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Issue 90 - 26th Feb 2010

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NOCs meet in Dubai and talk is of safety, security, and building on Bermuda

Over 300 delegates were in Dubai this week for the third marsh national Oil Company Conference and while the agenda was packed there plenty of others news to talk about.
The key note speaker for the opening day was Marsh & McLennan Companies CEO and Chairman Brian Duperreault.
He warned the oil companies that they faced some fundamental challenges in the coming year as they played an ever more dominant role in the supply of oil and gas to the world.
“NOCs have a real opportunity both now and in the future to develop a self sufficiency in the products they create and to ensure the consistency of supply,” he added.
“The security and reliability of energy supply continues to be a defining issue for both the producers and the consumers and the risks to that supply will continue to challenge the markets,” Mr Duperreault said. “NOCs have emerged as a powerful force in the energy marketplace.”
He added: “The dynamics of the energy marketplace have changed and with a change in the dynamics will come a change in the risks which are faced.”
Mr Duperreault also spent part of a busy week visiting a number of major Middle Eastern insurance and risk hubs and Marsh clients in the region but he also found time to fire a shot across the bows of the Premier of Bermuda in the Bermudan newspaper the Royal Gazette, over a property deal he is involved with.
Although work keeps Mr Duperreault in New York for much of his time his family home remains on the island and his is also part of a consortium, Southlands Ltd, which had ambitious plans to build a new resort on a site they acquired on Bermuda in 2005 in the Southlands Estate area of the island.
However the Bermuda government negotiated a deal in which the original site was to be swapped for the former US naval facility at Morgan’s Point which would leave the Southlands Estate to become open space.
However Mr Duperreault and his fellow investors have said that they now feel that Premier Dr Ewart Brown is stalling on the deal and it is costing the consortium money while they are left without the ability to build the resort.
Mr Duperreault gave the Royal Gazette an interview in which he accused Dr Brown of repeatedly stalling the land swap deal.
In the article he said the consortium had been "damaged" by endless delays, had spent a "lot of money" already and would consider suing if the exchange failed to happen.
"It is clear that the Premier does not want to have the swap take place," Mr. Duperreault said. "He doesn't want Southlands taken by the Government and made into a park. He doesn't want us to take possession of Morgan's Point. I don't think there is a desire, at least on the Premier's part, to do this at all."
The article explained that the two sides signed a land swap agreement in April 2008, when then Tourism Minister Dr. Brown said Southlands would "most likely" become a national park.
All seemed to be going well until earlier this month when, according to the report, Dr. Brown said his Government was dissatisfied with the proposal due to "too much concrete" and was looking at other opportunities for Morgan's Point.
"We would love to do this project but how do you deal with this kind of vacuous, non-specific criticism?" said Mr. Duperreault.  "I can't get specifics. What kind of relationship is that? To date we have still not got a specific answer about what's wrong with what was presented to them, except his comment in the press about concrete."
He added: "It's three Bermudians here trying to do something. You can draw your own conclusions about what's going on. Fundamentally, it's a question of fairness and good faith. We don't think we have been treated fairly and we don't think we have received the good faith in negotiations that we thought we would."
Mr Duperreault will be back on the island in three weeks when he takes part in the World Insurance Forum but the article has prompted a renewed debate over they project in the Bermuda media..
Back in the conference hall a range of senior speakers delivered the views on the oil and gas market with one of the most significant issues that of the future of Iraq and its huge oil deposits.
Luay Jawad Al Khatteed, Executive Director of the Iraq Energy Institute addressed the NOCs and told them that seeing was believing with Iraq.
Mr Al Khatteed said the country would need to be rebuilt by the private sector as the government remained constrained by lack of funds with which to enter into private public partnerships.
However the estimated 115 billion barrels of oil which are in the country were seen as the revenue stream which will fuel the country’s recovery with the expectation that Iraq will be a very rich nation in the future.
“For anyone who is thinking of doing business in Iraq I would tell them not to believe what they have heard or seen second hand – you need to come and see the country and the opportunities for yourself,” concluded Mr Al Khatteed.
He added trust remained a major issue in the country and any failure to deliver on promises would impact a business’ ability to operate.
“Trust is vital in Iraq and we see problems with trust in the government and the populating after years of sanctions,” he said. “There is a lack of trust between the public and private sector which has hindered the ability for projects to be progressed and my advice would be not to over promise something you will find challenging to deliver as it will backfire on all parties.”
Delegates heard that there was a huge potential for business in the country which it is estimated will need $600 billion of investment to regain the position it enjoyed three decades ago in terms of prosperity and infrastructure.
A new report from Marsh’s energy practice also showed that the oil firms had been beefing up risk management as claims costs were falling across the board and that would lead to rate reductions.
The report entitled “The 100 Largest Losses” has found that there have been fewer and less severe major losses which are seen as proof that companies are learning from past incidents and mistakes.
Jim Pierce Chairman Marsh’s Global Energy Practice said: “Energy sector risk management has evolved into an applied science that is making a real difference to mitigating the catastrophic losses that were more common in previous years.
“It is important that oil, gas, and chemical companies make use of improved risk management techniques as we predict three will be more energy sector mega projects. The age of the $50 billion project has arrived and with it the potential for any large loss to be very costly.
“However, by learning from past incidents and applying the latest risk mitigation strategies, many NOCs and other energy sector players are well equipped to avoid the kind of catastrophic incidents that could do serious long term harm.”
Marsh said the lower losses had attracted greater underwriting capacity into the market and had put further pressure on rating levels. The current predictions are that rates could ease by up to 20% in the coming months across the board.
“All energy companies are likely to see something of a reduction of their overall cost of risk,” added Mr Pierce. “However the firms which have embraced the highest levels of risk management will benefit most.”
Of the 20 most expensive losses from 1979-2009 only one was from the past 12 months with a collision between a vessel and an unmanned rig in the North Sea.
The most expensive loss during the past three decades was the Piper Alpha loss in 1988 which cost the industry $1.6 billion.
British politician Nicholas Soames addressed the conference in the politics of oil and said with the move towards natural gas for power instead of oil the development of the “Fracking” system to access natural gas from shale deposits was set to change the face of the global energy map with the US now in a position where it may even considering to become a natural gas exporter.
“All over Western Europe, similar gas deposits have been identified, although on a smaller scale” he said. “With new technology, they become accessible at a cost that makes economic sense, and are environmentally unobtrusive. Substantial deposits on a commercial scale have been located — and in some cases are already being developed — in Poland, Austria, Hungary, Sweden, Ukraine and the United Kingdom.
“The process lags behind the American gas boom but the implications are clear. In a few years, it has the potential to make Europe increasingly self-sufficient in gas, lessening its reliance on Russia for Western Europe's gas supply.
“This also means that plans for new gas pipelines that avoid Russia, bringing gas from Central Asia and the Caspian region to Europe – mostly through Turkey, look far less urgent. In the meantime, Gazprom will be searching for new customers and trying to cut its costs. The so-called ‘new great game’, which has involved trying to escape the Russian stranglehold on Western energy supplies, will have been turned on its head. Asian customers of Russian gas — including Japan, which relies on natural gas for well over half its daily electricity supply — will find eager salesmen pressing them to take more gas and enter into long-term contracts.
“Meanwhile, Iraq is on the threshold of huge new expansion. There is enormous opportunity in Iraq with so much potential as yet untapped. It must also be remembered that Iran is also sitting on enormous gas deposits. Also, China is finding new gas sources and is seeking advice from the Americans on new technology with which to exploit them.”
He added: “What is especially remarkable is that much of this activity has been taking place during the global financial crisis. As we heard already today, spending on energy infrastructure has been declining over the last couple of years. But there is has been clear interest by some countries in looking at ways of lessening reliance on energy supplies from countries deemed not to be stable trading partners.”

Jon Guy
Editor
Global Broker & Underwriter

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