Energy - Allianz Global Corporate & Specialty

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SPECIAL TOPIC Energy security Oil refineries may well soon be struggling to meet global demand. 14 Special Topic – Energy Securing oil and gas supplies The oil and gas sector faces major challenges in keeping up with demand As the global demand for oil and gas grows, energy companies will be forced to take increasing risks to try to secure future supply. Not only will energy companies need to explore new, untapped areas and search for fields at greater depths, but they will also be under increasing pressure to forge joint ventures with national oil companies, as well as better relations with the governments that own them, as they assume greater control over the extraction of their mineral wealth. NEIL HODGE The next few years will be tough for the oil and gas sector, especially as companies will need to invest more funds to finance increased risks that insurers will likely be unwilling – or incapable – of wholly underwriting. The world’s energy markets have been greatly impacted by the global economic crisis and increased price volatility, and financial markets are still nervous about the pace of economic recovery and the status of the energy industry, particularly as the margin between supply and demand becomes dangerously thin. Presently, oil supplies are just managing to meet demand – but the pressure is on to find new reserves fast. The International Energy Agency (IEA), which acts as a policy adviser to its 28 member countries, has recently increased its global oil demand forecast for 2010 to 87.32 million barrels per day – up from the 2009 figure of 84.9 million barrels per day. The figure is expected to reach 88.51 million barrels per day in 2011. By 2030, the IEA estimates that global demand for oil will reach 105 million barrels per day – an increase of over 20 percent on current demand. Current supply is around 92 million barrels per day. Even oil-producing countries are finding that they need to import greater volumes of oil to meet industrial and consumer needs. For example, China, a significant glob - al growth engine, increased its demand in January 2010 by 28 percent and today buys as much as 8 million barrels per day, or more than the combined daily production of Kuwait, Venezuela and Norway. Six Saudi Arabias Dr. Fatih Birol, the IEA’s chief economist, has said that the world would need to find the equivalent of four times the crude oil reserves now held by Saudi Arabia – the world’s largest oil producing country – to maintain current production plus six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030. As a result, exploration and production (E&P) investment, which dropped to $400 billion in 2009, is forecast to rise to $447 billion in 2010 – an increase of 12 percent. Accountants Ernst & Young’s (E&Y) Business Risk Report 2010, titled “The Top 10 Risks for Oil and Gas”, says that access to reserves at a reasonable cost is a key problem EXTREME OIL PRODUCTION According to the US Energy Information Administration, the US is actually the third largest producer of oil in the world, after Russia and Saudi Arabia – China is number five. However, demand in the US and China far exceeds their production and continues to rise. Special Topic – Energy 15
“The insurance industry has to help create a culture of openness with National Oil Companies so that they understand how we price premiums.” Oil companies will be forced to search for oil in riskier areas and deeper waters. 16 Special Topic – Energy Paul O'Neill, Head of Energy Underwriting for oil and gas companies. It points out that the location of many of these reserves are in difficult environments where the E&P costs are high — such as the Canadian oil sands, the Arctic or deep water — and so will increase the risk of making new investments. A vast number of offshore projects are coming on line and many more are being developed. Australia is seeing record breaking projects on the North West shelf, for example, with the vast Gorgon liquefied natural gas (LNG) project with reserves estimated at 1.1 trillion cubic meters of natural gas (see article on the Pluto gas field p. 20). Other projects are reaching fruition off the West African coast and in Venezuela and Canada. The targets are ambitious, as they often are in this industry: Iraq currently plans to expand production to as much as 12 million barrels per day over the next six to seven years. Shale gas projects are also coming to the fore: as the technology matures, projects are looking increasingly economically viable, although distribution remains a problem, particularly in newly tapped areas. However, such obstacles are being overcome, and major projects such as Nord Stream and the Russia-China pipeline will enable the development of a more efficient distribution network from source to customer. The OCs Paul O’Neill, head of energy underwriting at Allianz Global Corporate & Specialty (AGCS), says that with out doubt the energy environment represents a challeng ing future in which both quality energy companies and insurance partners will recognize opportunities, though the volatility of oil prices makes the economics of planning projects for the long term unpredictable and difficult. O’Neill also points out that the influence and strategic importance in their relationship with national oil companies (NOCs) is rapidly changing. NOCs, such as Petrobras in Brazil and China’s Sinopec, are now intent on controlling their own reserves, relying on the oil majors for their industry expertise and as equity partners, rather than needing them to carry out the bulk of the work. And their influence should not be underesti mated – NOCs now control nearly four-fifth’s of the world’s oil and gas reserves, compared to just six percent controlled by independent oil companies (IOCs). O’Neill believes that IOCs will be under increasing pressure to explore for oil and gas reserves in riskier areas and in deeper waters, and that they will need to use the latest technical innovations to secure fields as NOCs concentrate on exploiting their own national reserves. He also points out that the process will be an Total world oil demand (Mb/d) ‘10-’11 STEO forecast 88 87 86 85 84 83 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 expensive one: IOCs will need to spend billions of dollars on E&P investment, while NOCs have the back - ing of sovereign funds, local government support and a greater proximity to emerging markets. In the past few years, governments in emerging markets have showered billions of dollars worth of investments on their own oil companies. The growing desire to secure supply has seen Petrobras put together the largest ever share offering of over $ 67 billion. This will be used to fund a capital expenditure program of $ 224 billion, with the aim of developing the company’s significant offshore reserves. Chinese NOCs such as Sinopec and the China National Offshore Oil Corporation (CNOOC) have been taking stakes in projects from Africa to Canada. O’Neill believes that the rise of NOCs poses several challenges for the industry and for insurers, at least in the short-term. For example, he says: “Insurers need to make sure that NOCs provide quality information about the projects they are involved in, the inherent risks that have been identified, and the controls that have been put in place to mitigate them. This has not always been the case in the past, which has made it more difficult for insurers to price premiums and assess whether they could provide adequate coverage.” “The insurance industry has to help create a culture of openness with NOCs so that they understand how we price premiums. We need to encourage a greater exchange in quality information as this will help both parties,” he says. Securing skills Another global problem is that presently oil companies – both national and independent – do not have enough skilled and experienced people in place to 3Q 2011 4Q 2011 Source: IEA Special Topic – Energy 17
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Energy - Allianz Global Corporate & Specialty

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