Ian Curtin, Head of Energy Construction at Miller, brings together three of London’s leading upstream energy construction underwriters to discuss the state of the market, technical issues unique to offshore construction risks, and the outlook for the remainder of 2021.
He spoke to:
|Lyndsey Picton, Class underwriter in Upstream, Construction and Liabilities at the Chaucer Syndicate|
|Michael Stanton, Head of Upstream at Zurich London|
|Adam Reed, Offshore Energy Manager at Allianz Global Corporate & Specialty|
Ian: We’ve seen some relief from the energy-market doldrums this year, but no one would consider the current oil price stable. How might energy companies react to continued oil price volatility? Where will they invest?
Adam: When long-term commodity prices are uncertain, operators focus on lower-cost, lower-risk projects such as tie-backs to existing infrastructure and in-field developments. Larger, true greenfield, and frontier developments tend to be delayed due to the more-significant investment levels required. The length of delays often depends on the projected length and depth of the price downturn.
That said, broadly speaking energy companies made significant progress during the 2014-15 commodity price downturn to simplify their development plans through greater use of standardisation and off-the-shelf components and technologies. Combined with the current landscape in the contractor market, that meant even complex or multi-phase projects could been delivered with a lower break-even price, which made them viable at oil prices where they would have been impossible a decade ago.
Lyndsey: We do see strong parallels to the last downturn today, but notably the macro-environment is very different this time. As well as the development cost reductions, clients have made significant savings through their operating models and costs since then, enabling them to survive through a prolonged depressed oil price. Fortunately though, the price has recovered somewhat now, because for the majority of our clients $40 or $45 a barrel is not an easy price to live at.
Michael: That pricing environment we just experienced was not unchartered territory. In the past when prices have fallen so low, the majority of capital expenditure by smaller independents was concentrated on their existing portfolio, and on streamlining their operational costs to ensure survival. Investment in new offshore developments as well as drilling campaigns was limited.
But during previous downturns this work continued at the larger exploration and production companies that had an abundance of spare capital. They were able to take advantage of low contractor day-rates, and hoped that by the time these projects handed over to operational, the oil price would have recovered, so they would reap long-term rewards.
Ian: Do you expect an increase in starts now that the oil price has recovered somewhat? Or does caution still prevail?
Michael: Historically, a higher oil price has usually ended up with more projects being sanctioned, particularly by smaller independents who do not have an abundance of spare capital. That said, the oil price has been incredibly inconsistent over the past few years, so they may still be cautious. They will want a steady, consistent price to provide comfort for the future, given that the majority of offshore construction projects take more than two years to complete. Meanwhile the development appetites of larger companies won’t change, since, as I said, they have a surplus of spare capital to expend.
Lyndsey: Like Mike, we believe it’s not just the oil price per se that’s important to our assureds, but a belief that there’s a strong probability it will remain at or above the improved level for a considerable time. So it’s a combination of the actual price level and the stability of that price that’s key. Recent volatility hasn’t helped when trying to make future plans for projected future revenues, which is an important factor in project sanctioning decisions. A period of stability should lead to growing confidence in these future plans.
Adam: The commodity price has certainly recovered significantly in recent months, and we would anticipate seeing a cautious return of some of the larger projects that were put on hold during the downturn. Plus, increased discussions around the growth of green energy over the past year could actually have the longer-term impact of maintaining oil prices at higher levels, because of the uncertainty over supply from the more established basins due to potential regulatory changes, which could make larger projects more financially viable. That being said, with insurers and governments both increasingly focussed on ESG risk, any projects involving extraction of significant volumes of hydrocarbons will carefully consider ESG aspects, particularly on adequately mitigating or offsetting their impact.
Ian: Let’s turn to underwriting. How do you evaluate projects that you are presented with?
Adam: It’s important to assess all the key aspects outlined to us. The use of standard technology and the employment of proven and experienced contractors and warranty surveyors, along with established and highly-regarded quality assurance, quality control, and project-management oversight can help mitigate a significant amount of risk. So even challenging environments and locations can be overcome with the right people, equipment, and processes in place.
Lyndsey: There’s no such thing as too much information. We consider technology, environment, location, operator, contractors, engineering standards, client relationships and more at length when considering whether to write or quote a new project. Alongside the pricing adequacy of said project of course, and risk engineering through our in-house engineering expertise. We are very mindful of longstanding client relationships.
Adam: In terms of relationships, from our perspective, this is about us understanding our clients and their operations. It really goes hand-in-hand with knowing they will be doing things in the right way, and building up a two-way partnership to allow us to support them, which is certainly something we value in our organisation.
Michael: We look at all those things too, and others like water depth, installation methodology, pipe diameter and proposed route, and even tow distance for physical damage risks. For third party liability risks, we look at existing property in the area, P&I coverage for the main project vessels, proximity and crossing agreements, and a host of other factors.
Ian: Many underwriters are becoming increasingly selective with regard to Marine Warranty Surveyors. Why? What’s your advice to clients on this?
Michael: There have been incidences on previous projects where surveyors have succumbed to commercial pressures, and losses have arisen. There have also been examples where inexperienced personnel have been utilised, which has resulted in avoidable losses. Our advice to our customers is that it’s important to have an experienced Marine Warranty Surveyor specific to the work scope that the project entails, if say it’s export pipelay, jacket installation, mooring connection, et cetera. Don’t just focus on the cost, because you get what you pay for.
Lyndsey: Marine Warranty Surveyors are essentially our eyes and ears on the projects we write, so we’ve always put a lot of emphasis and importance on their role. It’s very important to us to have an established relationship with surveyors, and to ensure they have the relevant experience, and is accredited by the Society of Marine Warranty Surveyors.
Michael: It’s also incredibly important to ensure that the surveyor has a local presence in the country where the work is being performed. This ensures they understand local requirements, and gives ease of access to site. Marine Warranty Surveyors are not there just as the insurers’ eyes and ears, but also to create value for our customers, and ensure best business practices are maintained throughout the lifespan of the project.
Adam: Underwriters are mindful of the performance of individual marine warranty survey companies on a project-by-project basis, which they take into account when determining the pre-approved panel, or any other surveyor, for future operations. The SOMWS accreditation that Lyndsey referred to also ensures individuals with appropriate experience are selected for the tasks they are being asked to assess and certify, and most underwriters will view this as an important distinction, rather than just the headline company name being utilised for the project.
Clients should carefully consider these aspects when tendering their appointment, as well as being aware of the latest Joint Rig Committee standard Code of Practice and Scope of Work as a minimum baseline for projects, which should aid their safe delivery.
Lyndsey: And having an independent project observer with a breadth of experience across different countries, clients, and types of projects is advantageous. Clients should work with their surveyors to ensure the project is a success, but also for their insurance placement to respond as expected in the event of a claim.
Ian: What is your perception of buyers’ expectations of the offshore construction market and the competitive tendering processes they go through?
Michael: We see a much higher proportion of construction projects going to tender than operational accounts. This is driven by our customers’ procurement processes, as they are one-off projects that are new to the commercial insurance market.
They will naturally want to have the broadest wording available at the most competitive terms. But we believe they also expect consistency and honesty from the insurance market at all times. This flows both ways, and is the fundamental basis of any working relationship. We strongly feel that clear communication lines, knowledge-sharing, and learning from previous mistakes is essential in building trust and driving those relationships forward.
Adam: Yes, a lot can be gained on both sides from clear and open communication and information-sharing, particularly of key project information that already exists in-house for the client, such as Project Execution Plans, or access to certain project personnel in order to discuss certain aspects of the risk and how these are mitigated. This helps us to have confidence in the operations, and also to price the risks and construct the terms in a way that is more accurately reflective of the specifics of the client’s project.
Lyndsey: We’ve seen the construction market hardening in the past twelve months, so clients are likely to be looking at increased rates and deductibles compared to similar projects in the previous few years. Whilst these may be difficult to stomach, they have been driven by claims activity in the sector, whereby small claims have easily eroded the competitive premium charged for the risks, demonstrating the pricing levels previously were not sustainable.
The competitive tender process provides clients with certainty that they are getting the best possible price available at that point in time. But it does not guarantee the best security, leadership expertise, or service, especially claims service, which is so important in the unfortunate event of an incident under the policy. We believe these factors are especially important given the lengthy periods associated with construction risks. Like you said earlier, Michael, you get what you pay for!
Ian: Is there any appetite for ‘Welcar 2022’?
Note: ‘Welcar 2001’ is the London market’s standard policy wording for Offshore Construction Insurance risks, created by the market’s Joint Rig Committee. An update,’ Welcar 2011’, was not widely adopted.
Lyndsey: Welcar 2001 has been a relatively standard basis of cover for many years now, but 20 years is a long time for any wording, so we would not consider a review of it to be premature.
Michael: I’d say if it’s not broken, then there’s no need to fix it! Certainly there are pockets of issues within the current wording, but it’s tried and tested. We believe that focused corrective measures for Welcar are preferable to a new form.
The revised Welcar wording in 2011 did not gain traction because of soft market conditions and a lack of customer and broker consultation. We need to learn from our mistakes and ensure there’s an open dialogue with all elements of the insurance community.
Ian: 2020 saw a big move towards electronic trading. What’s your experience been, and how do you see things developing going forwards?
Lyndsey: COVID-19 accelerated the adoption of electronic placement by brokers and underwriters, which has certainly aided with risk acceptance whilst working from home. It’s a more modern way of doing things, but the sheer volume of emails and PPL matters has not necessarily eased the workload for underwriters. Regardless of this, it has still been a step in the right direction and has gained positive momentum. Broad usage of such systems has led to vast amounts of constructive feedback, which is set to bring about further enhancements and efficiencies to support underwriting.
Adam: Agreed. Electronic trading moved forward significantly in the past year, which has certainly been a positive step in terms of flexible working, and being able to complete underwriting tasks remotely. As the insurance industry moves towards a more agile workforce, electronic trading is a key tool to enable brokers and underwriters to service our clients more efficiently.
Michael: This is the future of the insurance market! Electronic trading helps reduce overall cost, and improves efficiency – most of the time at least – which is a positive. It is also incredibly important from a sustainability perspective, due to the reduced requirement for printing documentation.
Ian: The leadership landscape for offshore construction risks has been quite volatile in recent years. What drives your continued commitment to offshore construction, and what added value, other than the purely transactional, do you bring to clients in the class?
Lyndsey: Chaucer is still very focused on adequate pricing levels, quality of engineering, and the parties involved in any given project we write. The construction market in the last five years has been extremely competitive, with resulting pressure on pricing, deductibles, conditions, and even Marine Warranty Survey Scopes of Work. Given our focus, this has resulted in our construction appetite reducing. However, our more considered and consistent approach has meant that for the right risk profile and price we have continued to deploy our capacity, rather than taking the more drastic stance of some of our peers by completely pulling out of this sector.
Michael: At Zurich we have always provided a level of consistency and transparency for our customer and broking community. We have a vast amount of experience and expertise when it comes to offshore construction, and we appreciate that each project presents its own challenges. Risk transfer is only one mechanism out of a broad range of solutions we provide for our customers.
Adam: The offshore construction sector is a key part of the Allianz offering. We value long-term commitment to our partners, both for our clients and our brokers, and we therefore feel that it is important to ensure consistency and reliability, never more so than in times of uncertainty.
Thank you all for your insightful contributions.