Clements President Chris Beck Speaks to CNBC about Oil and Gas Insurance
Oil firms'
answer to global calamity: Insurance
Sunday, 27 Apr 2014 | 6:00 AM ET
CNBC.com
CNBC.com
The crisis in Ukraine has provided a reminder of an an old
story: The world is a dangerous and unstable place—and some of the most
volatile places on earth are oil-producing areas where oil companies are
compelled to drill.
That stark backdrop means oil companies must insure against
any number of adverse developments, all while prospecting for black gold in
countries like Venezuela, Iraq and Nigeria. In a
world where risks are mounting, threats are increasingly less conventional.
"While there's a lot going on in the U.S., the new
exploration is all occurring in the most challenging countries and most
high-hazard environments out there," said Chris Beck, president of
Clements Worldwide, an insurance company that sells coverage to global energy
companies.
"The reality of a lot of those countries is there a
tremendous amount of economic instability and inequality," Beck said in an
interview. Russia will continue to "re-establish its dominance in the
region, and that will have a destabilizing impact on other countries" in
Eastern Europe and central Asia, he said.
While political uncertainty has been the order of the day in
oil-producing countries, Beck said calamity can come from anywhere. Scenarios
can include anything from a tanker hijacked off the coast of Africa, to a
pipeline explosion in the perennially unstable Middle East, or even cyber
terrorism.
Despite soaring domestic production that has sent U.S. oil
reserves to their highest level in nearly 40 years, the U.S. is far from immune
from instability abroad. International demand means major oil companies must
explore in unsavory places.
A recent report by Securing America's Future Energy and Roubini
Global Economics underscores how vulnerable the U.S. is to supply disruptions
abroad. The survey noted that rising domestic production has helped the world's
largest economy become more secure, "but heavy oil use leaves the economy
vulnerable to high and volatile oil prices."
The report added that outages in Iran, Iraq, Nigeria and
Libya have driven global spare capacity down to 1.7 million barrels per day – a
level that gives "a very limited amount of flexibility in the event of
further outages."
Beck echoed those findings, saying that domestic production
alone was not enough to insulate big oil producers from unstable markets.
"It's not just the U.S.'s energy needs…it's the global
need," Beck said. "Irrespective of relative energy needs in the US,
there will be a significant ramp-up in other places. That requires [U.S. oil
companies] to be in these hazardous environments."
That can cost a pretty penny. Beck said oil and gas companies can pay tens of millions for premiums to insure against a host of
disasters, with prices determined by several factors. In hotspots like Libya
and Iraq, pipeline security is a big issue, as are ransom and kidnappings, to
name a few.
"It's not just about pricing, it's about risk
management," Beck said, adding that Clements' strategy is to "develop
processes and procedures to prevent there being a loss, as opposed to simply
reimbursing them after a loss."
The ability of oil companies to hedge against global risk is
complex because the nature of those threats is diffuse and unpredictable. Beck,
however, said they have one element in common.
"The roots of instability are all economic," he
said. "It's that level of economic instability and insecurity that we have
to pay close attention to now as we look at pricing of political violence
coverage, and policies to protect operations in that developing part of the
world."
Labels: Chris Beck, Commercial insurance, industry news, oil and gas
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