“Over the last five to six years there’s been a land race in Texas to acquire as many assets as possible to leverage the domestic and global oil and gas market,” explains Zach Burdine, RPS Area Senior Vice President. “Individuals and companies have negotiated large stretches of right-of-ways to build transmission pipelines and purchased large areas of adjoining acreage for producers to start drilling and extracting oil.”
West Texas, specifically in the Permian Basin, is seeing a surge in pipeline construction. As many as 15 oil and gas pipelines serving the Permian are expected to be completed by the middle of 2020, potentially increasing exports from the Gulf of Mexico four-fold to eight million barrels a day after 2021, according to a Morningstar Commodities Research report.
The biggest concern as these pipelines are being built is how to create more capacity to get all that oil to market. Producing four million barrels a day, the Permian generates more oil than any of the 14 members of OPEC except Saudi Arabia and Iraq.
“Those midstream companies first to go live with their pipelines and begin moving product will be the ones ahead of the game,” says Burdine.
Exposures in the Field
In addition to layers of oil-rich shale that have transformed the Permian, technological innovation has contributed to the energy boon in the region. Automation in the oil patch has brought impressive efficiencies and speed-to-market for midstream companies but it has also given rise to additional exposures, according to Burdine.
“There are midstream companies that can now operate pipelines remotely, from their cell phones even, opening and closing the valves based on volume needs and capacity readings. This is more efficient but it also opens the door to hacking and a potential cyber breach. When you don’t open the correct valve, you can have a huge pollution event, as well.”
Another area of risk to consider is pipeline construction. “A transmission pipeline is built in increments, not all at once, and can be operational while being built,” Burdine explains. “You may finish, for example, 10 miles of pipeline, or 100 miles, etc. at a time. The midstream company needs to insure the pipeline while under construction and once it’s completed.
“But there are incremental windows or gray areas where the completed [portion of the] pipeline is operational while you are still constructing the remaining portion. While there are protocols in place to prevent the product from moving to the unfinished section of the pipeline, there are exposures.
“It’s important that coverage is in place to insure the operational portion of the pipeline while construction takes place. RPS has developed a hybrid product to bridge the gap between the construction and operation of the pipeline in lieu of having to secure two separate policies – one to cover the pipeline under construction; the other for its operation. Our insurance product is seamless…as mileage goes live, the operation is covered.”
The energy sector also reflects the overall insurance market. “Any risk with a large auto exposure is facing higher primary Auto Liability rates and subsequently higher excess rates,” says Burdine. “This is resulting in additional excess layers to get the coverage limits we need.”
The other area experiencing higher rates, larger retention levels and tighter underwriting and risk management guidelines is property-driven and involves disposal facilities.
Burdine continues, “These facilities are situated on an oil patch and are the tallest structures out there for hundreds of miles. Most of West Texas is located in a heavy thunder, lightning, and hail belt, so when lightning comes through, these expensive facilities are prime targets and, when struck, will burn to the ground causing millions of dollars of damage.
“It’s a difficult coverage to place right now. What’s important is to work with a specialist like RPS that understands the exposures and how to address them.”
Sources: Morningstar Commodities Research, NY Times, CNBC