Oil & Gas: The State of the Industry

As oil and gas prices have increased over the last year, so has the oil production and exploration activity in Texas, the country’s largest producer. But the activity has somewhat lagged behind the increasing pace of prices because producers remain skeptical the market can maintain itself long enough to justify the added expense of finding and drilling new reserves.

Despite higher revenues and forecasts of continuing high prices, delegates to the Asian Oil & Gas Conference in Kuala Lumpur in late May voiced concern over the severe impact of the East Asian economic crisis and 1998’s low prices, saying many industry players are leery of launching new projects.

In Texas, Railroad Commissioner Michael Williams refers to that skepticism as “caution.”

“There is, without a doubt, a reluctance to invest capital in exploration and production that may be needed on a ‘rainy day.’ But, although the mood is cautious, it is lined with optimism.”

That cautious optimism is based, in part, on forecasts that it will be a turn-around year for the oil and gas industry. The Oil & Gas Journal reported in its 2000 annual forecast and review that operators will drill 25,600 wells in the U.S., up from an estimated 20,770 drilled in 1999; all operators will drill 2,550 exploratory wells of all types, up from an estimated 2,138 last year; The Baker Hughes count of active rotary rigs will average 800 per week, up from 623 per week in 1999; and operators will drill 13,660 wells in western Canada this year, up from an estimated 12,005 in 1999.

In Texas, the number of oil and gas wells completed in the first three months of 2000 set a pace that, if maintained through the year, will outnumber those for 1999 by 49 percent and 16 percent respectively.

The insurance translation
Insurers in the industry are also remaining optimistic, despite an increasingly litigious society, stricter environmental regulations and dwindling employment markets. But as producer profits roll in, oil and gas insurers are just happy to break even this year according to Gene Goodridge, worldwide petroleum industry manager for Chubb’s energy resources unit based in Dallas.

“The insurance side is counter-cyclical to the production side,” said Goodridge, a 26-year oil and gas insurance industry veteran. “When the production goes up it attracts a lot of inexperienced companies into the business, which drives prices down.”

In 1998 and 1999 only four non-standard oil and gas insurers left the Texas market, while 11 carriers entered, making a total of 111 non-standard insurers according to figures provided by the Surplus Lines Stamping Office of Texas. Many of those, however, are London companies with multiple insurers according to Phil Ballinger, director of the stamping office.

Similar figures were not available from the Texas Department of Insurance for standard carriers. But, companies writing oil and gas reported total written premiums of more than $1.9 million in 1998 with paid losses of roughly $10,000 according to TDI figures. While total premiums written for 1997 totaled nearly $3.3 million, paid losses were exponentially higher at $1.16 million. The figures for 1996 were somewhat better, with $4.25 million in premiums and $622,000 in losses.

A greater focus on loss management services helped turn those losses around in 1998 and 1999 despite an increasingly inexperienced labor pool according to Goodridge. Low unemployment rates around Texas have meant increased numbers of inexperienced workers in the oil and gas industry, which can often lead to more accidents, meaning higher liability and workers’ comp claims. But the shifting focus of insurers has seemingly overcome that obstacle.

“In terms of results, we’re probably about on a break even basis and the way we look at it is over a five-year period,” Goodridge said.

In early 1999, Chubb increased its loss management services in the oil and gas arena in an effort to curb claims Goodridge said. It also increased prices somewhat, as have other companies.

“We’ve had a very good six months as far as losses go,” Goodridge said, adding that the company’s efforts haven’t eliminated lawsuits, but there has been a decrease in their severity. “It’s a very high-hazard business. No one knows what they’re going to hit when they drill down 70,000 feet.”

Un-forecastable losses
And then there are the unforeseen catastrophes that all the loss management in the world can’t stop. Such was the case earlier this month in Nigeria where a fire burned out of control at the scene of a pipeline explosion that killed about 250 villagers who had been scooping up gasoline with buckets.

Such incidents occur all the time in the growing overseas oil and gas industry. In this particular incident, thieves had punctured the pipeline. The villagers killed were scavenging from the spill.

Steering clear of covering companies doing business overseas or even in the seas is not an option for most insurers. More and more petroleum companies have expanded, or are expanding, into other countries. And the number of marine rigs has increased dramatically. Off the coast of Texas alone, rigs increased from 9 in June of 1999 to 18 as of June 9 this year.

The result is an increase in the kinds of services provided by insurers, such as providing information on understanding different cultures. Also, the coverages oil and gas companies are buying are changing, according to Goodridge, with more focus on executive protection products especially.

“That’s true of the emerging public companies,” he said. “They’re having to buy broader coverage to protect their investors.”

With these facts in mind, insurers interested in a foray into oil and gas must consider key fundamentals of the oil and gas insurance market. In a special report last year in Insurance Journal/Texas, Marcus D. Jensvold, president and owner of M.D. Jensvold & Co., a Houston-based MGA specializing in oil and gas, provided numerous tips for entering the niche.

A basic understanding of three aspects of the industry are essential: 1. The types of operations involved and the terminology used; 2. How the parties interrelate contractually; and 3. The specialty insurance coverages involved.

“Unlike many other classes of insurance business, oil and gas exploration seems to be more difficult to learn. As a general rule, it is something most of us never come into contact with or have the chance to observe. For example, we see and come into contact with trucks, airlines, hospitals and supermarkets, but we could go a lifetime without seeing and hearing a drilling rig in operation,” Jensvold explained.

“Unless we take a special effort to don a hard-hat and go see one at work, we may never have the experience.”

As an initial step, Jensvold suggested contacting the Petroleum Extension Service at The University of Texas, where they have excellent primers designed to introduce the novice to the various phases of exploration and production. The extension service can be reached at: 512/471-5949 or petex@www.utexas.edu.

Ask for their catalog of reference material or look into one of the week-long classes they offer for more extensive training.