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 continued innovation.
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 insurance market.
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.
Please click here to download the report.