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BP's Gulf Oil Spill A Game Changer for Offshore Drilling Insurance

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Posted on 25 Jun 2010

As a result of BP's rig explosion which caused the worst oil spill in U.S. history, insurance coverage for offshore drilling will be curtailed, forcing companies to self-insure or exit deepwater fields.

BP's leak in the Gulf of Mexico is "a market-changing event," said Dieter Berg, senior executive manager marine at Munich Re, the world’s biggest reinsurer and among those exposed to losses. "Buyers and sellers of coverage will be reevaluating their appetites for offshore energy risk," said Berg in a June 11 e-mail response to questions.

Proposals in Congress to raise U.S. liability costs to $10 billion to drill for oil in the Gulf could leave just three companies -- BP, Exxon Mobil Corp. and Royal Dutch Shell Plc -- with the finances to self-insure, energy consultant PFC Energy said June 15 in a memo to clients.

Insurance coverage available may decline as much as 30 percent, John Lloyd, chief executive of Lloyd & Partners, said in written testimony to the U.S. Senate on May 11. His company is a unit of Jardine Lloyd Thompson Group Plc, the U.K.’s biggest publicly traded broker.

BP was drilling into its Macondo well in the Gulf when the Deepwater Horizon rig exploded April 20, killing 11 people. The well has since spewed tens of millions of gallons of crude into the Gulf, forcing BP to set up a $20 billion fund to compensate victims of the spill. The U.S. appealed yesterday a federal judge’s June 22 order lifting a moratorium on deepwater oil drilling imposed after the spill.

Three Times More

Insurers are reassessing how much they can afford to underwrite as the incident exposes higher liabilities than previously thought, said Gregory Thomas, head of offshore activities at Assuranceforeningen Skuld, an Oslo-based underwriter for deepwater contractors.

Insurers are charging 50 percent more for policies covering oil rigs in deep waters since the BP leak, Moody’s Investors Service said on June 3. R.S. Sharma, chairman of India’s biggest explorer Oil & Natural Gas Corp., said June 9 it would have cost the state-owned company three times as much if it had renewed its offshore policy after the disaster.

The BP oil spill will “significantly” push up the price of insurance on offshore drilling, said Lloyd’s of London Chief Executive Officer Richard Ward in an interview with Bloomberg Television on June 22.

The BP disaster is likely to be the second-biggest energy insurance loss based on current estimates, said the Insurance Information Institute. The most expensive property loss for energy insurers was a July 1988 explosion aboard the Piper Alpha oil platform in the North Sea, which killed 167 people and cost insurers $3.6 billion in 2009 dollars.

Self Insurance

Prohibitive premiums and the impracticality of insuring one-time, catastrophic events could mean deepwater operators will need to be self-insured, said James Eck, vice president senior credit officer at Moody’s in New York.

“What insurer is going to want to put out $1 billion worth of deepwater insurance and only get paid $5 to $10 million after this? They may as well write a few more hurricane-insurance contracts,” Eck said.

BP, Exxon Mobil and Shell, the world’s three largest non- state oil companies, are at least partially self-insured through wholly owned units, according to company filings. BP, which owns Guernsey-based Jupiter Insurance, said in a March regulatory filing that it was more economic for it to bear losses as they arose rather than to buy external policies.

Insufficient Capacity

More companies may have to cover themselves if the U.S. decides to raise the cap on liability for economic damages from deepwater drilling to $10 billion from $75 million, said Robert Hartwig, president of the Insurance Information Institute, a New York-based trade group. There isn’t enough capacity to provide that level of protection in the global energy insurance market, which currently collects $3 billion in annual premiums, he said.

BP, as owner of the underwater lease, has primary liability for damages caused by the pollution and damages by the leak from its Gulf well. Lawsuits are pursuing a broadening circle of contractors that provide equipment and drilling services.

“Our biggest fear at the moment is that there will be a change in the contracting dynamic and operators suddenly start to shift pollution and other liabilities over to the contractor,” said Skuld’s Thomas. A contractor like Transocean Ltd., owner of the rig that exploded in the Gulf in April, wouldn’t have entered into an agreement with BP if it expected to be responsible for pollution from the wells, he said.

Legal Action

Lawsuits filed as of June 16 name Transocean, Cameron International Corp., which supplies blowout-prevention equipment, and drilling services provider Halliburton Energy Services Inc.

Anadarko Petroleum Corp. has a 25 percent stake in BP’s Macondo well, while Mitsui Oil & Exploration Co. owns 10 percent.

The real impact on energy insurance prices hasn’t emerged yet because this year’s contract terms were set before the BP- leased rig exploded, Hartwig said.

If the Atlantic hurricane season, which started on June 1 and is expected to be twice as active as normal, causes more damage, premiums may rise as much as 100 percent by the end of the year, Hartwig said.


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