Energy insurers under pressure as oil companies slash jobs and shelve drilling plans
By James Brewer
Income is tumbling in the energy insurance sector as a consequence of industry reaction to plummeting oil prices, the International Union of Marine Insurance has said.
Simon Williams, chairman of the IUMI offshore energy committee, reported that many oil and gas-related projects are being slowed down, and others have been postponed as demand for the product falls away.
Speaking after the winter 2016 meeting of IUMI in London, Mr Williams said: “Individual insurance rates continue to be under pressure and with the oil price collapse the overall premium base has reduced significantly. The 2015 premium base could be down substantially on the previous year, as oil companies rein in costs and cut back substantially on activity. Oil prices have continued to slide, and some commentators are predicting that there is still some way to go.”
Mr Williams went on: “With more capacity having entered the energy insurance sector in recent years, it will be a real test to see how insurers adapt to this very challenging environment.”
He said that some oil and gas companies are struggling to stay afloat in the new low price environment. “There seems little chance of an immediate respite, and the recent announcement that Iran will potentially add 500, 000 barrels a day to the market will only compound the issue. Many companies are postponing projects and laying off staff – bankruptcies seem inevitable.”
Mr Williams said that BP had summed the situation up well during its results announcement that day, in as much as that company was having challenging times, “and they are not alone.”
BP, which revealed its profits had halved, announced 3, 000 lay-offs around the world by the end of 2017. That was in addition to 4, 000 job cuts planned in exploration and production, including some 600 in North Sea operations. Just days earlier, Shell had said that streamlining and integration from its merger with gas producer BG Group would eradicate 10, 000 staff and contractor jobs.
Mr Williams said that insurers would be asking companies about the kind of jobs that would be axed, in the hope that safety and equipment maintenance would not be jeopardised.
Speakers at IUMI’s 2015 conference in Berlin had already outlined the devastating effects on oil and gas company revenues of the sliding commodity price, which plunged to a 12-year low of $27.10 a barrel in January, down from $100 in September 2014.
Companies could rely on hedging their revenues only for a certain period, said Mr Williams. “I think what we are seeing is the start of – yes, the majors but there are many, many other oil and gas companies, medium to small where they have some challenging times.”
A number of companies went into US Chapter 11 bankruptcy protection in 2015. Mr Williams expected there would be more Bankruptcies and liquidations, mergers and acquisitions and asset sales.
The London insurance market is the key market for upstream energy business. What would to be the requirement for energy insurance in 2016? Oil companies renew their policies in the first six to seven months of each year, and the early ones to renew gave indications of “lower exposures, less drilling, values down. We should be expecting the [market] premium base would be considerably lower.”
It was unclear exactly what energy companies were going to do. “The oil price has been so volatile that they are changing their plans all the time.” But it was clear that in the next few months the pattern would be lower activity, very limited construction, and huge slowing of drilling projects globally.
What was encouraging was BP chief executive Bob Dudley expressing an expectation of an oil price of $50 to $60 by the end of 2016, but there was always a time lag between such movements and the benefit to balance sheets and drilling by the contractors.