Willis Energy, a unit of Willis Group Holdings, released its “Energy Market Review” at conference held at its London headquarters last Tuesday. The review focused on industry losses, current capacity and the current controversy over the extraction of shale gas by hydraulic fracturing, or “fracking,”
Other than the “downstream” consequences from the Japanese earthquake and tsunami, the energy market actually managed to avoid major impacts from 2011’s record number of natural catastrophes. However, the sector recorded its worst ever year for non-windstorm related losses in 2011 with close to $9 billion in combined insured and uninsured total losses.
The review showed that 2011 was the worst year in recent memory for the energy market following unusually large losses in the Canadian Oil Sands and FPSO (Floating Production and Storage Offshore) sectors.
Despite those losses, capacity in the energy sector continues to remain relatively high. The review said it had “continued to increase in 2011 as capital providers sought more stable returns in the volatile global economy. Theoretical upstream and downstream capacity increased by over 10 percent from 2010.”
In his presentation Robin Somerville, the editor of the report, said “underwriting capacity has increased by nearly $5 billion [compared to 2010] in the construction and operating sectors, while downstream capacity continues to be a ‘soft market.'”
The picture he painted is a bit more complicated, however, as underwriters are deploying this capital selectively and showing greater differentiation in favor of the most attractive business. Willis said “the correlation between capacity and rates in the energy market has weakened markedly in recent years, with a significant increase in overall capacity failing to lead to a further decline in rates.
“Modest rating increases were the norm on upstream business at recent renewals, while the downstream market remains effectively flat, albeit with average rates at their lowest ebb for a number of years.”
Willis Global Energy CEO Alistair Rivers commented: “Conditions in the energy insurance market are stable but fragile. Capacity is at a record level but insurers are deploying it selectively due to past claims volatility.
“Insurers are differentiating even further between the risks they truly value and those they don’t due to the recent losses or lack of underwriting information. It is vital that buyers provide as much information as possible and differentiate their risk profiles to secure optimum terms and conditions from underwriters.
“The offshore market direction remains in the balance as insurers wait for the full picture to emerge on the Elgin platform situation. However, if Elgin [the Total platform in the North Sea that is leaking gas] is resolved satisfactorily, there is ample opportunity for those buyers that can continue to differentiate themselves from their peer group to obtain much more preferential terms.”
In a special report on the fracking controversy, those attending the conference were treated to the trailer of the film “Gasland,” which was nominated for an Oscar, featuring devastated landscapes, and fires from ignited gas erupting from faucets in kitchen sinks -a truly scary occurrence. The energy insurance industry, which covers liabilities and related claims resulting from the fracking process, is a good deal less alarmist about the process.
Somerville pointed out that it “isn’t a new process, but has been in use since the 1950’s.” Energy insurers cover three types of risks; contamination at the site; contamination underground and possible side effects, such as earthquakes.
The presentation coincided with the announcement that a panel of experts appointed by the UK government recommended that fracking could continue, provided that the process adheres to strict new guidelines.
In an overall refutation of some of the charges activists have attributed to the process the Willis Energy review pointed out that the chemicals used in it are largely non-toxic – 99.51 percent is water and sand, with a small number of lubricants and other chemicals added to increase efficiency.
While known by their scientific names, the more common ones include table salt, laundry detergent and anti-freeze. The most widely used, Polyacrylamide, which minimizes the friction between fluid and pipe, is also commonly used for water treatment, as a soil conditioner and in cosmetics.
In addition the gas is found at very deep levels, well below ground water reservoirs, and the equipment used to drill and liberate the gas is highly protected by reinforced steel casings down to those deep levels. An insurer, who assumes the risks of covering a fracking site, of necessity requires these “best practices” to be observed and adhered to, which further minimizes the chance of a mishap.
As far as earthquakes are concerned, there have been two recently in the UK – more in the U.S. – linked to fracking. However, they have been so small that no damage has been caused. The review points out that there are 1.3 million “minor,” i.e. 2.0 to 2.9 quakes a year, and a similar number of quakes between 3.0 and 3.9, none of which cause damage. It’s about the same level of shaking which occurs close to an Interstate highwy.
Mark Miller, CEO of Quadrilla Resources, an expert who contributed to the fracking report, stated: “This is another popular misconception – when people turn on the TV the only earthquakes they see are the really big ones, those involve millions of times more energy release than anything that we are doing. We say: how far is it between a 2.3 and a 7.5, which knocks down buildings? It’s literally millions and millions of times different. That’s why we know there is no expectation of us producing a six, a five or even a four.”
As a result, despite the increased public scrutiny, the Review concluded that the “insurance market is still keen to underwrite shale gas drilling risks provided buyers can demonstrate best practice.
“As with other sections of the energy market, the coverage provided and the premium charged depends on the nature and extent of the underwriting information. This is especially the case in the Environmental Impairment Liability arena, which offers critical protection for gradual pollution liability risks associated with the hydraulic fracturing process.”
Source: Willis Energy – Willis Group Holdings
Topics Catastrophe Profit Loss Underwriting Market Earthquake
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