New era of exploration and extraction – Market News – Lloyd’s – The world’s specialist insurance market. Also known as Lloyd’s of London; is a market where members join together as syndicates to insure risks.

New era of exploration and extraction – Market News – Lloyd’s – The world’s specialist insurance market. Also known as Lloyd’s of London; is a market where members join together as syndicates to insure risks..


By opening its doors to private energy investment Mexico is expected to boost demand for specialist (re)insurance.

From deep water exploration, construction of marine facilities, pipelines and renewable energy projects, liberalisation could transform Mexico’s energy sector and with it, increase demand for specialist re/insurance.

“There will be particular growth in offshore energy, which is where most of Mexico’s potential oil reserves are,” thinks Lloyd’s Mexico Desk Manager Gabriel Anguiano.

“Production has fallen in the last decade as the ‘low hanging fruit’ in shallow waters is being exhausted. Now the industry has to work much harder to maintain production in shallow waters and venture into deep waters to tap into additional reserves.”

Lloyd’s Mexico

Lloyd’s has received approval from the Mexican authorities, to open a representative office in Mexico City.

Gabriel Anguiano has been appointed as Lloyd’s first General Representative in Mexico. Gabriel will take up his new position in January 2015.

Lloyd’s Mexico will offer the opportunity for the Mexican representatives of Lloyd’s insurers to co-locate in the Lloyd’s General Representative Office. Read the full press release here

The need to explore deep water drilling and shale gas extraction among other areas is one factor that prompted the energy reform, thinks Michael Gunther, Energy & Infrastructure Practice Leader, Mexico for Marsh. “It will allow Pemex to partner up with private companies, be they international or Mexico, to access these technologies that will improve production in the future.”

Since reforms were finalised by President Enrique Peña Nieto in mid-August, ending the 76-year monopoly of state-owned oil company Pemex, the country has moved quickly to announce upcoming tenders for natural gas and energy projects.

In March, during “Round Zero” of the reforms, Pemex sent regulators a list of which fields it wants to keep for its own development.

“What you’re seeing in Mexico in the media is all these names signing primary contracts with Pemex at the moment,” states Gunther. “I’d expect in the next month Pemex to announce the first joint ventures to exploit the fields that were granted to Pemex in Round Zero and we expect, next year, to see international companies bidding for Round One and subsequent rounds.”

The Mexican government hopes that by 2018, investment in its energy sector will have doubled to around $60bn a year.

Billion dollar baby

Under the new law, foreign and private domestic energy companies will be able to explore, produce and refine oil for the first time since 1938, when Mexico nationalised its oil industry.

Japan’s Mitsui and US-based Chevron Corp are among those that have expressed interest in investing. Start-up exploration firm Sierra Oil & Gas has already secured commitments of $525m from a trio of US and Mexican private equity firms.

Placed in the context of Mexico’s natural resources and global energy demand, there are significant opportunities. Mexico is thought to have the world’s sixth largest reserves of shale gas. Shale gas extraction, or fracking, has transformed the US energy market in recent years.

The country is also one of the seventh largest oil producers. Meanwhile 72% of the country’s electricity comes from thermal facilities, 16% from hydro power, 8% from coal and 4% from nuclear power.

Investment in extracting these natural resources could go some way to meeting Mexico and other country’s future energy demands.

Some of this demand is due to be met through renewable energy sources. Peña Nieto’s administration has plans to generate 35% of its electricity from sources such as onshore and offshore wind farms and solar thermal power by 2024. However, it is expected that energy generation will continue to be dominated by petroleum (33% to 28%) and natural gas (21% to 23%) over the next decade.

(Re) insurance opportunities

“Mexico has [shale] gas in the north and north east of the country comparable to those in Eagle Ford in Texas, and it has great expectations regarding both shallow and deep water wells in the Gulf of Mexico,” says Ingrid Carlou, chief executive of LatAm reinsurer Patria Re.

Carlou thinks the international re/insurance needs of the energy sector will grow significantly as projects increase in size and complexity.

“Facultative covers are expected to be in high demand as technology adoption kick starts the investment dynamics, and there will likely be a huge spill over to property and personal lines,” says Carlou. “New deep water exploration, and more sophisticated distribution technologies will, I think, make their way to the international reinsurance market.”

“The insurance industry in Mexico has a big challenge, we need to improve our skills and adapt our products to satisfy the demand in this sector,” she adds.

Marsh’s Gunther points out that the international insurance and reinsurance market has been covering energy risks in Mexico for many years. But the transition from a state monopoly to an energy industry that contains private players and joint ventures will present new risk transfer requirements, he thinks.

“I expect that we will do a lot of benchmarking with what other countries are doing, such as Brazil and Norway, countries that in the past have gone down the same path of opening up the industry.”

The expertise international carriers can offer in underwriting more complex energy projects will also be useful. In particularly for deep sea drilling and construction, which are not risks commonly underwritten in the Mexican re/insurance market.

“It will be very dynamic times for the next five to ten years,” says Luis Macias, senior vice president, facultative reinsurance for Mexico at Guy Carpenter. ” We have to be prepared to show the markets the correct and proper information in order to assess and rate the risk. And this will likely increase the premium volume of our market… I believe that it’s going to be really good for the insurance market in general.”