Over the course of 2014, oil prices dropped from approximately $90 to $100 per barrel to around $60 per barrel. And then last year, as detailed in Deloitte’s 2016
Outlook on Oil and Gas, prices continued to trend lower, moving down toward the $40-a-barrel mark in summer and then dropping below $40 per barrel in December.
“The oil & gas industry has been in decline due to the reduced price of oil,” says Michael Hill of Hill Program Managers, which serves a segment of the market primarily made up of small and medium-sized firms that provide service to the major producers. “This has caused many small oil & gas operations to go out of business. Operations that have been able to stay in business are experiencing declines in gross revenue across the board.”
According to the Deloitte report, upstream oil & gas companies faced a 50% drop in revenues in less than a year.
“The impact on insurers and brokers has been a series of non-renewals and cancellations,” Hill says. “Industries under stress react by reducing expenditures, laying off employees and pushing suppliers for better pricing. The brokers and insurers are suppliers, and they are being pushed for reduced premiums. For the brokers, this results in reduced brokerage income, and for the insurers, this may result in higher loss ratios resulting from reduced rates.
“When an industry is under stress like the current oil and gas industry, insurersfrequently see an increase in claims reporting,” Hill adds. “Workers’ compensation claims and equipment and property claims frequently increase in situations like this.
”According to Deloitte, 2015 saw the exploration and production sector cut capital expenditure and defer major capital projects while reducing operating expenditures and headcount.
If the deterioration of premium levels continues, in tandem with no withdrawal of capacity, how profitable will carriers’ oil & gas portfolios remain? Will we see some
insurers exit the space?
The environmental aspect
Talking about developments on the regulatory front that will impact the space, Hill brings up the work currently being undertaken by the Environmental Protection
Agency. Recently, the EPA began a formal process of collecting information from oil & gas companies to assist in the development of comprehensive regulations, aimed at reducing the industry’s methane emissions.
According to the EPA, nearly 30% of methane emissions in the US come from oil production, as well as the production, processing, transmission and distribution
of natural gas. The plans have been met with expressions of concern, particularly from the American Petroleum Institute. Those concerns have centered around the potential of the proposed reductions to reduce oil & gas activity in the US, which in turn has the potential to lead to more job losses and higher energy costs, and a possible greater reliance on foreign oil.
Whatever shape the EPA’s proposed regulations ultimately take, this will obviously continue to be key regulatory activity that industry players will need to remain informed about.
Additionally, according to a US Geological Survey report, studies suggest that the increase in the frequency of earthquakes in certain parts of the country is potentially linked to fracking-related activities.
“Carriers we trade with all seem to be looking at how each state will rule on seismic activity ‘linked’ to the production of hydrocarbons,” says Thomas Blanquez of Quirk & Company. “Oklahoma has led the way in respects to this topic, and there seem to be rumblings that there are other states to follow. The impact of this will also carry over to the disposal of produced water and owners of wells who allow others to dispose their produced water at these sites.”
Tech and cyber exposures
Deloitte reports that, throughout last year, the oil & gas industry continued to employ new technologies and innovation, and that this was a successful vehicle for cost-cutting.
One technology generating considerable conversation – and already being used – in the oil & gas space is the unmanned aerial vehicle (more commonly referred to as a drone). Drones today are commercially applied in an increasingly wide range of industries, for purposes from counting fruit on trees to tracking Malaria-ridden monkeys in Africa by the heat of their heads.
Use within the oil & gas industry has concentrated on the inspection and monitoring of oil & gas facilities and infrastructure. In place of human surveillance, high-quality images and videos of plants, platforms and pipelines can safely and quickly be collected by drones. The key benefi ts include safety and speed, higher-quality inspections and cost savings.
Of course, while new technologies can deliver a range of benefits, they can also bring their own issues and challenges. The energy industry has become increasingly reliant on GPS and networks that can be interrupted by natural disasters and are prone to cyber attacks.
“The [oil & gas] industry in general has a heightened cyber risk due to the introduction of IP-enabled equipment,” Hill says. “The major companies have serious cybersecurity issues.”