From the multi-billion LNG development to the small building refurbishment, almost every construction project is being affected by Covid-19 related restrictions.
The recent fall in oil prices, however, could potentially cause far longer delays for energy related construction.
Though the full impact is yet to be determined, the Covid-19 pandemic is hitting global industry at an accelerated rate. The construction sector, and especially the energy sector, is no different.
Sites are either shut down completely due to government imposed social distancing measurers, or partially with only essential staff allowed to continue working; while schedules are being pushed back following delays in key equipment deliveries due to global transportation disruption.
The fall in US crude oil prices to below USD20 a barrel towards the end of March brings further project delay and termination risks. Initially driven by a drop in demand due to Covid-19, the price war between Russia and Saudi Arabia within the OPEC+ group of oil producers could significantly lengthen such impact, especially for higher cost producers. Although an agreement has been reached to cut production (from current artificially high levels), the cut is unlikely to return oil prices to those seen in late 2019 and they are unlikely to rise above USD45 a barrel in the near future.
Some of the largest global oil companies have already announced reductions in capital expenditure and delays in investment decisions. Higher cost US shale producers will also have to consider not only reducing capital investment, but halting it completely.
So what can construction and oil companies do to protect project sites during this period of uncertainty.
Temporary cessation of works
Depending on what stage of construction a project is at, be it preliminary site clearance, partially built or at substantial completion stage ready for testing, it will have its own risk factors to consider.
Insureds have an obligation to take reasonable precaution to protect their project during any site closure. Whilst not an exhaustive list, below are a number of key things to consider while works are ceased:
- Site security - what measures are being implemented to protect the site from theft or wilful destruction? Ensure all valuable plant, equipment and machinery is suitably secured.
- Offsite storage and temporary laydown areas - are these adequately secured and protected?
- Fire protection - what automatic fire detection measures are in place? Ensure removal of all waste materials.
- What measures are being undertaken to prevent the escape of water?
- Are regular site inspection plans in place?
- Are changes in the project schedule being recorded, and kept as up to date as possible?
- Will the delay cause any additional seasonal exposures that were not considered in the original schedule?
Long-term cessation or semi-permanent mothballing
For longer-term cessation of works there are additional factors to consider:
- Equipment preservation – contact original equipment manufacturers (OEMs) for instructions on maintaining long-term storage.
- Corrosion – how to prevent corrosion, especially pipes and valves in laydown yards.
- Record keeping – accurate records of preservation activities are crucial to obtaining the broadest insurance coverage and re-instating warranties when projects do resume.
Talk to your broker
In uncertain times, we need to work together. We recommend for insureds to liaise with their broker, risk management team, engineers and insurers during any period where there is a cessation of works to ensure a continuous policy remains in place.
It is also vital to keep your broker up to date with any project developments as insureds have a duty to disclose all material changes in risk, no matter how big or small, even if there is a cessation of works clause in a policy.
Your broker will then negotiate with your insurer(s) to ensure that the appropriate level of cover is maintained during the period of change and that it will respond appropriately should a loss occur.
For longer-term mothballing or significant delays, a specialist policy and expert guidance for preserving value during such a period may well be necessary.
We’re here to help
Miller’s construction team has significant experience at arranging insurance for projects during a longer-term cessation of works, and then when coverage is required for a subsequent restart many months later.
If you have any concerns or further questions, contact us and we’d be happy to help.