Energy upstream in emerging markets

By Michele Cibrario FCII, Energy Upstream Underwriter, Vice President, Property & Specialty Underwriting, Swiss Reinsurance Company Ltd., and IUMI Offshore Energy Committee Member

Few insurance companies in emerging markets have the full overview of operations, processes, contractual instruments and objectives of upstream energy ventures and their implications for re-insurance decisions.  

Upstream energy operations use a joint venture structure in several continents. Such structures set out how the relationship among the interested parties is arranged: the international oil companies and their co-venturers; the producing countries and their national oil companies; the specialised construction and drilling contractors; and the service providers.

The international oil companies adopt a rigorous risk management process in forming a balanced portfolio of hydrocarbon assets. Such process begins when taking the decisions to bid for a new hydrocarbon licence and adding a new prospect to the portfolio of reserves. The competitive bidding rounds to acquire the licence is preliminary to enter into a Petroleum Agreement with the producing country.

When referring to the contractual instruments among the parties, the contractual provisions trickle down from a Petroleum Agreement with the producing country to a Joint Operating Agreement among the joint venturers and then cascading via the Drilling Contract to individual contractors. The construction phase is regulated by the Engineering, Procurement, Construction and Installation (EPCI) contract structure. The EPCI contract will need to consider the local content requirements of the host country.

The contracting strategy will dictate the conditions for the provision of insurance and reinsurance for the hydrocarbon venture as aligned with the contractual allocation of liabilities in the venture, following the allocation of the duty to take out insurance set out in the Petroleum Agreement.

The process of providing insurance and reinsurance for the hydrocarbon venture comprises competitive bidding dedicated to each project phase of the venture (drilling, construction, operation) and ultimately the need to structuring locally admitted coverage with local insurance partners.

Upstream energy insurance is a highly volatile line of business, in fact a sub-line within the wider marine business. An in-depth knowledge of the energy industry is widely considered a prerequisite for working in this line of business and the paper below (available for download) seeks to fill such an information gap. Unreplaceable experience is gained from working within industry itself, however.

The technical publication is available below and on the Swiss Re website.