BP Oil Spill to Limit Insurance Coverage for Offshore Drilling

Published: Thu 24 Jun 2010

Mary Banks

The BP oil rig explosion that led to the most catastrophic oil spill in the country's history is expected to restrict insurance coverage for offshore drilling, compelling oil corporations to leave deepwater fields or self-insure.

The Gulf of Mexico leak is "a market-changing event," according to Dieter Berg, Munich Re's senior executive manager marine. Munich is the largest reinsurer in the world, and one of the companies that will absorb the most losses from the spill. "Buyers and sellers of coverage will be reevaluating their appetites for offshore energy risk," explained Berg in an emailed response to queries on June 11.

Congress is considering new proposals increasing United States liability expenses to $10 billion for Gulf oil drilling, which may leave only three companies-Royal Dutch Shell Plc, Exxon Mobil Corp., and BP-with the wherewithal to self-insure, according to a client memo from energy consultant PFC on June 15.

The available insurance coverage may drop by as much as 30 percent, predicted John Lloyd, CEO of Lloyd and Partners, on May 11 in testimony written to the U.S. Senate. Lloyd's company is a subsidiary of Jardine Lloyd Thompson Group Plc, the largest publicly traded broker in the United Kingdom.

When BP's Deepwater Horizon rig exploded on April 20 and killed 11 people, the company was drilling into the Gulf's Macondo well. Since then, the well has spurted tens of millions of gallons of crude oil into the waters, spurring BP to create a $20 billion fund for victim compensation. Yesterday, the United States appealed a federal judge's June 22 ruling that lifted a ban on deepwater drilling enacted after the Gulf spill.

Insurance Premiums Explode

Insurance companies are revisiting what they can afford to underwrite as the spill reveals higher levels of liability than previously considered, explained Gregory Thomas, chief of offshore activities at an insurance underwriting company in Oslo for deepwater oil contractors.

The cost of insurance policies covering deepwater oil rigs has increased by more than 50 percent since the BP spill, said Moody's Investors Service on June 3. On June 9, the chief of India's largest explorer Oil and Natural Gas Corporation, R.S. Sharma, explained that its offshore insurance policy would have cost three times more if it had renewed its coverage following the Gulf spill.

The Gulf spill will "significantly" raise the costs of offshore drilling insurance, predicted Lloyd's of London CEO Richard Ward during a June 22 interview with Bloomberg Television.

The BP spill will likely become the second-largest energy insurance loss according to existing estimates from the Insurance Information Institute. The costliest loss so far for energy insurance companies was the explosion that occurred in July of 1988 on the Piper Alpha Oil platform in the North Sea, resulting in insurance losses of $3.6 billion and 167 deaths.