Onshore Energy Conference — Dubai Onshore Energy Conference — Dubai 01 | Page 38

DESCRIPTION
Selling price of final product
Production cost

BUT FOR ACTUAL
(US$ PER BBL)
70
(60)

Import – purchase cost

(70)

Import – transport cost

(5)

Margin

10

(5)

Additional cost: split by

15

Economic

10

Uneconomic
If the minimum orders are not taken,
it could result in additional costs to the
buyer particularly if the clause restricts
the buyer’s ability to consume the
product at alternative locations or sell
the product to a third party. The basis of
the costs depends on the conditions of the
contract and could be in the form of:
a Value of sales shortfall against the
commitment – this is where a seller has the
right to sell the volume in question to another
entity at market price, with any value lost being
passed on to the buyer. These costs could be
significant especially if the contract price does
not take account of changes in prices, such as the
drop in oil or natural gas prices in 2015;
of distressed sale incurred
b Cost

by the seller (i.e. the lost sales
value and additional selling
costs in a third party sale);

c Percentage
of the

minimum volume.
These costs may be avoided
if there is a make-up
clause allowing catch-up
in later months, or if a Force
Majeure Clause is triggered.
In the event of an insured
incident which results in lower
feedstock requirements, and if the
contractual commitments cannot be avoided,
38

70

5

it is not uncommon for the loss to form part of
a Business Interruption claim, which can be
substantial, as set out in the example below:
Raw materials / feedstock are usually
uninsured costs, and as such, purchases are
assumed to vary directly with sales and are
therefore “saved” if sales reduce following an
incident. However, if feedstock purchases are
below the minimum offtake, then the cost
will not vary with sales / production,
resulting in part of the cost continuing.
Although a financial loss has been
sustained, this may not be indemnifiable
as part of the loss of gross profit.
A feedstock loss is frequently claimed
as an increased costs of working (“ICWs”),
but this raises the question as to whether
it would satisfy the policy definition
of being “necessarily and reasonably
incurred for the sole purpose of avoiding
or diminishing the reduction in turnover…
but not exceeding the sum produced by
applying the Rate of Gross Profit to the
amount of the reduction thereby avoided.”
Ultimately, it is for Insurers to interpret the
policy wording, however consideration would
need to be given as to whether these costs
“avoid or diminish the reduction in turnover”.
Given the nature of the cost it may be difficult
to link this to a mitigation of lost turnover.
Some policies may include Additional
Increased Costs of Working (“AICW”)
or Extra Expense (“EE”) extension.
These extensions frequently
require the costs to “protect
turnover” or “resume or
maintain normal business
operations”, and are not
subject to an economic limit,
but are often sub limited.
As such, it is necessary
to consider whether the
contractual cost is considered
to be “protecting turnover” or
“maintaining normal business
operations”. However, these
issues would need to be addressed
on a case by case basis by Insurers /
Adjusters after taking into account the
circumstances and the wording of the policy.