Insuring the Arctic: handling emerging risks

The Arctic represents one of the last great, untapped energy sources on the planet. According to estimates made by the US Geological Survey (USGS) in 2008, the total mean undiscovered conventional oil and gas resources of the Arctic are approximately 90 billion barrels of oil, 1,669 trillion cubic feet of natural gas, and 44 billion barrels of natural gas liquids.

And the appetite to access these riches is being sharpened by three factors. Firstly, technological improvements mean that many more resource projects are technically feasible and commercially viable, while geological risks can be better managed. Second, access to the region is much improved, which reduces costs of operation and eases logistics.

Most importantly, high commodity prices – particularly for oil, coupled with uncertainty about access to resources elsewhere in the world, will entice investors.

Infrassure offshore natural resources underwriter Des McCormack said: “The Arctic is one of the places in the world where there are still major reserves, and this is obviously a very attractive prize for many companies. But when it comes to undertaking projects in the region, they face real challenges. And this is for an industry that is already setting the standards in terms of working in harsh environments.”

That the Arctic is one of the harshest environments on Earth can be in little doubt and companies setting out to drill for oil there will be confronted by myriad challenges.

Temperatures are extreme, lows of -50°C have been recorded, and storms, high winds and dense cloud cover all make operations difficult. The region is predominantly covered by pack ice, which is constantly drifting, and it is dark for six months of the year.

It is also remote, and if an accident or oil spill were to occur help might be days – or even weeks – away.

McCormack said: “One of the concerns for operators when they are doing the risk assessment is the mitigation measures they would have to put in place. Macondo, for example, has highlighted to operators some of the challenges of not mitigating the worst consequences of these sorts of activities.”

The Macondo incident of April 2010 highlighted the heightened risks of drilling in extreme environments as this was the first major oil spill in deep water. The costs for cleanup after such a pollution incident would normally fall under an operator’s extra expense policy cover.

McCormack said: “We’ve seen at Macondo where a serious incident required mobilising massive amounts of resources, people and equipment very quickly and the idea that you could mobilise a similar amount of resources to the Arctic would be a massive challenge.

“We talk about risks you can insure, but you can’t insure your reputation. Any company that was considered to be responsible for a pollution-type incident in the Arctic would suffer massive damage to its reputation.”

Even the modest attempts at exploration that have taken place so far have provoked strong reactions. Have these companies understood the risks? Have they mitigated the consequences?

One of the questions for insurers would be whether or not the limits that are in place are sufficient? Are they sufficient to cover the cost of re-drilling, handle pollution, third party liabilities.  And is there enough capacity in the market to cover the limits required?

Infrassure portfolio manager for natural resources David Breen said: “We are used to harsh environments, we are used to deeper waters, but I think the Arctic brings its own set of unique challenges.

“Insurers are willing to take on risk that they can understand. Where it starts to get a bit grey and unquantifiable then obviously we’d have to look very closely at what we are prepared to commit. From an underwriting point of view it is incumbent on insurers to understand how much of the risk they are willing to accept.”