Marsh Concludes Energy Sector Applies Risk Lessons from Past Losses

February 24, 2010

New research by Marsh has concluded that, “despite an increase in the size and scale of new energy infrastructure projects, national oil companies (NOCs) and other energy and chemical concerns are experiencing fewer and less-severe major losses than in previous years.”

Marsh launched the report – The 100 Largest Losses – at its National Oil Companies Conference in Dubai. It gives details of the most significant property damage losses in the hydrocarbon industries since 1972. The two most costly losses were an explosion on a North Sea drilling platform in 1988, which cost $1.6 billion and an explosion at a Texas petrochemical plant in 1989, a $1.3 billion loss.

Marsh stressed that, although the sector has experienced “massive growth,”…”catastrophic losses at petrochemical plants, gas processing plants, upstream projects and terminal and other distribution points have declined over the last five years as companies enhance their risk management techniques.”

Jim Pierce, Chairman of Marsh’s Global Energy Practice, commented: “Energy sector risk management has evolved into an applied science that is making a real difference to mitigating the catastrophic losses that were more common in previous years.

“It is important that oil, gas, and chemical companies make use of improved risk management techniques as we predict that there will be more energy sector mega-projects. The age of the $50 billion project has arrived and with it the potential for any large loss to be very costly. However, by learning from past incidents, and applying the latest risk mitigation strategies, many NOCs and other energy sector players are well-equipped to avoid the kind of catastrophic incidents that could do serious long-term harm.”

Using “sophisticated risk management techniques combined with a lack of natural catastrophes and plentiful insurance capacity,” has led Marsh to predict that “NOCs could benefit from lower overall costs of risk over the next few years. 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.”

Pierce added: “All energy companies are likely to see something of a reduction of their overall cost of risk. However, the firms that have embraced the highest levels of risk management will benefit most.”

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

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