Willis Sees Threats on Horizon for Booming Latin American Energy Industry

October 10, 2012

“The booming Latin American energy industry is not insulated from the threat of a euro zone collapse or hostilities in the Middle East,” warned global insurance broker Willis.

Speaking to a gathering of energy companies in Foz Do Iguacu, Brazil, Martin Sullivan, Willis Deputy Chairman, cautioned that while global demand for energy resources is buoyant and Latin American economies largely resilient, there are several clouds on the economic horizon including political tension, rising oil prices, natural catastrophes, supply chain disruption, and cyber risk.

“We now all live, to a much greater extent, in one global village and these clouds have the potential to pose many additional risks to the energy industry in Latin America,” he told the Willis Latin American Energy Conference.

Highlighting the knock-on impact the euro zone crisis could have on the Latin American energy sector, which relies on European insurers for over 60 percent of its insurance capacity, Sullivan referred to recent estimates from Swiss Re that a restructuring resulting in a 50 per cent haircut of Greek, Irish, Portuguese, Spanish and Italian sovereign debt could wipe 24.3 per cent from European insurers’ capital base.

He explained that there is “certainly the potential for a disconnect between supply and demand for energy business in the future and you don’t need me to tell you that without adequate insurance, these projects simply won’t be able to go ahead.”

Sullivan also cautioned that a serious outbreak of hostilities in the Middle East would have a devastating impact on the global economy, particularly the energy industry. A conflict in the Middle East and the closure of the Strait of Hormuz would disrupt 20 percent of the world’s oil production, leading to supply chain failures and, he estimated, an oil spike of up to $300 a barrel.

The fallout from another war in the Middle East could rise to existential proportions. Sullivan indicated that such an event “would be a breakdown of the ties of interdependency between the nations of the world brought together by globalization – just at the time when regions such as Latin America need to cultivate markets in the developed world for their products.”

Looking back to the oil price spike in 2007-2008, Sullivan observed that the pressure to meet global demand led to a dramatic increase in new projects and new risks as the industry moved into more hostile geophysical environments.

“All these developments necessitated the deployment of new, untried and untested technologies at a time when the pressure to maximize production levels was greater than ever,” he continued. “As many of you here will know, the correlation between the deployment of new technology and increased losses and insurance claims is well documented.”

Sullivan also highlighted the vulnerability of the industry to cyber threats, noting: “The energy and insurance industries are now utterly dependent on our IT systems. The problem, however, is that our IT systems are in turn utterly dependent on other firms that specialize in data storage and processing, communications, online transactions, and so on. Each represents a node of vulnerability.”

“There is also the risk of cyber-attack, motivated by political, social, economic, or other aims – and as I said earlier, this risk would be seriously exacerbated by any escalation of the tension in the Middle East,” Sullivan added.

He then called on the energy and insurance industries to work together to understand and prepare for threats as the search for energy moves into riskier, more remote regions.

“The energy industry is developing fresh technology – moving into deeper water, exploring more remote regions, deploying newer, untried and tested technology,” he stated. “We have to ask ourselves some key questions: Do we yet have the data to identify, quantify and assess the risk properly? Will there be sufficient capacity and/or appetite for an appropriate risk transfer solution to be developed? And can such a solution be offered at a premium that an energy company is willing to pay?”

Source: Willis Group Holdings plc

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