Oil’s Global Reach
The risks within oil exploration are many, so those in the industry should do their due diligence--prepare for the worst and hope for the best
Gone are the days when countries in the Middle East were surveyed as the sole distributors of oil. Today’s oil and gas industry is evolving globally, and explorers are scouting new locations to set up drilling sites.
In fact, recent exploration in Ghana and Sierra Leone in West Africa led to the discovery of oil reserves of 2.5 billion barrels, according to RIMS.
George Hutchings, senior VP and COO of Bermuda-based Oil Insurance Limited, agrees there has definitely been a push to find oil and gas reserves in more technically challenging locations, especially in the offshore E&P sector.
“Reserves are becoming more difficult to find,” he says. “This has dramatically increased the cost of exploring for oil and gas reserves. And when looking for reserves in more extreme environments, for example in deeper water, the capital cost required is substantially higher than it has been in less challenging environments.”
However, for stakeholders in the insurance industry, oil exploration and discovery lead to business development.
“The industry has been international for many years but it has gotten even more global recently,” says Bertil Olsson, practice leader for energy in the U.S. at Marsh Inc. “Several major insurers have established underwriting centres in some of the key oil and gas locations [e.g. Singapore, Dubai, Perth in Australia].”
As a result of this globalization, compliance has become a bigger issue, Olsson says. “There are complex insurance-related tax and regulatory issues that brokers and insurers must comply with on a local level.”
The BP Oil Spill
The catastrophic event that has forever tainted oil and gas exploration is the BP oil spill. The spill has resulted in 114,000 claims, of which it has paid out over $200 million (US) to 32,000 claimants as of July 16, according to the company. But the environment, businesses, and insurers are still feeling the repercussions of the spill.
At press time, the insurers that had been affected most are those that provided property damage insurance. The insurers and coverages that are still pending are on the liability side.
The spill has resulted in 114,000 claims, of which it has paid out over $200 million (US) to 32,000 claimants as of July 16, according to the company.
With BP being the largest partner at 65% and considering it is completely self-insured, it will be quite some time until the legal issues are resolved, according to Hutchings.
“Those that didn’t have significant liability insurance, including business liability, product liability, D&O for the shareholders, and workers’ compensation, are starting to feel the effects,” says Hutchings.
He adds that even if BP had wanted to buy insurance, they couldn’t have bought sufficient coverage for this type of event. “They would’ve needed maybe $40 billion or more in liability insurance, and at best you can buy maybe $1.5 billion.”
So what did those in the industry learn from this event?
“The primary lesson is that big and bad things can happen,” says Hutchings. “Just because you have the equipment does not guarantee it’s going to work. When an insurance company provides coverage, they need to know a lot about the safety, technology, and maintenance on these facilities so that they can properly assess the risks.”
Going forward, the U.S. and possibly other foreign jurisdictional regulatory environments for oil and gas exploration will likely change, according to Hutchings. “There will be a higher level of regulations from a safety and financial responsibility point of view.”
Olsson adds it will also be more challenging to obtain insurance for deepwater operations, and that pricing could increase as a result.
Due to the risks involved with drilling, oil exploration has been given a bad name. But if the proper safety precautions are taken, then certain risks can be mitigated.
Generally, the risks when drilling offshore versus onshore are much greater. However, there are property and casualty risks associated with exploring and developing oil reserves, no matter where the site is located. This includes the risk of safety on the site, such as employee safety, and environmental risks, such as forest fires. Lastly, with new technology advancements come new risks.
One issue is trying to preserve the sites as they were before development. “Companies will go into a site and start excavating and drilling,” says Ramy Dasuki, commercial broker at Alberta-based Western Financial Group. “When they are done, they must make it like it was before. Coming up with ways to do the least amount of damage can be an issue.”
‘Green’ initiatives are being put in place to help mitigate some of the risks, and reduce the carbon footprint left by oil exploration.
Prior to drilling, O&G companies will typically need to prepare a site, he says. This usually involves some excavation and land grading in order to allow the drill rig to be appropriately set up. When they are done with the site, they must remediate the site and leave it in as close a condition to what it was prior to any disruption. Reducing environmental impact on these sites is an issue that firms and industry are grappling with regularly.
Brokers must inform their clients about all the safety and maintenance procedures, and ensure their client’s equipment is working properly. Additionally, abiding by best practices is a must.
“Some of the pending regulatory changes are going to be a fact of life,” says Hutchings. “Companies are going to have to change their practices to meet these standards if they want to participate in future E&P activities. This will mean that they may need to buy more insurance in the commercial markets, and brokers will need to know of these changes to be value-added participants in the clients’ solutions.”
When looking to oil exploration in Canada, the Alberta oil sands come to mind. The risks are similar to many other oil projects–site safety being the number 1 concern.
“In Alberta, we have a higher workplace/accident ratio than many other provinces,” says Dasuki. “Some of these accidents can be attributed to the oil and gas industry, so safety is one of the major inherent risks and priorities here.”
Additionally, there is a risk of forest fires due to the nature of the sites because they tend to be in remote locations.
“Green” initiatives are being put in place to help mitigate some of the risks, and reduce the carbon footprint left by oil exploration. At this time, it takes about half a barrel of energy to drill and produce one barrel of oil, according to Dasuki.
“Companies are looking at ways of improving this by reducing the use of fossil fuels and utilizing more solar and wind power,” he says. “The green approach is also going to make it safer to drill.”
For example, says Dasuki, when using fossil fuels an employee could light a cigarette and cause an explosion. Using solar or wind power could prevent this type of risk.
“We have a niche market and we are revolutionizing the way we are doing business,” he adds. “The Canadian oil patch is one of the cleanest, most organized and regulated industries in the world.”
Oil and Gas Insurance
A look at some of the various coverages for contractors in the oil and gas sectors
- General liability insurance (any business, regardless of whether it’s in oil and gas, would have this).
- Sub-surface coverage provides coverage for loss or damage that is caused underneath the ground level.
- Forest firefighting expense coverage helps pay for any forest fires.
- Riggers or hook liability is coverage for the contractors that operate cranes as part of their job. For example, it covers the value of the equipment being lifted or moved by a crane.
- Limited pollution coverage provides coverage for bodily injury or property damage caused by a pollution accident. This also covers clean up costs associated with the accident.
Errors and omissions insurance is for the consultants, engineers, industry professionals, etc.
In order to be approved for some of these coverages, insurers look to two areas. The first is experience–contractors must have work experience in the oil and gas industry to ensure coverage. The second is education. Insurers expect companies and their employees to have the appropriate licensing, and have taken the necessary work safety courses.
Source: Ramy Dasuki, commercial broker, Western Financial Group
Oil Quick Facts
- Canada is the top U.S. supplier of crude oil, exporting $15.8 billion in the first half of 2010; Nigeria follows with $8.6 billion; and Mexico is third at about $8.3 billion
- The cost of crude oil per barrel was about $76 (US) in July 2010, and expected to rise to $88 per barrel by July 2011
- Canada had 178 billion barrels of oil reserves in January 2009, second only to Saudi Arabia
- 95% of Canada’s oil reserves are the oil sands deposits in Alberta
- The 2009 merger of Suncor and Petro-Canada created the largest oil producer in Canada
- Other large oil producers in Canada include: Imperial Oil, EnCana, Talisman Energy, Suncor, EOG Resources, Husky Energy, and Apache Canada
Source: U.S. Energy Information Administration, oil-price.net
© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the July/August 2010 edition of Canadian Insurance Top Broker magazine.