Risk Management after the Macondo Blowout
At the start of May 2010, many in the US oil and gas industry were still celebrating the news, announced by President Barack Obama in March, that many new offshore areas of the United States would be opened for drilling, including northern Alaska and offshore Virginia. He had also asked Congress to lift a drilling ban on the eastern part of the US Gulf of Mexico, 200km off the Florida coast.
However, on April 20th 2010, BP’s rig Deepwater Horizon exploded after a blowout at the Macondo well it was drilling in the Gulf of Mexico, resulting in the largest marine oil spill in the history of the petroleum industry. Over 4.9 million barrels of crude were spilled into the Gulf, and the explosion at the drilling rig killed 11 men. The accident prompted the US government to announce a six-month moratorium on all deepwater offshore drilling activity in US waters.
The Macondo well blowout caused repercussions across the world, but perhaps nowhere was as close to the fallout as Mexico, where Pemex was just beginning to explore its deepwater potential on its side of the Gulf of Mexico. The National Hydrocarbons Commission (CNH), the newly- created regulatory body responsible for assessing the viability of Pemex’s projects, quickly intervened to order a reassessment of the company’s exploration activities in deepwater zones.
Those companies tasked with insuring deepwater production solutions also keenly felt the implications of the BP blowout. Miguel Ángel Camacho Torres, Director General of Camacho & Asociados, explains the consequences for the risk management company following the spill: “Pemex was concerned about how the Macondo blowout would affect their premiums and market dynamics. Camacho & Asociados worked hard with its partners in London to gauge their expectations of the market and report back to Pemex. The accident had the potential to affect Pemex’s operations significantly. The Macondo well is very close to the US-Mexican maritime border. It has not yet been spudded on the Mexican side, but part of the Macondo field is in Mexican territory. Any Mexican project would have the same risk exposure as the BP operation, and would require the same type of drilling.”
The result for Pemex was not as financially impactful as expected on the insurance front. Whereas Camacho & Asociados had expected a premium rise of 25%-30% after talking to its London partners, Pemex’s insurance programme only saw a 10% premium increase due to the fact that not all aspects of the company’s programme were affected by the Deepwater Horizon incident. The cost of insuring activities such as construction, interconnection, pipeline laying and transportation of equipment such as semi-submersible platforms and pipeline barges remained unaffected by the incident. The premiums that saw the largest increase were those that involved insuring against pollution, clean up, control of well, contract termination, delays in start-up and business interruption.
Another consequence of the Deepwater Horizon incident has been on general liability insurance for offshore vessels. Camacho Torres explains that, “It is the intention of the US Congress to increase a company’s liability for a spill under the Oil Pollution Act (OPA) of 1990 from its US$75 million minimum up to US$150 million. This would mean that any vessel going into US waters must provide insurance responsibility up to US$150 million, which is not financially viable for smaller companies and could be a big limitation for US commerce. Due to the spill liability requirement, providing general liability insurance is more difficult. Ground-up coverage from zero dollars to US$500 million is not available anymore in the market. Increases in the premium have not kept pace with rising exposure to risk, and underwriters do not want such a huge exposure.”
Mexico does not have the same minimum liability stipulations as the US, but it does require all vessels in high risk work conditions to provide spill coverage, and Pemex itself has US$1.5 billion in environmental and spill insurance, bolstered from US$1 billion in the last few months, according to Camacho Torres.
Camacho Torres says the general industry perspective is that “Pemex’s risk exposure with its Bicentennial platform is identical to BP’s exposure for its Deepwater Horizon platform, given the similar water depths and high-pressure wells. Whilst it is good that Pemex is taking such care over its planned deepwater expansion, it is also important to remember that Mexico really needs deepwater production to start as soon as possible.”