How merger frenzy restricts business

David Knott
London
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The recent mergers among petroleum companies are likely to be good for the companies involved but bad for those they do business with.

For most companies serving the petroleum industry, the formation of BP Amoco plc, Exxon Mobil, and smaller combines increases competitive pressures in an already cutthroat market.

Simon Williams, line underwriter for offshore energy at Hiscox plc, London, said mergers and acquisitions are the biggest concern facing energy insurers right now.

"There has been a spate over the past few months," said Williams, "and they are sure to continue, driven by low oil prices and the inability of OPEC (the Organization of Petroleum Exporting Countries) to control the supply of oil.

"Unfortunately, non-OPEC producers and some OPEC members are not prepared to act together to reduce output, so we expect oil could be as low as $9/bbl for the next 2 years."

Small oil producers cannot afford to get oil out of the ground at that price, said Williams; some will have to sell out to majors or suffer a loss-making year.

Shrinkage

Hiscox insures energy industry worldwide through the Lloyd's market, and it expects to suffer the after-effects of mergers like any other service company.

Mark Donald, Hiscox partner and energy division head, said that, as far as the insurance industry goes, mergers will affect the market in two ways.

"The biggest impact," said Donald, "comes from the fact that, in mergers, 1 + 1 = 11/2, whether this be staff numbers or items purchased. And the first announcement after any merger is staff reductions.

"Linked to this in the insurance sector, some of the majors self-insure either everything they do or major projects. Thus, mergers take premium dollars and assets out of the conventional insurance market."

Adaptability

Like service and supply companies, insurers have survived earlier petroleum industry mergers and other crises by adapting.

"We're sure the same happened when the 'Seven Sisters' were created," said Donald. "The insurance market responded then to the energy industry's needs and can do so today.

"After the Piper Alpha and Pasadena blasts, people wondered if there would ever be energy insurance on such a scale again, but now there is eight times as much cover available.

"One sure thing is that the energy industry will always need insurance, as it drills in deeper water and as it introduces new technologies. Banks that supply their capital will continue to demand risk transfer."

Williams said that petroleum companies not only look to insurers for protection against risk, but also increasingly use hedging as a means of protection against fluctuating oil prices.

Hence, trading mechanisms are a potential way for insurance companies to boost their energy business: "If banks are prepared to give cover through hedging, we've got to be in a position to offer similar protection."