Research

2017 Energy Market Review

Is change the new normal in energy markets?

May 5, 2017
Welcome to the 2017 edition of our Energy Market Review. The last 12 months have seen some significant changes in the geo-political landscape, particularly in the United States and the United Kingdom but also in many other countries around the world. In overall terms, these global changes are likely to have a significant impact on the energy industry, wherever it is operating.

Our Natural Resources Risk Index, published last year, showed that geopolitical instability and regulatory change was viewed as the most significant megatrend affecting these industries. However, geopolitical upheaval represents only one of a series of challenges facing the energy industry today – low oil prices, cost control pressures, workforce layoffs, onerous legislation/regulation and the escalating risk of cyber-attacks, to name but a few. For energy companies, finding a clear path to managing these challenges is going to be no easy task; most of them look likely to stay and reflect the new normal for the energy industry as we head further into 2017 and beyond.

The first part of our Review is therefore dedicated to six key risk management issues that we think reflect the new normal in the industry. These are:

  • Managing people risk in the energy industry – breaking down the silos between Risk Management and Human Resources departments is fundamental to managing people risk in a modern, effective way (Figure 1 opposite suggests that our clients agree).
  • Managing offshore dismantling & removal risk – this is a growing risk for the industry and energy companies may be looking at how to transfer this risk if it is going to be managed effectively.
  • Managing hydraulic fracturing (“fracking”) risk – we include a “deep dive” into the UK fracking industry to identify this industry’s true risk profile.
  • Managing high temperature hydrogen attack (HTHA) risk – our analysis of the energy industry’s exposure to this risk shows that this can be a real danger, especially to older processing assets.
  • Managing retained risk – how energy companies use captive insurance companies in the future will be critical to the effectiveness of their overall risk management strategy.
  • Managing the risks involved in political change – energy companies need to focus more clearly than ever before on being prepared for political upheaval in the domiciles in which they operate.

Figure 1 – Question asked at our Latin American Energy Conference in October 2016

2017 Energy Market Review

At the same time, there may also be a new normal emerging in the global energy insurance markets. The abundance of (re)insurance market capital, the driving dynamic behind market conditions now for nearly a decade, is likely to remain dedicated to the industry – no matter what individual sector loss records produce.

With most insurance carriers continuing to record overall profits during 2016 – despite some exceptions – Energy insurance practitioners are going to have to adapt to today’s conditions and find new ways of adding value and generating income. We have included a special feature on the long term effect of excess capital on the market at the beginning of Part two of this Review, but we have also included an insurer’s perspective on today’s insurance market to provide our readers with an alternative perspective. We conclude our Review with a round-up of current developments in the global Energy insurance markets.

We hope that you enjoy the Review, and as always we would welcome any feedback or comments that you might have.