NEWS

ALESCO
NEWS
ISSUE 4 – DECEMBER 2015
E&P:
A WELL OILED
MACHINE?
THIS ISSUE
OIL PRICES
The effect of oil prices on
our industry and beyond
ENERGY
CASUALTY
Recent updates in the
market
LOSS
UPDATE
Significant energy
claims globally
WINDS OF
CHANGE
Latest thought leadership
in the wind farm industry
DECOMMISSIONING
A review of changes to the
guidelines

ALESCO NEWS
ISSUE 4 DECEMBER 2015
WELCOME TO
ALESCO
NEWS
We are pleased to
introduce the final
instalment of Alesco
News for 2015, which
THE EFFECT OF
OIL PRICES ON
OUR INDUSTRY
AND BEYOND...
has a particular focus
on the oil and gas
industry.
2015 has been a year of growth for
Alesco in terms of our evolving team.
We’ve had a number of new joiners
in our energy and construction teams
and look forward to further change
with some big announcements we’ll be
making in the first quarter of 2016.
At the beginning of the year the massive slump in oil price
was seen as the bottom of the market and it was expected
to begin recovering at the end of the year and beginning of
2016. Now in December oil prices fell to its lowest level since
the financial crisis; following an OPEC meeting where the
group’s collaborative strength looked like it was wavering, as
it could not come to any production agreement at its annual
meeting.
In this edition we introduce you to
some of our most recent new joiners
and showcase our team in Houston,
with whom we work closely on energy
projects in the US.
The energy industry has also seen
much change this year, with oil prices
falling to the lowest they have been in
11 years, and the changing make up
of E&P companies leading to revised
guidelines for decommissioning. In
addition we’ve seen growth in the
renewables market, in particular for
wind farms, thanks to improved, low
cost technology. Our construction and
casualty teams have had the benefit
of working on the first offshore wind
farm in the US and our power team
has gained experience from new
investments in the industry in Africa.
Shares in the world’s largest oil and gas groups tumbled as investors factored in the
hit to revenues. Hedge funds are holding a near record ‘short’ derivative position,
equivalent to almost 360m barrels of crude that will benefit if prices fall. Sovereign
wealth funds in the Gulf have been pulling money out of asset managers at the fastest
rate on record as they rush to boost their economies following the collapse in the oil
price. Goldman Sachs, one of the most influential banks in the commodities market,
has said that oil could fall to as low as $20 a barrel, amid fears that the world is
running out of storage capacity. The situation is bleak across most commodities with
the mining giant, Anglo American set to sell huge chunks of its business and cut its
workforce by 85,000.
As the end of the year fast approaches,
we’d like to wish you merry Christmas
and a prosperous new year from the
whole team here at Alesco. We look
forward to working with you in 2016.
The depressed oil prices have impacted almost all stakeholders in the oil market, the
US shale market which looked fairly resilient is starting to buckle and in 2015, 36
US E&P companies have filed for bankruptcy. Venezuela is in turmoil, with rampant
inflation and plunging gross domestic product. Nigeria’s stock market has hit a three
year low, as growth slowed to its slowest pace since 1999. Even Saudi Arabia has
been forced to cut spending and is planning to tap international markets for financing.
Russia, the largest producer outside OPEC, has also raised output to a record high as it
seeks to compensate for lower prices and the impact of western sanctions on parts of
its economy.
The situation is not predicted to ease into 2016 with analysts predicting an extended
period of low priced oil. 500,000 barrels per day could come from Iran when
sanctions are lifted, ramping up to 1 million barrels per day in six months; making
the glut even worse. Higher exports from Iran, at least initially do not depend only on
increasing flows from existing producing fields or reactive idle ones. The country has
also amassed a stockpile of between 30 and 40 million barrels that could supplement
additional production.
However in the midst of this, Iran presents an interesting opportunity;
Iran is offering flexible oil contracts to attract foreign investors. The
Iran Petroleum Contract put an end to a two decade old buyback
system that prevented foreign companies from booking reserves
(reserves are used by investors as a tool to judge the value of oil
companies) or taking equity stakes in Iranian companies. Details
of the new framework was unveiled during a two day conference
in Iran attended by oil executives from European and Asian
companies including Total, Statoil, BP, Royal Dutch Shell, Repsol,
and Sinopec. This presents new sources of income to all involved
in the oil industry, Iran is expected to initiate about 50 oil and gas
projects of the back of the Tehran conference but it is not clear when
the companies will be able to bid or start direct negotiations. The
absence of US companies or their subsidiaries at the conference in
Iran is a reminder of the constitution of US restrictions as well as
opposition inside Iran to US companies exploiting national resources.
The Iranian officials still remain hopeful of American companies
attending future conferences.
The year ahead looks to be very difficult for those in the oil industry
but opportunities do exist such as Iran, and for some new players in
the market, such as private equity backed start-ups buying depressed
assets, and of course refiners who are benefiting from the increased
margins.
By: Omar Bashir
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ALESCO NEWS
ISSUE 4 DECEMBER 2015
DECOMMISSIONING
With the changing make up of E&P companies operating in the Gulf of Mexico (GOM) and the
sharp decline in the oil price over the last 12 months, decommissioning and how it will be paid
for is an issue that has been brought to the fore by the Obama administration and the Bureau of
Ocean Energy Management (BOEM).
Escalating decommissioning costs, due to companies expanding
operations into deeper waters, and smaller less well capitalised
companies buying up decade old facilities, all against the
backdrop of a cash strained industry, has led to BOEM proposing
new guidelines to ensure companies have the financial ability to
carry out their decommissioning liabilities.
A view expressed by BOEM Director Abigail Ross Hopper
“The market has changed, the character of the operators have
changed, the places in which they are operating have changed…
it is appropriate to modernise our regulations and our guidance
to reflect the realities that are happening on the outer continental
shelf” 1
The key issue that we have seen raised by clients and which was
raised at the BOEM workshop on 9 October was whether BOEM
would make co-lessees each provide financial assurance for a
100% of the decommissioning liability of a lease. The feedback
was that this will not happen. BOEM will be looking for a tailored
response from co-lessees to provide 100% assurance for a leases
decommissioning liability.
For BOEM the key issue is to ensure the US tax payer doesn’t foot
the bill if an undercapitalised E&P company cannot financially
fulfil their decommissioning obligations. However, to the E&P
industry operating on the OCS these new regulations at best will
only add an additional administrative burden to risk management
departments and at worse it will mean companies providing more
financial assurance, ultimately at a financial cost, adding further
pressure to some already creaking balance sheets. The challenge
is for BOEM to find a balance between good regulation whilst
at the same time ensuring current operators are not hindered in
conducting activities.
Key proposed changes to the guidelines can be
summarised as follows:
• Lessees will no longer be granted waivers
for their supplemental bond obligations. At
present BOEM waives required supplementary
financial assurance for some companies as long
decommissioning liabilities total 50 percent or
less of a company’s net worth.
• Lessees will be able to apply for self-insurance
which will be set at a maximum of 10% of
tangible net worth
• BOEM will consider 100% of each lessee’s
decommissioning liability for every lease
• No longer consider the combined financial
strength of co-lessees when determining a
lessee’s ability to meet its decommissioning
liability financial assurance requirements.
• With multiple co-lessees, it will be up to the
co-lessees to determine how best to fulfill
BOEM’s requirement for 100% assurance of
Outer Continental Shelf (OCS) decommissioning
liabilities.
• BOEM may consider alternative forms of financial
assurance to provide additional flexibility.
• There will be a phase-in period for compliance.
To see the full listing of proposed guidelines visit http://
www.boem.gov/Risk-Management/
The next stage is for the BOEM to feedback on the
review period which closed on the 23 November 2015.
1
Source: Houston Chronicle, 23rd Sept 2015
By: Ronan Barrett
RECENT
DEVELOPMENTS
IN THE
INTERNATIONAL
ENERGY
CASUALTY
MARKET
The stand alone energy casualty market had
been holding firm on rates and breadth of
coverage largely as a result of low capacity levels
post Macondo.
Increases in liability lines on package slips, as a result of insurers
looking to retain their position on the larger property damage
sections, saw a limited impact to the stand alone market. In recent
months there has been some evidence that the market is starting
to be affected by the macroeconomic environment and follow other
energy classes downwards. An increase in capacity to the market,
particularly in London, and insurers hungry for premium income
has seen concessions on rates and terms. On one recent national oil
company casualty placement we saw:
• More capacity was available in London reducing the
participation of Bermudan insurers
• Bermudan insurers that did participate on the placement were
willing to follow the London market wording; something they
have been very reluctant to do in the past
• A 20% reduction in premium, reflecting the increase in capacity
available through new markets
• Insurers looking to increase their lines to maintain premium
income
• Insurers were willing to spread their capacity across different
layers of the placement in order to maintain premium income;
writing on layers that they previously hadn’t.
We don’t expect to see a freefall in rates and coverage for heavier
energy risks but we still expect further reductions and more pressure
on Bermudan insurers as London capacity continues to grow.
By: Tom Payne
CHALLENGES
OF SOFT
RENEWABLE
ENERGY
MARKET
As renewable energy technology continues
to improve and the costs associated with it
decrease, the challenge for the insurance
market is retaining premium income in an
environment where overcapacity is rife.
In a recent article for Insurance Day, Alesco partner Bob Lock
explores the challenges for insurers in the renewable energy
market resulting from increased investment in the industry and
takes a look at the advances we’re seeing in Africa and the US, as
well as the impact of the recent Paris COP21 climate summit.
Read the full insurance Day article here: https://www.
insuranceday.com/news_analysis/special_reports/holding-the-linethe-challenges-of-soft-renewable-energy-market.htm
OFFSHORE
WIND FARMS:
A CASE STUDY
On 15th May 2015, our international
construction team successfully bound a
comprehensive insurance program for
the construction, installation, testing and
commissioning of the Deepwater Wind Block
Island, LLC (DWBI), the first offshore wind
farm in the US.
Download our full case study here which provides great insight
into how we can add value over and above the insurance placing
process: http://www.alescorms.com/wp-content/uploads/2015/11/
Alesco-DeepWater-Wind-Construction-case-study.pdf
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ALESCO NEWS
ISSUE 4 DECEMBER 2015
LOSS UPDATE
NORTH
AMERICA
DOWNSTREAM:
620,759,070
23%
POWER:
199,143,000
8%
UPSTREAM:
1,830,386,660
69%
$2,650,288,730 52%
SOUTH &
CENTRAL AMERICA
DOWNSTREAM:
73,800,000
11%
POWER:
7,300,000
1%
$704,415,000
UPSTREAM:
623,315,000
88%
14%
EUROPE
DOWNSTREAM: POWER:
818,655,000 168,080,000
79%
$1,037,451,000
AFRICA
POWER:
105,940,000
38%
16%
$278,085,000
UPSTREAM:
50,716,000
UPSTREAM:
78,945,000
62%
5%
20%
6%
MIDDLE EAST
DOWNSTREAM: POWER: UPSTREAM:
97,000,000 113,485,000 140,000,000
28%
$350,485,000
ASIA PACIFIC
DOWNSTREAM:
1,000,000
1%
32%
POWER:
21,500,000
28%
$76,000,000
40%
7%
UPSTREAM:
53,500,000
71%
1%
Downstream
69% of downstream losses to date in 2015 are largely attributed
to two losses totalling just over $1bn, the largest of which related
to an explosion and fire in August at Unipetrol’s petrochemical
complex in Litviniov, Czech Republic. Initial estimates have the
loss around the $575m mark, with roughly $500m of this relating
to business interruption. The other most significant loss which we
have previously highlighted was a fire at Exxon Mobil’s Torrance
refinery in Ohio, US, which accounts for $480M.
With the Exxon loss reported to have been largely self-insured
underwriters are likely to have had a profitable year, especially if
they avoided the Unipetrol loss.
Power
As we have previously noted, the power market on the whole has
seen a global spread of attritional losses in 2015, with 35 out of
the 50 reported claims being under the $10m barrier. There have
however since larger losses since our last bulletin, with a $100m
loss in Saudi Arabi being the most notable.
Upstream
Reported losses year to date place upstream losses at close to
$3bn. This is made up of some sizeable losses including a Fire on
a Pemex platform in the Bay of Campeche ($780m), an explosion
on the Petrobras FPSO Cidade de Sao Mateus ($443m) and the
loss of mooring tendons on Chevron’s Big Foot platform in the Gulf
of Mexico ($375m).
Although the sector has seen some large losses, as noted above,
the most striking feature is the attritional and medium sized claims
with around 25 claims being reported between $10m-$100m. It
is also feared by some in the market that certain losses may slip
from the estimates included above, with rumours reported that the
Pemex loss could reach up to the $1.3bn policy limit and some
sources fearing the Big Foot loss could also creep up.
It is however unlikely that these losses will have an impact on the
market moving into 2016. Underwriters are struggling to meet
2015 premium targets, with Lloyds premium income estimated to
be down by 30-40%. We may be close to the bottom of the pricing
cycle but with close to $7bn of upstream capacity and various
new entrants entering the market combined with depressed activity
levels we may still see further rate reductions as underwriters quote
accounts as new business although there may be resistance from
some incumbents.
STOP PRESS
A fire broke out on the 4th of December on a SOCAR operated
platform in the Caspian Sea resulting in significant damage and a
number of fatalities. The latest reports note 23 oil and gas wells
have been shut in and one well continues to burn.
By: Ronan Barrett
INTRODUCING...
ALESCO HOUSTON
Alesco Houston is an independent wholesaler, offering risk management solutions for the energy industry
on behalf of retail broker clients.
Our particular areas of expertise include:
• Drilling contractors and Oil Field Service Contractors
• OPA (Offshore Pollution Act)
• Energy Package Policies, both on and offshore
• Control of Well
• Offshore Property
• Refineries & Petrochemicals
• Terminals
• Natural Gas processing
• Pipelines
Alesco Houston has extensive relationships with US markets who operate
in the energy space and we work closely with the Alesco London team
to deliver the optimal mix of domestic and international capacity for
Insureds.
In conjunction with our London office we offer a unique skill set
which provides true value added services to our retail broker clientele.
For further details contact:
Bruce Wohlwend
Bruce_Wohlwend@alescorms.com
+1(713)401-3505
Nick Locke
Nick_Locke@alescorms.com
+1 (713)401-3506
Katrina Pasternak
Katrina_Pasternak@alescorms.com
+1(713)401-3513
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WELCOME TO THE TEAM
We are pleased to welcome a host of new faces to the Alesco team:
James Floyd: After graduating from
Bristol with a degree in Economics and
Management, James secured a place on
Arthur J. Gallagher’s graduate programme.
He has since joined Alesco’s downstream
division and will be working as a broker
helping Laura Dagger manage the S&T
book.
Omar Gonzalez: Recently joining our
construction team based in Scotland, Omar
will be supporting Irene Bissett with our
Scottish accounts and new business.
Eamonn Johnston: Eamonn has recently
joined our construction team and will
be focussing on the South / South West
UK region. Eamonn has over 25 years’
insurance broking and risk manager
experience.
Dominic Lion: Having worked for several
years at Zurich, Dominic has joined our
construction team. He will be focused on
our UK Projects New Business.
Kent Nickerson: Kent has joined Alesco
as a senior actuary with over 37 years’
experience in the industry. He will be
providing actuarial analysis for the Alesco
Risk Consulting team.
Ed Oldaker: Ed has joined us from JLT
and has three years’ insurance experience.
Ed will be an account handler working on
servicing our large international projects.
Tim Perkins: Fresh from Nottingham Trent
University where he graduated this summer
with a 2:1 in Civil Engineering, Tim has
recently joined our construction team.
Dean Sambrook: Joining us from CG NMB,
Dean has over 8 years’ experience in the
industry and will be responsible for the
management, support & negotiation of key
upstream accounts.
Dom Suckling: Dom has joined Alesco
having spent three months working with a
broker in Sydney. Dom will be working as
an account handler focussing on the day
to day servicing of upstream contractor
accounts.
Claire Wilson: Claire has joined us from
Marsh with over 26 years in the industry.
She will be working with the offshore
broking team on all aspects of the upstream
book.
CONTACTS
OMAR BASHIR
+44 (0)20 7560 3036
Omar_Bashir@alescorms.com
TOM PAYNE
+44 (0)20 3425 3297
Tom_Payne@alescorms.com
RONAN BARRETT
+44 (0)20 7560 3084
Ronan_Barrett@alescorms.com
Alesco Risk Management Services
133 Houndsditch
London
EC3A 7AH
Tel: +44 (0)20 7204 8999
www.alescorms.com
twitter.com/AlescoRMS
linkedin.com/company/alesco-risk-management-services
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Alesco is a trading name of Alesco Risk Management Services Limited. Alesco Risk Management
Services Limited is an appointed representative of Arthur J. Gallagher (UK) Limited which is
authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building,
25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 1193013.
www.alescorms.com
Alesco cannot be held liable for any errors, omissions or inaccuracies contained within the document.
The opinions and views expressed in the above article are those of the author only and are for guidance
purposes only. The authors disclaim any liability for reliance upon those opinions and would encourage
readers to rely upon more than one source before making a decision based on the information.