It is fair to say that easy oil has gone: Andrew George

Interview with Chairman, Energy Practice, Marsh

GMR might have burnt its fingers in Male, but Indian companies, especially in the oil and gas space, have made great strides abroad. Insuring against risks in unchartered territories has nonetheless become important. Insurance broking and risk management firms, like Marsh, are the vital link here. In an interview with Jyoti Mukul, its chairman, energy practice, Andrew George, lists the risks for Indian companies. Edited excerpts:

How real are the risks for Indian energy firms abroad?
There is no doubt, that as India has to satiate its energy demand, security of supply is critical. Indian companies need to extract more oil and gas domestically and explore technology around unconventional ways, like fracking, for shale gas, which isn’t taking place now, but at some point will. It is fair to say easy oil has gone, and oil and gas are now found in tricky areas. The risk of extraction, or the risk of problem and failure during extraction, is greater. For instance, in the Gulf of Mexico, in April 2010, historic norms of costs related to investment changed. If you invested 100 units in drilling a well, maybe the cost associated with any accident was 300 or 400 units, but the BP incident showed it could be a multiple of that. So, to protect the financial wherewithal of a company, a real deep understanding of risk has to be there.

 

How far political risks have become important?
Companies will see political and governance risks. Every country has its own rules, and you have to abide by those. Companies ask us to make sure they do not have a problem, because extraction of hydrocarbon is important. We also see governance is a critical component, particularly with regard to sanctions. Like certain areas of the world, where there are pretty tough sanctions, and sometimes the interpretation is not clear. Indian companies look for insurance. Our work is reducing risks and making them more successful.

For India, how important is it to secure commercial interest, since the primary purpose is energy security?
Companies invest with others in areas where host governments are also taking part. The macro-economic view is India wants to secure hydrocarbon, but at the micro level, it is a commercial investment.

Environmental catastrophe could also pose a high risk.

There are natural perils and we have seen a real proliferation and a heightened exposure to earthquakes, tsunamis and floods. You can have good operations, but if you are in catastrophic areas, your venture can cease. Also, a significant amount of losses occur due to human negligence. Energy is a high-hazard business, if you get it wrong, you can have explosive consequences; so, there should be a way for those companies to have financial wherewithal. You might spend $200 million in drilling a well, and spend $10 billion in building a refinery, but if there is an explosion or a failure, you might not have wherewithal to just spend that money again, so we look at the insurance market and capital to provide indemnity. You want to protect the loss of revenues and profits. There are areas safer than others. Certain areas are subject to terrorist action that can damage, or impede, or expropriate your venture. Also, an accident can damage the third party. Marsh has risk indices and matrices. A lot of work we do is not just facilitation of transaction, but also providing deep statistical analysis.

Considering what happened to BP in the Gulf of Mexico, what kind of safeguards should Indian companies adopt?
A lot of things go wrong because humans go wrong. Indian companies have first-class knowledge and facilities, but that can sustain only if you draw up the proper processes. Some of the companies can do a better job by valuing their businesses. People would say it is not about price, but it is always about price. Understand what costs are. I think Indian companies are well poised to drive the best deals in the world.

Besides in risks like seepage and pollution, company may face liability way above international and local jurisdictions because of larger social pressure. In the age we live in, the pressures on the governments to seek remedial measures, may exceed prescribed limits.

How should companies share these risks?
We are seeing E&P companies going overseas in joint venture. India has huge contracting advantage. The contractual allocation of risks either among the host government or the host company, the operating company and the contractor can have huge impact on the operation of the contract.

How would compare the current geo-political situation to what it was some 50 years back when the western companies went looking for oil?
Compared to 30-40 years, the framework around the world for regulation and governance is much more mature. The corrupt practices or bribery act may come out of the US or the UK but they have broad implications. The impact of trade sanctions and the speed with these regulations can change is huge. Host governments have around the world have learnt the lesson. In some countries, oil wealth is positive, in some it creates the burden of corruption. That is a challenge for Indian companies that have to successfully and sustainably invest in these countries irrespective of regime. Twenty to thirty years ago, there was a greater need for technology. The seven sisters were providing capital and technology. There is more diversity of capital and technology now. The way contracts are led are more sustainable today with more equitable sharing of risks. In the past, the pendulum was too much in favour of the company that came in and took hydrocarbon. There was a stage when pendulum swung too far the other way towards host countries. In many areas, there is good tension now, and we have more sustainable future.

How equipped is the insurance market to handle this?
The insurance market is very mature around confiscation, nationalization, expropriation, deprivation, political risks and violence. There are well-crafted tools around them. Political risks market is developing in the financial market because if you are investing in West Africa you wouldn’t take insurance in that country. So one is efficacy of the product and the other is efficacy of the capital. Indian companies are going as operators but they are also going as capital provider. They do not take technological risk themselves.

Do you think treaties and diplomacy can create investment comfort?
Any multilateral arrangement which two countries have origin of investment gets significant benefit. When multilateral agencies are lenders, it gives protection to investment. The way contracts are awarded, with respect to transparency and equitability, also reduces political risks significantly. A pure negotiated contract is open to scrutiny. Fair transparent and open competitive contracts tend to have less political risks.