Negotiating the Highs and Lows in the Oil and Gas Market

Everything’s negotiable. If that’s not the key operational phrase in the oil and gas sector–both in terms of oil and gas production and insuring that risk–then it comes very close. Contracts rule in the oilfield and the insurance agent who understands that will stay ahead of the pack when it comes to servicing their oil and gas customers.

Master service agreements, or MSAs, between oil operators who front the money and negotiate the right to drill a well and contractors who drill and service the well spell out just who is responsible for what in the oilfield. There are parameters, such as the International Association of Drilling Contractors (IADC) form, but they are just a starting point.

“One standard of the oil and gas industry is that there are no standards,” said David Wetzel, assistant vice president/broker with national wholesaler Colemont Insurance Brokers. “There’s a starting point, but then you start haggling and it’s difficult to be specific from there.”

Wetzel said underwriters will generally want to see the contracts “between the contractor and the operator, or if they are a subcontractor, with the contractor they are providing subcontractor work for. Because quite honestly that’s where a lot of horse-trading goes on, as I like to say, in terms of shifting or transferring of liability. And that’s contained in the hold harmless and indemnity agreements.”

Mike Miller, a vice president with U.S. Risk Insurance Group, which also operates nationally, said insurers look for “balanced indemnification wording” where each party is responsible for their own actions. What each insurer looks for in an oil and gas account “depends on each insurer,” Miller said. “But one of those things would be balanced contractual liability.”

In Fall 2004 when oil was tripping across the $50 per barrel mark, oilfield operators had a lot to smile about. Prices were high enough so that smaller operations could go back into already established fields and use new technology to mine existing wells that were unprofitable when prices were in the $20 per barrel range. And the insurance environment was at least stabilizing to the point where operators could expect premiums to back away from the massive increases they had seen in previous years.

Going in to Fall 2005, oil prices have soared to the mid-$60s, and oil and gas operations from Alaska to Wyoming to the Gulf of Mexico are busy drilling–and making money. Miller said it is not uncommon for “us to see 40, 50, or even 100 percent increase in revenue on renewals” for his insureds.

Submissions are up, Miller said, and he believes the increase is partly in response to a transitioning market, one that is going from “hard to softening.”

Wetzel also said he has seen an increase in applications. “We’re seeing an increase in requests for start up companies and also from clients we have. New applications are coming in and we’re seeing increased payrolls and revenues in existing operations. Their businesses are flourishing because of the increased activity.”

Oil and gas is both a niche market and one that encompasses a variety of risks. Market conditions have not changed significantly from last year, with prices being a little softer in some areas, a little higher in others. While the market remains very narrow for certain coverages–control of well, pollution and “wet,” or over-water, operations, for instance–competition does exist for coverages that would apply to most businesses, such as general liability, workers’ compensation and commercial auto. Wetzel said there are number of carriers operating in the area, “although it’s still a defined marketplace. But there is competition out there. And the competition is defined by the sort of coverages that are being sought.”

Insurance for most oilfield operations are placed in the excess and surplus market, but Miller said some admitted companies are beginning to offer coverages for the peripheral oil and gas businesses, such as valve manufacturers and pipe distributors. The admitted markets are “under production quotas and the traditional E&S business has become more and more attractive to them,” Miller said. “Whereas a year or two ago they would have stayed with only the admitted-type cover and leave the E&S business to the E&S market, they’ve become a major force. So when you have more and more companies like that coming in and everybody needs market share, that’s one of the key elements driving prices down.”

Wetzel said agents should help their customers by providing as much information as they can about the oil and gas operation “itself, the principals, their experience, their areas of operation. A lot of the times we’ll see a submission that refers to an oilfield contractor providing services. What kind of services are those?” He added that he wants to see “resumes on the principals that demonstrate their experience and the type of operation they are providing, and contracts that can identify the transfer or acceptance of the liability.”

Miller echoed that sentiment. Relating that he’s seen “submissions from agents with description of operations of four or five words,” he emphasized that he needs more information than that. “The main thing that a good wholesaler needs to do is to convey to the underwriter the understanding of what the insured really does,” Miller said. “What the risk does. What is the past loss experience? And most importantly, how the company is run. If it’s well managed, we need to convey that.”

Topics Agencies Energy Oil Gas Contractors