Companies Reassess Risk as Political Violence in Egypt Continues
Political unrest in Egypt has prompted oil and gas companies, as well as companies from a number of industries, to reassess the adequacy of their insurance coverage and risk management arrangements, according to New York-based insurance broker and risk adviser Marsh.
Companies investing, manufacturing, and trading in emerging markets are increasingly realizing that they face a more complex risk landscape as political violence can occur with little warning in countries previously considered relatively stable. Oil and gas companies often find themselves doing business in emerging markets countries where potential for greater returns is higher, due to pressure from Wall Street for greater shareholder returns, global energy demand, and that fact that remaining global oil and gas reserves exist in what Wall Street dubs "frontier markets".
"Companies find themselves going to these countries en masse because that's where the action is, but it's easy to take their eyes off the risks, especially if you've been in a country for several years with no problems," said Stephen Kay, head of Marsh's U.S. Political Risk and Structured Credit Practice, which has nearly 20 oil and gas clients, some of whom have operations in Egypt.
Several oil and gas companies have halted drilling operations or evacuated workers from Egypt following the outbreak of violence. Atwood Oceanics reported it received a force majeure notice from RWE Dea Nile GmbH, which has the Atwood Aurora drilling rig under contract in the Mediterranean Sea offshore Egypt. RWE said the political turmoil in Egypt was impacting drilling operations. Apache Corp. also reported this week it has evacuated non-essential expatriate workers and expatriate dependents from Egypt due to the political situation in Egypt.
Companies across a number of industries, including oil and gas, hospitality, and real estate sectors as well as professional service firms and financial institutions, have been impacted by political violence in Egypt. Evan Freely, global head of Marsh's Political Risk and Trade Credit Practice, said affected companies should be gathering as much information as possible to prepare for the claims process.
"These incidents in Egypt should cause every company with operations in emerging markets to re-evaluate the adequacy of their risk management strategies," Freely said. "Companies need to have plans as much that can protect both colleagues and strategic assets."
Companies with operations in countries affected by political unrest face losses from risks such as business interruption, theft of and damage to property, threats to contract for purchase and supply, late payments – potentially impairing cash flow – and the need to evacuate employees. In the case of oil and gas companies, this can include damage to rigs, platforms or pipeline infrastructure, forced abandonment of equipment or the nationalization of drilling rigs and other assets such as in Venezuela.
Many times, companies will buy basic terrorism insurance as a common add-on to property insurance. However, some buyers of terrorism insurance have found themselves without cover following civil disturbances, for example in Thailand last year, because of disagreements about whether certain events were acts of terrorism or political violence, Freely said. "Companies need to make sure that they have insurance coverage for a broad range of perils, reducing uncertainty that can be caused over the classification of an event."
Kay said that a blanket policy for covering risk for global operations is the best solution. Companies that try and pick and choose what foreign operations to insure often find themselves facing political risks in the area they didn't insure. "The question remains if the new regime following Mubarak will be open to foreign investors," said Kay, adding that the potential devastation of political risk on companies’ balance sheets could prompt some companies to reassess risk and potential costs.
Insurance also is available to cover assets that, while not owned by a company, impact their operations and revenue, Kay said. For example, if a company owned an offshore platform and pipeline, but not the trunk interconnecting the two, insurance could be obtained to cover the connection since the company can't transport gas without the asset and would lose income. Insurance coverage should also be considered to cover loss of income while rigs and facilities are repaired and operations restored.
IHS CERA reports that, so far, no oil and gas production in Egypt has been disrupted due to civil violence. "More importantly for global oil markets, there has been no hindrance to oil and gas transit through Egypt, whether by pipelines or through the Suez Canal."
Egypt's military is protecting the oil and gas infrastructure and transit routes during the political upheaval. There is also some redundancy in the system to protect this infrastructure, as the military has deployed troops to enhance security along the Suez-Mediterranean (Sumed) pipeline, which alone has enough theoretical spare capacity to accommodate the tanker-borne oil that passes through the Suez Canal.
Sumed transports mainly Gulf of Suez oil to the Mediterranean Sea via the Red Sea. In 2009, approximately 1.1 million b/d, less than half of the Sumed pipeline's 2.3 million b/d capacity, flowed through the system. A smaller amount, 585,000 b/d, was transported through the Suez Canal that same year, IHS CERA said.
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