Analysts at Ernst went on to say that oil prices are anticipated to grow with increased demand as the economy continues to recover.  The challenge may be higher prices negatively affecting economic development.  While natural gas long term prospects for pricing and demand are strong, current prices and demand remain generally weak on continued production growth largely from unconventional gas plays.  Not surprisingly, oilfield service company bottom lines have benefited from the strong uptick in drilling assets and the growth in unconventional gas and associated boom in horizontal drilling.   Meanwhile refining margins have finally showed some strengthening though capacity remains shut in at pre 2008 levels.   Deal flow is up and deal size is growing on loosening capital markets and consolidation in oilfield services.

And in the insurance world, a quiet hurricane season and significant new capacity both upstream and downstream is stabilizing and in some cases softening pricing.  Absent more events such as the tragic loss and developing environmental problem accompanying the fire and total loss of TransOcean’s Deepwater Horizon this week, the challenge for energy accounts is to differentiate themselves within this market to take advantage of the opportunities.  But conversely with increasing capacity, insurers are feeling the pressure to differentiate as well to show their market leadership.  What is still unclear early in this process is how far this trend will go to impact retentions and other terms and conditions.  No significant changes are expected in terms and conditions but pressure could be applied on retentions in an effort to pressure competitors in an environment of improved capacity over the past 18 months.

If you have questions about the impact on your business, let us know.

Meridian is a highly dynamic specialized insurance consulting group and broker with offices in Boston, MA, Newport, RI and Brookfield, CT. We specialize in risk management and risk transfer for traditional and alternative energy companies. We are members of the International Energy Credit Association and the Connecticut Maritime Association. Our Mission is simple.  We seek to help our clients make the best risk and risk transfer decisions possible.

MERIDIAN – YOUR RISK RETHOUGHT

Meridian is a highly dynamic specialized insurance consulting group and broker with offices in Boston, MA, Newport, RI and Brookfield, CT.  We are a hard-driving group with an entrepreneurial spirit who will work tirelessly for clients. We specialize in risk management and risk transfer for alternative energy companies. We personally promote sustainable practices and are members of the Sustainable Business Network and the International Energy Credit Association.  Our Mission is simple.  We seek to help our clients make the best risk and risk transfer decisions possible. To do so we bring market-leading service to the most creative solutions in the risk management field to ensure that each Meridian client achieves their risk objectives.

Renewable Energy Project Risks (see in brackets the corresponding Financial Risk Management Instruments)

Risks associated with LARGE SCALE PROJECTS

Project Development/Pre Construction

Concept to implementation                     (Grants, Contingent Grants)

Construction Phase

Construction/Completion Risk               (Insurance =Construction All Risks CAR/EAR)

Counterparty Risk                                         (Surety bonds –Performance guarantees     //Liquidation damages)

Operating Phase

Performance Risk                                            (Insurance)

Counterparty Risk                                           (Surety bonds –Performance guarantees   //Liquidation damages)

Fuel Supply/Weather Resources  Risk    (Weather Insurance/Derivatives)

Credit Risk                                                           (Guarantees, Credit insurance/Credit derivatives)

All Phases

Financial Risk                                                      (Standard derivative products)

Political Risk                                                         (Political Risk Insurance//MFI Guarantees//Export Credit guarantees)

Force Majeure Risk                                             (Insurance/Catastrophe bonds)

Risks associated with SMALL SCALE PROJECTS

Project Developer

Development Risk                                                  (Guarantee Funds)

End User

Risks  of physical damage incl. theft                 (Insurance)

Risks associated with CARBON FINANCED PROJECTS

Market Risk                                                              (Standard derivative products to hedge price)

CER Delivery Risk (Insurance –carbon delivery guarantee, permit                                                         delivery guarantee)

Meridian is a highly dynamic specialized insurance consulting group and broker  with offices in Boston, MA, Newport, RI and Brookfield, CT. We specialize in risk management and risk transfer for Energy companies. We also promote sustainable practices and are members of the Sustainable Business Network and Slow Money Alliance. Our Mission is simple.  We seek to help our clients make the best risk and risk transfer decisions possible.

We bring market-leading service to the most creative solutions in the risk management field to ensure that each Meridian client achieves their risk objectives.

The Wall Street Journal noted on August 24th, that more energy companies are uninsured or underinsured as prices for coverage rise and as  infrastructure improves .

http://www.foxbusiness.com/story/markets/industries/energy/energy-companies-slash-insurance-levels-wsj/The focus of the article was primarily on offshore companies and their windstorm coverage decisions this year.

Brokers seemed to think these decisions are due to stiff rate increases while the energy companies attributed the changes to improved technology and more regulation reducing the likelihood of damage.

Particular approaches ranged from total wind self insurance to dropping cover on less valuable structures.

While we certainly have seen significant increases in offshore wind pricing post  Ivan, the risk transfer decisions made by these companies at this point are not just a factor of insurance product availability and pricing.  The 08-09 crash of prices and growth in inventories and its impact on company bottomlines in many cases threatened even company survival.   Those in the offshore world with the most stable contracts and utilization levels have weathered things well thus far thanks to the rebound that is occurring. By nature offshore exploration is more of a commitment in time and less vulnerable to the impacts felt in the land rig world.

In this context that companies are choosing to take on risk is not surprising. Tragically some of them may find themselves in a catastrophic loss at some point  for which they are totally unprepared.

Others may opt to go into captives or make some other arrangements as an alternative to traditional insurance products.

In many ways it is a tough loss for those of us who like to work with this industry to provide appropriate solutions.  But this takes  little creativity and unfortunately it’s not consistently present in the staid insurance industry.

We believe we can help with that.

Tom Bryant is a partner in Meridian Consulting . His 35 year work career began in a farming community in Alberta and encompasses years in the onshore/offshore oilfield industry, penitentiary and parole supervision of violent offenders in the Correctional Service of Canada, and more recently risk management for corporate clientele primarily in the energy industry.

Energy Usage at Three Cubic Miles of Oil and Growing

SRI International’s Ripudaman Malhotra says the world’s energy usage equals burning three cubic miles of oil every year, and that will grow to nine cubic miles of oil by 2050 if current trends continue.

Imagine the island of Manhattan covered with 150 feet of crude oil – almost enough to drown the Statue of Liberty – or 1,000 football stadiums filled to the brim with black gold.

That’s a cubic mile of oil, or the amount of oil alone the world now consumes in a year, Ripudaman Malhotra told an audience Monday at Greentech Media’s Greentech Innovations: End-to-End Electricity conference in New York.

And Malhotra, associate director of SRI International’s Chemical Science and Technology Laboratory in Menlo Park, Calif., wants people to think of all the world’s energy usage in terms of cubic miles of oil, or CMOs, because “That exercise will bring us face to face with the enormity of the challenge we are facing” in moving to a renewable energy future.

Including electricity generation, which takes up about 40 percent of the world’s energy usage, and all other forms of energy, the world uses the equivalent of three cubic miles of oil per year, he said.

But renewable energy makes up only a tiny portion of that measure of world energy supply, he said – about two-tenths of a cubic mile including large hydropower projects, and a mere 0.005 cubic miles of oil for all the solar and wind power now in place today.

It will be very difficult for renewable sources to grow to meet the world’s projected demand growth to somewhere between six to nine cubic miles of oil by 2050, he said. (see IEA Paints Dire Picture of Energy Supply and Demand).

While the sun provides an equivalent of 22,000 cubic miles of oil in energy to the earth, capturing that energy will take new technologies deployed on a scale that is hard to fathom, he said.

“If we are at .005 CMO [for solar and wind power] and want to get to 5 CMO, that’s a thousand-fold increase” over the next 40 years, Malhotra said by way of example. And current technologies are not effective enough to make up for “a big part of that gap, so I’m looking to see some new things,” he said.

The first problem is the sheer scale of the expected growth in energy demand, he said. Second is the disadvantages that solar and wind power have in terms of intermittency – not producing power consistently throughout the day and year – which will require new forms of energy storage to capture the power for use when it’s needed most, he said.

In terms of cubic miles of oil, Malhotra laid out some daunting figures for how much solar and wind would be needed to meet demand.

Getting just one CMO-equivalent of photovoltaic solar power in the next 50 years would require 4.2 billion 2-kilowatt solar rooftop systems, or 250,000 installed every single day over that timeframe, he said.

Looking at concentrated solar-thermal power, which produces power using the sun’s heat at lower cost than photovoltaic solar systems, Malhotra said it would take 7,700 solar-thermal parks of 900-megawatts capacity – or three built per week over the next 50 years – to add up to one cubic mile of oil equivalent.

As for wind power, getting to that one CMO-equivalent within 50 years would require putting up 1,200 1.6-megawatt wind turbines every week over that time, he said.

Using solar-thermal and wind power effectively will also require a massive investment in transmission to bring the power from the remote areas where it’s best produced to the cities that need it most, he said. (See NREL Hunts for Solar-Thermal Hot Spots and National Grid: Dream or Reality?)

Biofuels – which have the advantage of being the only form of renewable energy that can be easily stored – offer other problems, such as the energy that’s required to make them and the potential environmental and greenhouse-gas emission costs of clearing land or cutting down forests to make room for planting the crops to make them, he said.

Creating one CMO-equivalent of biodiesel, for example, would require an 85-fold increase in the current amount of land now dedicated to growing soybeans around the world, he said.

As for nuclear power, which Malhotra said must be a part of the world’s energy future, getting to the equivalent of one cubic mile of oil would require the building of 2,500 nuclear plants, or one every week for the next 50 years.

And fossil fuels, which now account for the vast majority of the world’s energy supplies, will have to increase in use as well, even as the world tackles how to keep their use from increasing greenhouse-gas emissions and thus the threat of global warming, he said (see Can You Spare $45T to Curb Global Warming?).

Given these massive challenges, “The operative conjunction is ‘and,’ because it will take nuclear and solar and wind and whatever” to meet the world’s energy needs, he said.

And the solution won’t just lie in increasing energy supplies, Malhotra said. Efficiency – doing more with less energy – and conservation, or foregoing the use of energy, will play an equally important role, he said.

Efficiency has “historically never reduced net consumption,” since people tend to increase their energy use as efficiency improvements make it cheaper, he said. Still, doing things like replacing one billion incandescent light bulbs with compact fluorescent lamps, or CFLs, could save the world an equivalent of one cubic mile of oil per year, he said.

Making more energy-efficient buildings, which now account for about half the world’s use of energy, could also have a big impact – if such improvements in lighting, heating and air conditioning systems, as well as more efficient building materials, can meet the price demands of developing countries like China and India, he said.

Bringing a host of efficiencies to the United States’ roughly $500-billion-per-year building renovation market could yield a savings of about one-tenth of a CMO, he said.

Bringing the same innovations to India and China, where several trillion dollars of buildings are built and renovated each year, would raise that energy savings to as much as two CMOs, he said. But right now “we really need major innovations to produce cost-effective solutions” for those markets, he said.

“Conservation, or avoiding [energy use], is tougher,” he said. But, given the enormous challenges in increasing energy supplies and improving energy efficiency, it will have to be part of the equation, he said.

Conservation and efficiency together could reduce the world’s energy demand by three cubic miles of oil equivalent, he said.

“The question is, what about the rest? Those solutions will have to come form the supply side now – and as we’ve seen, we have absolutely nothing on the supply side to meet this right now.”

Jeff St. John for Greentech Media  Nov 17th 2008