The Role of Insurance in Deepwater Activities

Tue, 01/22/2013 - 17:57

To ensure safe operation during drilling procedures, well control and monitoring have to be thoroughly observed and regulated in order to prevent the possibility of hydrocarbons leaking out the wellbore. Those tasks need to be strengthened even more in the harsher conditions of deepwater, since there are additional complex variables to be taken into consideration when drilling at greater depths – higher pressure, higher temperatures, and nature-related variables, such as erosion and water drift strength, among others.

After the Deepwater Horizon incident in 2010, Pemex is carefully working towards bringing additional regulations to anticipate and prevent possible accidents in deepwater. “Pemex requires service companies to increase the number of blowout preventers and divisors to stop hydrocarbons from getting out of the wellbore,” details Miguel Ángel Camacho Torres, President of Camacho & Asociados. “However, the inclusion of these precautionary measures does not replace the need to have financial guarantees and insurance to execute the project.” Every company that seeks to do business in the Mexican oil and gas industry needs both insurance and bond guarantees before contracting with Pemex. “All service providers need to adhere to a surety bond and an insurance contract – either on civil liability or on the assets,” says Juan Pablo Murguía Ashby, Director General of Murguía.

This deepwater incident also caused oil-related businesses to amplify the importance of liability assurance for their deepwater enterprises, as they were reminded of the possible economic and legal repercussions that could come with performing operations at increased water depths. To be able to provide the financial assurances necessary from a risk management point of view, companies in the financial services sector continue to prepare themselves for the future development of deepwater in Mexico. In order to understand the segment better, they have surrounded themselves with oil and gas experts from all over the world. “It is fundamental to rely on experts’ assistance for the risk assessment of each project,” Murguía Ashby emphasizes. “Our company has been involved in incident management consulting in many high profiled cases such as the Deepwater Horizon blowout,” says Bruno Portilla, General Manager of London Offshore Consultants. “We are familiar with deepwater operations up to 3,000m depth based on our participation in deepwater projects around the world.”

International insurance companies that have been involved in foreign deepwater enterprises and therefore know about the fundamentals of how the coverage market works globally still need to anticipate to what the Mexican model will look like. In their quest to understand the variables involved with the local culture, they still need answers to many questions, since Pemex has yet to define its approach on deepwater risk administration. “We believe deepwater in the country will be done following the development path that Mexico has traditionally followed,” asserts Portilla. “The question is: will Pemex absorb all the construction costs in deepwater, as it does in shallow water and onshore?” This answer might be crucial in the definition of companies’ insurance strategies and risk assessment criteria.

Camacho Torres also believes that the main difference for insurance relies on local safety regulations. “Lloyd’s Insurance Market has worked in the same way for 200 years, and the company continues to be the insignia for insurers. The difference comes in the legal framework that Pemex and other Mexican authorities have established for other companies to operate in the country’s oil and gas market,” he explains. “The market already has a very strong regulation with the intentions of protecting the interests of all involved.” But these regulations include some conditions that have scared off companies, and some international corporations have even left the Mexican market. “Some international companies no longer work in Mexico due to unlimited liability clauses included in the contracts, which state that the contractors are financially responsible for every possible incident during the period of the contract,” says Camacho Torres. “As long as there is no record of the delivery of every job stipulated in the contract, the risk is still on providers and contractors. This is why it is so common for them to get insurance against acts of nature,” Murguía Ashby adds.

With a new energy reform on the horizon, the whole landscape for deepwater activities might change, and prospects for a wider insurance market at greater depths will continue to gather momentum. “Political consensus seems to encourage more private investment in the Mexican industry,” says Camacho Torres. “With this in mind, and the fact that certain activities are not specifically mentioned in the Constitution, there could be some opportunities for additional opening in deepwater – especially when talking about deepwater drilling.”

Pemex needs to define some gray areas within its approach to deepwater projects. As these questions are answered, the already paramount insurance and bond markets will have more accurate regulations that will lead to a safer Mexican deepwater segment.