Onshore Upstream Oil & Gas Production: An Overview of Onshore Upstream Oil and Gas Insurance, Part 2September 21, 2018
Matt Begnaud, Senior Vice President / Broker, Worldwide Facilities – Houston
Tom Davies, Deputy Head of Marine and Energy Liability, Aspen Insurance
Past Market Cycle Challenges Created Hiring Challenges and Sparked Innovation
In the past decade, crude oil prices have had a tumultuous ride. In 2008, oil peaked at about $160 per barrel. By January of 2009, however, oil had dropped to less than $50 a barrel. In January of 2016, oil prices bottomed out at less than $30 per barrel and then began a slow climb to its current price of roughly $70 per barrel. Upstream oil producers began to “stack” their rigs, a leading market indicator of an expected long slump in oil prices.
When crude prices drop, the oil industry begins to shutter rigs. Drilling outfits lay off the least experienced crew members and even seasoned roughnecks may have trouble finding work. Drilling comes to a halt and rigs are stacked. The industry compartmentalizes idle rigs into two categories: cold-stacked rigs and warm- stacked rigs. Warm-stacked rigs remain operational and retain most of their crew. In a prolonged pricing slump, many drilling operators cold stack their rigs to save costs.
The Market Cycle and Current Increase in Oil Prices
In 2014, falling oil prices coincided with almost immediate upstream drilling stoppage. At oil’s recent $109 per barrel peak in 2012, the average count was 1,853 rigs, according to Baker Hughes North American Rotary Rig Count. Today, oil is at almost $70 per barrel and rigs total 957.
If prices continue to rise, rig counts will likely increase, creating market opportunities for retail insurance agents.
According to Kiplinger, geopolitical worries “are pushing crude oil prices higher” and the industry continues to ramp toward a jump in oil prices and increased production.
In a cold stack, rig owners lay off almost all the workers and shutter the oil rig completely. Only a few key individuals, usually the most experienced, remain. While rig owners take preventative maintenance steps before mothballing the rigs, return to service can require “tens of millions” in retrofitting costs.
Underwriters have concerns when owners reactivate cold-stacked rigs after a long economic slump. Without proper maintenance, mothballed rigs deteriorate, especially when exposed to weather and outdoor elements. Safety concerns mount when operators return cold-stacked rigs to service. As one oil expert said, “Entropy always wins.”
Like Other Industries, the Oil and Gas Industry Struggles for Employee Talent
While the oil and gas industry is not the only industry struggling for talent, it faces special employment challenges. When oil prices fall and rigs cease operations, many experienced crew members leave the industry for less cyclical employment. They have experienced the boom-and-bust nature of the oil and gas business and may be reluctant to return even when the pay is quite attractive. This leaves upstream oil producers at a hiring disadvantage, forcing them to hire less experienced employees.
Safety is another concern. Between 2002 and 2007, almost 600 workers died on the job in the oil and gas industry. As recently as 2008, ABC News reported “rampant” drug use, especially methamphetamine use. Workers allegedly may resort to methamphetamine use so they can continuously work 12-hour shifts for up to 14 days. Many workers are not native English speakers, which can increase safety concerns, as well. Training normally occurs in English and non-native speakers may be reluctant to admit they do not understand. Workplace safety lapses are common, according to many experts in the industry. Heavy machinery can quickly maim or kill when operated incorrectly or if improperly maintained. According to the Society of Petroleum Engineers, auto exposures are another significant hazard in the oil and gas industry. Auto accidents were the leading cause of death in the industry in 2014.
When prices recover to a profitable level, oil and gas lease operators begin to drill. When upstream drilling contractors reactivate more rigs, staffing drilling rigs with experienced crews is a challenge. This, of course, can affect underwriting decisions.
Underwriters seek accounts with stellar maintenance records, seasoned crew members and a good loss history. Impaired accounts may struggle to find placement with the broadest coverage at competitive rates.
In our next part, we explore the challenges today’s upstream oil-and-gas businesses face and how your agency can help assist them in meeting current insurance challenges.
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