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 With less insurance coverage for physical damage and business
interruption, energy companies could be liable for millions of
dollars of costs in repairs and lost business in the case of an
explosion or fire. In the worst-case outcome, entire refineries
could close if insurance coverage is inadequate.
Insurance rates for property damage and business interruption have
increased as much as 100% for some refiners, particularly those that
have experienced explosions or fires in the past. Energy companies,
which have traditionally bought billions of dollars in insurance,
are buying less coverage than in the past.
Unexpected refining outages have soared in recent years, surpassing
2,000 incidents in 2019, quadruple 2015 levels, according to
Industrial Info Resources, a provider of industrial process and
energy market intelligence.
With U.S. energy and chemical production at an all-time high,
increasingly complex refineries have been running full-tilt,
eschewing planned downtime to try to boost profits.
The heightened risk comes after a series of high-profile accidents,
including several explosions at petrochemical plants in Texas and
last year's blaze that shut the Philadelphia Energy Solutions
refinery.
None of the nation's large independent refineries, including Valero,
Phillips 66 or PBF, would comment on the record for this story.
MORE MONEY, MORE PROBLEMS
The overall liability to insurers for global refining and
petrochemical incidents over the last three years comes to more than
$12.5 billion, according to global insurance broker Marsh/JLT. That
is more than double the gross premiums paid to insurers, the broker
said in a January report.
Annual insurance premiums are costly. A refiner worth $1 billion
will likely pay $2.5 million or more, according to loss adjusters.
Losses are mounting for what is known as business interruption
policies, which provide coverage for companies that lose income
after operational problems, according to Michael Buckle, managing
director of downstream natural resources at rival broker Willis
Towers Watson.
Last year's fire that shut the Philadelphia Energy Solutions
refinery could cost $1.25 billion in insured losses alone, though
industry sources say PES will likely receive less than that amount
from its insurers. Husky Energy is counting on insurers to fund the
$400 million rebuild of its refinery in Superior, Wisconsin after a
2018 explosion.
Insurance companies with sizable energy exposure such as AIG and CV
Starr are responding by offering less overall insurance capacity or
reducing exposure, according to insurance industry sources. AIG did
not return a request for comment and CV Starr declined comment.
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Insurers have increased the cost of coverage by 25 percent to 100
percent, depending on a variety of factors including the insurer's
assessment of risk based on a history of losses. Some refiners are
responding by curbing their coverage.
"Refiners are choosing to buy coverage for only 90, 80, 70% of their
total asset value in response to insurance rate hikes," said one
senior refining executive, who spoke to Reuters on condition of
anonymity.
Some refiners also choose to delay the number of days before their
business interruption coverage to cut costs, the executive added.
CHANGING RISKS
Gross crude oil inputs into U.S. refineries reached a record high in
2018 of 17.3 million barrels per day. Refinery utilization rates
rose to 93.1% in 2018, the fifth straight annual increase, according
to U.S. Energy Department figures.
Refining margins were strong through 2018 and 2019, which
discourages refiners from shutting down for maintenance.
“When refinery margins are high, there can be a tendency for
refineries to extend turnarounds in order to take advantage of the
more profitable environment,” said Ian Robb, head of risk
engineering at insurance carrier Liberty Specialty Markets.
Many U.S. refineries have added units to take advantage of growth in
chemicals and plastics demand. Insurance sources said the growing
size and complexity of refineries adds to insurance risks, because
an interruption in one unit can affect production in several other
units, such as petrochemical production.
These new "interdependencies" expose insurers to increasing business
interruption risk, said Steffen Halscheidt, global practice lead for
oil & gas of Allianz Global Corporate and Specialty.
The growth in joint refining ventures and increased acquisition
activity can add to risk for insurers, Halscheidt said. Acquisitions
that cause workforce turnover can lead to changes to a refinery's
operations and the departure of experienced workers.
(Reporting by Laura Sanicola; Editing by David Gregorio)
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