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Oil industry adapts to the new norm

Mon 13 Feb 2017 by Paul Fanning

Oil industry adapts to the new norm
Simon Williams, chairman of the International Union of Maritime Insurance’s Offshore Energy Committee

Simon Williams, chairman of the International Union of Maritime Insurance’s Offshore Energy Committee assesses the offshore market

The low oil price is clearly affecting the energy industry in all areas and is having a knock-on effect in the insurance sector. It is pleasing, however, to see that there has been somewhat of a recovery following the agreement of OPEC members to temper supply. A more normalised oil price is good, albeit some way off what the energy industry would like.

Nevertheless, oil companies are having to accept that it will never be the same as it was, and adapt their businesses accordingly. They seem to be doing so. I think they are now dealing with what is likely to be the new norm for a while, at least, and are accepting a level that is around the mid US$50 to low US$60 range.

As oil companies continue to adapt to this and move forward with their decisions to drill – albeit cautiously – the number of mobile units that have been laid up that may now be called back into service could pose an additional risk from the perspective of the insurance industry. The costs to reactivate a rig can be significant and hiring the right crews is essential.

There is a potential problem in an upturn of this kind, if experienced and trained personnel have been lost to other companies and even other industries. Have the companies in question retained sufficient experience during this downturn to deal with the future upturn in the cycle? This is something that may be worth looking out for, over the next year or so.

The onshore drilling revival is ahead of the offshore, but both are of potential concern to insurers. Insurers will be looking to make sure that, for those with lower margins, the amount allocated for maintenance is still reasonable both for rigs in service and for those in a so-called warm-stacked status, which may come back into service in the coming months.

As many mobile assets continue to be scrapped and timetables for the decommissioning of fixed assets are brought forward, there is no doubt that the overall fleet size will be reduced. And the obvious positive aspect of this is that the fleet will also be younger.

In one sense, the industry is in a worse position than this time last year, but more so-called green shoots are visible. Overall, we are starting to see a small improvement for the 2017-2018 period and I would expect there to be a steady recovery for the industry over the next two or three years.

In addition, the industry has undoubtedly received a helping hand from what might be called the Trump effect, as this has seen projects that were shelved or closed down under the previous US administration getting the green light.

An area of concern going forward is cyber security, as more and more data is exchanged for various operational reasons. With this in mind, it is vital that insurers make sure that they address these potential concerns and keep up to speed with the new technology, as this will undoubtedly form a larger part of risk assessment in the future.

 

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