Alfonso Araiza
Head of Energy, Mining and Construction
View from the Top

Managing Risk in times of Change

Wed, 10/11/2017 - 12:56

Q: How is the Energy Reform affecting INTERprotección’s activities in the industry?

A: The Energy Reform triggered the development of competitive markets and as a result, we believe the industry will soon face an exponential increase in activity. This applies to every subsector of the value chain, such as upstream, midstream, downstream and P&U. In addition to looking at specific projects, we are making an effort to understand and serve different niches, each with very specific needs. We are convinced that the company is very well-positioned to achieve this, since we have both the local knowledge and the global expertise to understand our clients’ risks and required coverage. For example, one niche where we already are adding significant value is with the operators that won E&P blocks in rounds one and two and that do not have risk management experience for this type of activity. 

Q: How has the regulatory framework impacted the insurance industry and how is it evolving?

A: We have been following the regulatory framework closely because of its relevance and the potential impact it could have on the industry. We believe that the regulation is going in the right direction but that there will be a learning curve as the activity progresses. In the long-run, the idea is that regulation becomes less prescriptive and more objective-driven so that companies have more control over the risks/limits they want to retain and those they want to transfer to the markets. However, until markets consolidate and mature, we believe that regulators will have an important role in making sure that the risks are controlled and managed appropriately. 

Q: How do risk profiles change over the course of a project?

A: It depends on the business model of the company we are talking about but usually there is a correlation between the complexity of the activity and the exposure to different risks. At the moment, most of the operators have won contracts but have not engaged in physical activity, so the main risk they face is related to how they design their development plans, in the sense that these must be aligned to the characteristics of the resources operators will exploit and the kind of environment they will operate in. That will change as soon as they start drilling or doing workovers in their fields. After several years, when the activity drops, the level of exposure decreases with a few exceptions, such as environmental risk, which tends to be present even after decommissioning activities. For that reason, it is of great value to develop long-term relationships between the insurance stakeholders and the insured companies so that there is a deep and common understanding of how the risks are evolving and covered along the life of a project. 

Q: How has risk exposure in the oil and gas sector evolved since the Energy Reform’s implementation?

A: We are quite certain the level of exposure will increase as more players and consortiums kick off operations in the Mexican market, many of which have limited or no experience working under our operational, social and political conditions. Another source of exposure that needs to be monitored is climate change. We have seen an increase in floods and hurricanes recently, which have had a significant impact on the industry. Also, we think there is an element of technological complexity that stems from the environment in which the industry must operate. Oil is becoming more difficult to exploit and we see companies facing major technical challenges.