potential exists for the North Sea to experience a number of subsea “tie-back” projects. Such “tie-back” projects, to existing infrastructure, give rise to certain insurance issues that require particularly careful attention on the part of oil & gas companies.

Firstly, if such projects involve a “tie-back” to another party’s infrastructure, the likelihood is that the partners in the new project will be faced with a contractual liability exposure in the form of a tie-in or proximity agreement. Such contractual liability exposures will require careful consideration in relation to the Existing Property / Contractual Exclusion and Existing Property / Contractual Exclusion Buyback Endorsements associated with the WELCAR 2001 Offshore Construction Project Policy.

Notwithstanding the High Court’s view of the coverage buyback declaration requirements associated with exclusion 3 of the Existing Property / Contractual Exclusion Endorsement, it is strongly recommend that policyholders declare any contractual liability exposures to underwriters for their agreement. (Technip Saudi Arabia Limited v The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023] EWHC 1859 (Comm).)

Oil & gas companies faced with contractual liability exposures for loss of use, arising out of tie-in agreements, proximity agreements and the like, will need to ensure that specific enhancements are secured in relation to the terminology of the standard Existing Property / Contractual Exclusion Buyback Endorsement.

Secondly, oil & gas companies should remain mindful that contractual liability exposures, associated with “tie-back” projects, could arise other than via tie-in and proximity agreements. For example, instances may arise whereby the partners in the project are forced to grant hold harmless agreements to their vessel contractors in respect of any damage caused to nearby “third party” platforms. For insurance purposes, any such hold harmless exposures must be treated by oil & gas companies as contractual liability risks, in the same way as tie-in and proximity agreements, with coverage being negotiated with underwriters in the same manner.

Thirdly, oil & gas companies may be involved in “tie-back” projects attaching back to their own existing infrastructure. Such oil & gas companies being faced with the risk of their own existing infrastructure sustaining damage during the “tie-back” project.

Certain oil & gas companies may seek to obtain “first party” property damage cover, in respect of their own existing infrastructure, by making a declaration under the “stand alone” Offshore Construction policy associated with the project. Often with the objective of seeking to protect the loss record of their annual operational Package Policy. However, any oil & gas companies seeking such “stand alone” “first party” property damage cover, away from the annual operational Package Policy, must remain acutely aware of their Business Interruption coverage requirements.

It is highly unlikely Offshore Construction underwriters will grant any “first party” loss of use cover. Accordingly, any oil & gas company requiring such cover will need to rely upon the Business Interruption section of its annual operational Package Policy. Such cover will, most likely, be afforded in accordance with the provisions of either the 2005 or 2020 version of the Loss of Production Income Wording – Production Loss Sustained. (“LOPI wording”.)

Both the 2005 and 2020 versions of the LOPI wording expressly require the trigger for the loss of use claim to be “a claim… in respect of … physical damage… under the Physical Damage Section of this policy” i.e. the operational Package Policy. 

Therefore, any oil & gas company seeking to rely upon loss of use cover under the Business Interruption section of its operational Package Policy, whilst insuring the property damage risk under a separate insurance contract, would no doubt require express amendments to be made to the wording of its Business Interruption cover.