Oil firms' answer to global calamity: Insurance

By Javier E. David

Despite soaring domestic production that has sent U.S. oil reserves to their highest level in nearly 40 years, the U.S. is far from immune from instability abroad. International demand means major oil companies must explore in unsavory places.

A recent report by Securing America's Future Energy and Roubini Global Economics underscores how vulnerable the U.S. is to supply disruptions abroad. The survey noted that rising domestic production has helped the world's largest economy become more secure, "but heavy oil use leaves the economy vulnerable to high and volatile oil prices."

The report added that outages in Iran, Iraq, Nigeria and Libya have driven global spare capacity down to 1.7 million barrels per day - a level that gives "a very limited amount of flexibility in the event of further outages."

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Beck echoed those findings, saying that domestic production alone was not enough to insulate big oil producers from unstable markets.

"It's not just the U.S.'s energy needs...it's the global need," Beck said. "Irrespective of relative energy needs in the US, there will be a significant ramp-up in other places. That requires [U.S. oil companies] to be in these hazardous environments."

That can cost a pretty penny. Beck said oil and gas companies can pay tens of millions for premiums to insure against a host of disasters, with prices determined by several factors. In hotspots like Libya and Iraq, pipeline security is a big issue, as are ransom and kidnappings, to name a few.

"It's not just about pricing, it's about risk management," Beck said, adding that Clements' strategy is to "develop processes and procedures to prevent there being a loss, as opposed to simply reimbursing them after a loss."

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The ability of oil companies to hedge against global risk is complex because the nature of those threats is diffuse and unpredictable. Beck, however, said they have one element in common.

"The roots of instability are all economic," he said. "It's that level of economic instability and insecurity that we have to pay close attention to now as we look at pricing of political violence coverage, and policies to protect operations in that developing part of the world."

Source CNBC