Marsh Sees Lower Risk Costs for National Oil Companies

February 1, 2010

“The world’s national oil companies (NOCs) could be in a position to benefit from lower overall costs of risk over the next few years,” according to an analysis from Marsh.

A reduction in the number of natural catastrophes, more capacity and “more sophisticated risk management techniques,” have combined to the extent that “NOC’s insurance costs could be up to 20 percent less for both the refining (downstream) and exploration & production (upstream) sides of their businesses. Companies involved in both onshore and offshore energy construction projects also stand to benefit from current market conditions.”

Jim Pierce, chairman of Marsh’s global energy practice, explained: “A decline in global demand for energy combined with fewer natural catastrophes and enhanced risk management techniques provide NOCs with opportunities to save substantial amounts on their insurance spend over the coming two years. When energy demand begins to increase and NOCs re-examine previously shelved infrastructure projects, this could lead to substantial savings.”

Assuming there are no major catastrophes, Marsh expects to see a decline of between 10 percent and 20 percent by June this year for exploration & production insurance cover, with a further reduction of 15 percent by June 2011. For the refining, or downstream, side of the business, the reductions will be even more pronounced with reductions of up to 25 percent by June this year and a further 10 percent by June next year.

Marsh also expects insurance rates for both onshore and offshore construction projects to decline 5 percent by June, another 5 percent by January next year and a further 10 percent to 15 percent by June 2011.

“While this news will be welcomed by all NOCs, companies that have established the highest levels of risk management will benefit the most,” Pierce added. “Energy insurance underwriters increasingly want to see highly detailed risk management plans before they offer the best terms. Further, the NOCs that better manage total cost of risk, which is the combined cost of retentions and premiums for actual risk transfer, will be the ones that benefit most from the surfeit of underwriting capital available in the 2010-2011 energy insurance market.”

Marsh has scheduled its third National Oil Companies conference in Dubai in late February.

Pierce noted that in this “complex risk environment” the conference agenda will feature industry leaders, who will address a range of the most pressing issues facing the industry. “These include the impact of climate change – especially in the wake of the Copenhagen summit – and the challenges of resource scarcity, as well as how best to manage the strategic, operational and political risks to which NOCs are exposed. They will also hear how to get the most value from their spending on insurance.”

Speakers at the conference include Brian Duperreault, Chairman and CEO, Marsh & McLennan Companies; Dr. Anthony Knap, Senior Scientist, Bermuda Biological Station for Research; Petri Pentti, Group CFO, Emirates National Oil Co. (ENOC); Claiborne Deming, Retired President and CEO, Murphy Oil; Matthew Simmons, Chairman Emeritus, Simmons and Company International; Dr José Manuel Carrera, Managing Director of Risk Management, Petróleos Mexicanos (PEMEX); and, Herman Franssen, Senior Associate, Energy and National Security Program, Center for Strategic and International Studies (CSIS)

Source: Marsh – www.mmc.com or www.marsh.com

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