Successive Govt.'s ignored early warnings of dangers posed by Exxon’s self-insurance

Successive Govt.’s ignored early warnings of dangers posed by Exxon’s self-insurance

Jan 07, 2023 News

Kaieteur News – Members of the local insurance, Brokers fraternities are expressing frustration after they would have pleaded with successive governments, and gave them early warning about the dangers of granting ExxonMobil and partners permission to self-insure oil and gas operations taking place in the offshore Stabroek Block.

Just over three years since Guyana started pumping oil, insurance coverage is still not being held in country as per the Insurance and Local Content Acts.

This means Guyana is losing billions of US dollars because the oil companies have been allowed to control all elements of risk, losses, liability and damages associated with their oil and gas operation.

It also means taxes lost, no local monitoring of Exxon’s insurance workings, no urgency in getting the companies to comply with the law and the stagnation of the industry in a booming oil economy.

Kaieteur News was told that as early as 2018 correspondences were being exchanged with the Insurance regulator-the Bank of Guyana (BOG) and political parties regarding Guyana’s insurance exposure.

The publication was told that a letter, for instance, was delivered to the BOG appealing for the regulator to meet with local operators to discuss the matter of the oil companies handling their own insurance.

It was highlighted that based on the Production Sharing Agreement (PSA), Guyana has with the oil consortium, Article 20.2 which speaks to Insurance, requires the operators to have insurance, and have it according to international standards covering loss and damage to assets, pollution, bodily harm to a third party and liability to employees among others.

It continued however that to the extent of the law, rules and regulations, the oil companies could place the insurance with an affiliate company and with the subject Minister’s approval, have the right to self -insure all or part of the coverage.

Local operators state that to self-insure means that the oil company will be retaining the risk for itself or its affiliate companies. They argue that self -insurance in deep-water drilling continues to be of a global concern since the oil companies keep the risk themselves and are also responsible for paying liabilities and losses incurred.

The problem, however, is that experience has shown that liabilities arising from operation mishaps could be so huge that it surpasses the capabilities of the affiliates or captive companies, created by the oil companies to cover their policies. Governments are then left saddled with huge bills in cleanup cost, liabilities among others, and in many cases, end up in court fighting with oil companies to have them address the issues caused by their operations.

Outside of this, taxes are lost when the oil companies are able to keep the risk. They say because the local companies are not involved in the multi-million- dollar arrangements, there is nothing to be gained by the government.

All the ceding commissions, premiums and other revenues garnered from the placement of the policy is received by the oil companies’ captives and affiliates outside of Guyana.

There is also the loss of risk management scrutiny and best practices. Third party commercial insurers are said to keep rigorous levels of risk management and could cancel coverages if conditions of policies are not adhered to.

Stringent checks and balances are conducted to ensure a properly placed coverage. Operators say that without their involvement Guyana being able to say whether the oil companies are using best practices and managing risk appropriately is out the window.

The local operators insist also that because the oil companies are self-insuring, it does not require the involvement of locally registered insurers as the oil companies would argue that placement of the policies are internal transactions.

Additionally, this would mean not even ‘fronting’ fees would have to be paid. The ‘fronting’ fee is the sum that the local insurance company would be paid to pretend as if they are managing the insurance coverage in country, when in reality, the coverage would be owned by the oil company’s overseas affiliate or captive company.

Local companies are adamant that because insurance for pollution, transit risk, business interruption, third party and employers’ liability among others carry huge premiums, the lost to the industry and the loss in taxes to the country remains significant.