Rising oil and gas prices are driving a resurgence of the energy industry, but as new reserves are identified they are often in areas of both physical and political peril. As one expert said this month “there is no longer anywhere which can be described as ‘easy oil’".

New efforts to survey and explore the frozen Arctic abound and deepwater drilling continues to push new boundaries; at the other end of the climatic, environmental and political spectrum, firms are also looking at the continued emergence of Iraq back into the global community and the significant oil reserves it contains.

This coupled with political risks posed by Iraq’s neighbour Iran, which is still under strict international sanctions, has left underwriters and experts wrestling with both rising physical and political exposures.

This comes against a backdrop for the market of the fallout from the Deepwater Horizon loss and subsequent oil spill, which has left the United States and several other countries looking at the issue of who shoulders the liability for the clean up and compensation of any future spills.

Kevin Jarman, CEO of specialty marine and energy loss adjusting, surveying and risk assessment group; MatthewsDaniel, says the market continues to evolve as the number and complexity of projects continues to grow, with new technologies which could allow exploration and development of oil and gas reserves in new and challenging locations.

“What we are seeing is a move to new and innovative solutions with several operators now looking to increasing use of sub-sea technology, including some processing functions sited on the seabed, which brings with it new challenges for the market.”

Technology, and the ability to operate in extreme and challenging environments, comes at a price, with new projects now of a size which means that the values exposed on plant and equipment is running well in excess of what has been seen even three years ago.

As such, Underwriters have been quick to review wordings to take into account the rising exposure levels and how the market should respond.

Post Deepwater Horizon, Governments including the United States are looking at the liability issues and Underwriters are watching nervously as to what regulatory framework changes will be imposed. If the liability levels are capped too high, the market may find itself unable to meet the needs of the oil and gas industry due to lack of both capacity and risk appetite.

“We are seeing a tangible move by underwriters towards the use of specialist firms, both for survey and claims handling, because of the growing complexity of projects and consequently, the level of specific knowledge and experience required from experts,” adds Mr Jarman.

He says that areas such as Iraq are now becoming the focus for more projects as the efforts to tap into the country’s oil reserves intensify.  “The country has the third largest oil reserves in the world and is seen as a major focus for many energy firms, as the political situation continues to stabilise; as a company, we have responded to this by establishing a local resource” he adds. However there are certain areas of the country where drilling is intrinsically difficult regardless of the political risks.

The move to other areas of the world where in the past oil and gas field development has not been viewed as cost effective continues but, as companies access these areas, the cost of projects increases. The Shtokman project in the harsh and challenging environment of the Barents Sea, for example, has estimated gas reserves of 3.9 trillion cubic metres and will move the industry into new territory.  Energy underwriters are also facing a rise in new builds; in Brazil alone, 97 deepwater drilling units are set to be delivered by 2020, each a major investment for their owners. 

“The energy industry is investing heavily in the technology and the equipment to access oil and gas reserves and those investments will bring with them new risks for the market to consider; MatthewsDaniel is conscious of this, and is rising to the challenge of providing leading edge expertise to the insurance market, so that the risks and implications for insurers can be fully understood” concludes Mr Jarman.