Energy Sector Struggling Under Pandemic Pressures

A leading broker has said the global energy industry faces a series of major threats which have been compounded by the impact of the global COVID-19 pandemic.

Speaking as Willis Towers Watson issued its annual Energy Market Review, the broker’s Head of Global Natural Resources, Graham Knight, warned the repercussions of the pandemic will be widespread and significant.

“We cannot underestimate the immediate challenge faced in loss of demand as a result of Covid-19 and the impact of the recent oil price war, notwithstanding the agreement now reached by OPEC+ to cut production by 10% of global supply,” he said. “While it is still too early to forecast exactly how these twin factors will play out in the months ahead, the potential effects on the energy industry are obvious; reduced capital expenditure, a reduction of exploration and production activities, lower refining margins and lower business Interruption valuations. It will also have a knock-on effect on premium income levels for an insurance market that remains unprofitable for most lines of business.”

The report warned climate change and Environmental Social Governance (ESG) will transform the energy industry risk landscape. ESG is key theme of the report, highlighting that the transition to a low carbon economy requires a fundamental reappraisal of energy company climate risk; the Review contends that achieving a satisfactory ESG rating will be critical in enabling energy companies to attract and maintain the support of key stakeholders in the future.

“In these unprecedented and uncertain times, there is no denying that the last 12 months have been challenging ones for the energy industry,” added Mr Knight. “However, it is the issue of climate risk and wider ESG factors that will have a significant impact on the future shape of the industry. In short, today’s energy businesses must commit to incorporating ESG standards and climate change into their risk mitigation strategies in order to ensure a sustainable future.”

The report covered a wide rage of issues including global capacity. It found once again the upstream market has bucked the general market trend, as theoretical amounts are now at another record level, US$8.73 billion, from $8.10 billion in 2019. The reverse is true, however, for Downstream, where capacity has declined for the second successive year, down to $5.978 billion from last year’s $6.428 billion.

In terms of losses the seemingly extraordinary run of benign loss years in upstream continues, with only three losses in excess of $100 million during 2019. It is a different story for the downstream sector which saw a significant number of losses over $100 million, with one major loss significantly above $1 billion.

Underwriters have sought to harden rates with limited success. Upstream rating increases are still very modest (2.5-5% on average) said the report. However, for the downstream sector increases are well in excess of 20% for virtually every type of programme, and significantly more for refinery and petrochemical business.

It leaves the market still struggling to deliver a return. While the upstream market remains profitable in overall terms, premium income levels are still low by historical standards, and certain sub-sectors of the upstream market such as offshore construction, have been hit by attritional losses. For downstream and liability insurers, their portfolios remain firmly in the red and the long road back to profitability is uncertain.

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