Oil & gas companies need to be insured the right way

Written by Viraj Nair | Mumbai | Updated: Aug 31 2013, 06:24am hrs
It is not enough for oil and gas players to merely insure their capital intensive projects anymore, it is crucial that they find the right cover that best protects them from losses resulting from any damage to their equipment.

Insurance is vital for the oil and gas industry, where billions of dollars are spent to set up the apparatus to extract natural resources from the earth, but there are loopholes or grey areas in insurance contracts, often left intentionally by insurers seeking to minimise pay outs.

The catastrophic oil spill in the Gulf of Mexico in April 2010 revealed the extent of losses that can be raked up when disaster strikes, and even three years later, there is no let up in the legal wranglings, compensation claims, and cost of damages. Within weeks of the disaster, BP, the owner of the ill-fated Deepwater Horizon rig, started paying up claims to help dilute an epic legal and public-relations mess, and has so far spent more than $25 billion for clean-up and compensation. This hasnt stopped demands for more.

Disputes in the oil and gas industry usually arise over the wording of contracts where there may be an element of ambiguity, said Prabodh Thakker, chairman of the Indian division of global insurance broker Aon. This is not uncommon in the world of insurance of course, but it could be very tricky for oil and gas companies. Is, for example, an eroded pipe insured Only if it is not normal wear and tear that resulted in the damage, explained Vimal Patel, offshore construction broker at Aon.

The Indian arm of global insurance broker and consultant Aon, which is a well known brand among Indian football enthusiasts as the principal sponsor of Manchester United, organised an event in Mumbai on Friday to bring together their brokers with stakeholders in the offshore energy industry, including representatives from state run oil and gas major ONGC, to discuss key insurance issues for the industry, a panel discussion that the insurance broker was the first of its kind in India.

It is important for us to ensure everything is well covered as a tripartite agreement between insurer, exploration and production company, and contractor, said Harpreet Joshi, general manager (finance and accounts), ONGC.

Satpal Singh, managing director of contractor Global Dolphin Drilling Company, called for greater clarity and fewer grey areas in insurance contracts, stressing that there were myriad imponderables or risks in the offshore industry that made finding the right cover essential and challenging at the same time.

Aon insurance brokers explained that standard exclusions from insurance contracts for oil and gas firms include damages from terrorism, political risks, and consequential losses or business lost due to an event that has been insured. These events need additional coverage. So if a project is delayed, which is a worryingly common occurrence in the Indian energy industry, standard insurance does not losses to the company from the delay.

A lack of a competitive reinsurance market in India is damaging the insurance industry, which is currently grappling with the sharp fall in the rupee and the introduction of 12.5% service tax, Prabodh Thakker, chairman of the Indian division of global insurance broker Aon, said. State-run General Insurance Corporation of India (GIC Re) is the sole reinsurance company in the Indian insurance market.

India should build a global reinsurance hub domestically, it will help stimulate the industry, he said.