Insurance Costs for Region's Oil Projects Decline

The cost of insuring hydrocarbon projects in the GCC - both upstream and downstream - has come down by as much as 30% in certain cases during the past two years, industry insiders said.

The overall costs of various hydrocarbon projects vary and can rise to billions of dollars. "Oil companies are witnessing a change in cost of insurance ranging between 10% and 30% in the past 24 months. The cost of insurance varies with the nature of the project. On an average, the insurance costs have declined by 20%. There is more capital [with insurance companies as of now as compared to demand," James R. Pierce Jr., Chairman (Energy Practice) with London-based insurance broker and risk advisor Marsh, said on the sidelines of Marsh's National Oil Companies conference in Dubai.

Analysts point out a variety of reasons ranging from financial crisis-rattled companies wanting to save insurance costs to an increasing tendency to resort to captive insurance as the reason for the decline in insurance costs. Underwriters point out an interesting mixture of trends which factors into insurance costs.

"While the cost of financing the projects has increased because of banks becoming more cautious of lending, the cost of construction has come down. Several other costs, including the amount spent on lawyers, have declined," said Kumar Rajan, a senior underwriter with Gulf Reinsurance, a Dubai International Financial Centre-based enterprise. On average, cost of construction had come down by 20% to 30% from November 2008 to the middle of 2009, officials of oil companies had earlier stated.

Abu Dhabi-based oil major ADNOC and Saudi oil major Saudi Aramco had used this for awarding new projects.

On the other hand, there have been several reports of banks being very cautious in lending for construction projects.

Industry insiders pointed out two other major trends that they have observed in the past two years in the region.

"There are more gas companies as compared to oil companies out in the markets with requirements of finance," Jan P Mumenthaler, Principal Insurance Officer at the business risk department of Washington-based International Financial Corporation, said.

"Secondly there are more and more individuals and family businesses from the GCC wanting finance for beginning oil and gas enterprises abroad," Mumenthaler added. - Business 24/7