Risk managers warned they face biggest energy challenge this millennium

The ongoing conflict in Ukraine is likely to have a fundamental impact on the world’s energy industry from a “fossil fuel binge” accompanied with an acceleration in the shift to sustainable fuels.

Launching its 2022 Energy Market Review, Graham Knight, head of global natural resources, at broker WTW, warned the conflict has dramatically changed the industry.

He added that risk managers were now in a position where they simply could not avoid the need to tackle the uncertainties that the current energy market presented to businesses of all sizes.

“As if COVID-19 and its devastating effects over the last two years was not enough, we now find ourselves living in the most turbulent geopolitical era that any of us can remember,” Knight explained.

“The effect on the energy industry has, of course, already been profound,” he added. “We have not seen oil prices as high as these for over a decade; indeed, with western governments continuing to show a determination to shun Russian oil and gas, it seems clear that they are here to stay for the foreseeable future.

“In previous times, higher oil prices were generally good news for the industry. And for insurers, they usually meant increased premium flows from greater rig utilisations, refinery margins and exploration & production activity, together with new construction projects. But following COP-26, the industry must now come to terms with the consequences of the energy transition, a transition that may actually be accelerated by the recent events in eastern Europe, as governments step up their efforts to find alternative sources of energy to oil and gas. It’s a transition that means that any future expansion of the oil and gas industry, even if in response to this new geopolitical era, may well be a relatively short-term and limited one.”

The review found total global upstream capacity for 2022 has reached yet another record level, now standing at nearly US$9.4 billion, up from US$9.25 billion in 2021. Downstream capacity both internationally and for North American risks increased as did liability.

Most energy lines of business returned to profitability in 2021, resulting in an easing of the ongoing hardening market conditions.

“In all lines of business, rating level percentage increases are significantly less than in 2021 and in some cases ‘flat’, or even better, renewal terms are now being secured,” stated the review. “However, a combination of factors is preventing a wholesale market softening, including restricted insurer leadership options and concerns regarding the effect of the situation in eastern Europe on premium income streams.”

Knight added that at present the market’s thinking was being dominated by the ongoing crisis in Ukraine and the impact on Russian energy production and supply.

“Now we have a new factor to add to the mix, a significant future loss of Energy market premium income from Russian business,” he said. “It really is too early at this stage to predict with any accuracy what effect this withdrawal of premium income will have on market conditions. On the one hand, insurers may use this factor to insist on recouping lost premium by re-imposing stiff rating increases; on the other, they may be inclined to compete more aggressively for the remainder of the premium income pool.

“ In the meantime, it is likely that there will be a short-term fossil fuel ‘binge’ as a result of this crisis that will alter the balance of the broader energy trilemma of affordability, availability and reliability. “It is probable that some assets may need to ramp up production and/or other mothballed assets may be brought back online. The big question, of course, is whether maintenance and capital expenditure have been maintained for these facilities; if not, perhaps we can expect a future escalation of the current loss levels affecting the energy insurance markets, which may fuel a return to hard market conditions.”

“Every risk manager involved in the industry will need to address the uncertainties arising out of both the new geopolitical landscape and the mounting momentum towards achieving Net Zero emissions targets,” he explained. “We have entitled this review ‘Facing up to Uncertainty’ because we think that this is the most challenging and uncertain risk landscape to confront the energy industry since the beginning of the century.”

The review found total global upstream capacity for 2022 has reached yet another record level, now standing at nearly US$9.4 billion, up from US$9.25 billion in 2021. Downstream capacity both internationally and for North American risks increased as did liability.

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