Energy and power:
Director, Global Power & Energy
Head of EMEA Power
Part of understanding the relationship between the
two industries, and how it is changing, is to accept
the frontier between oil and gas and power
companies is disappearing.
For power companies, the risks are clear. Increased
competition and supply will drive prices down; firms
tend to operate with small margins in the power space,
and this business model may be impacted. The industry
may also become less attractive over the next 20 years
as governments reduce support and sponsorship
previously bestowed upon renewables. Key factors
underpinning the future business model will be continued
technological advancement, reduced supply chain costs,
increased interconnection between electricity markets,
social and governmental support internationally and
Oil and gas companies are obliged to invest in power, but
they haven’t had time to prepare their business for such
significant acquisitions. Many are entering a market that
is new to them. Majors are used to managing high-profit
projects and are now confronted by assets that could take
many years to generate a return. There are many complex
decisions to make and risks to assess, and selecting the
right partners is going to be key across the full value chain.
With oil and gas, one hurdle to overcome is a somewhat
dated mindset regarding insurance. Energy clients have
programmes that are focused on specific and extremely
valuable assets (refineries, FNLGs, FPSOs), which will
remain on the books for a lifetime and are treated as
the core business of the company. This approach will
not work with new power acquisitions where asset
rotation is key to success.
Oil and gas companies will need
to develop the in-house technical
knowledge for the power landscape.
As they grow in this space, so will
the list of associated contractors and
subcontractors, and this brings its own set
of risks that will need to be addressed.
The power sector’s insurance needs are
evolving exponentially, as companies try
to eliminate fossil fuels from their energy
mix and invest in different assets, bringing
more complexity to the equation.
From a risk perspective, it will be an
immense challenge to aggregate the
same protection structures for the two
different dimensions of assets. The level
of retentions, the singularity of each asset,
the strategies and the mechanisms to deal
with an increasing hardening market will
be a real challenge to address; mixing
these two distinct worlds will test the
Mutuals like OIL offer a compelling
proposition for power companies as
they could benefit from the element
of unification on offer. Therefore, the
commercial market is under pressure to
provide attractive alternatives.
In response, the insurance industry will
need to be much more flexible than in
the past, and it must break down internal
silos. Brokers should be willing to mix
available capacity and partner with
specialist markets to provide the client
with the broadest offering and deliver
solutions to their changing needs.
Projected revenues for the next five-year period will be down due to the volatile
global context. Natural catastrophes will continue to occur and will remain uncertain
in terms of impact.
The market will have to adapt its value proposition, breaking silos in terms of
underwriting rules and adapting current policies to meet client needs.
Long term investments in energy and utilities will be imperative: the new
strategic direction towards renewables will bump on the grid bottleneck.
Public and private sector investments in the development of national energy
will support market output, representing commercial opportunity.
On the energy side, decreasing demand will also drive prices and investment
down. This could be a risk if companies start to neglect the maintenance
investments on the refining infrastructure.
During this period, gas will play an important role as the transition
mechanism between fossil fuels and renewables.
No doubt, the energy mix will be different. The asset rotation will be an essential
mechanism to guarantee that companies keep capturing the gold.
In this time horizon, we will have “meta-companies”: fully integrated and diversified
companies (both in activity and geographically) that will demand a different level of
sophistication from the insurance market.
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