DJE Forum: With Strait of Hormuz Uncertainty ‘New Normal,’ Lloyd’s and McDermott Executives Point to Market Innovation, Optionality
Energy companies are focused on innovating offtake agreements and diversifying market strategies as global energy transits remain disrupted through the Strait of Hormuz in the Middle East, executives for Lloyd’s and McDermott International said at the Dow Jones Energy Forum in New York City on Wednesday.
In a panel that examined commercial risk and infrastructure choices for energy security in the Middle East and beyond, McDermott Chief Executive Officer Michael McKelvy said his company and its clients are pushing more fabrication facilities in the Middle East region to determine what they can push into the region without utilizing the Strait of Hormuz.
“None of these actions is isolated,” McKelvy said, “it creates an interconnection of issues where even if we are moving across the land, for example, we’re coming in at the port of Fujeirah. It just moves the bottleneck. … The only thing we can expect is uncertainty with these events.”
Shippers like A.P. Moller-Maersk redirected cargoes bound for Kuwait, Qatar, Bahrain and the United Arab Emirates in August, increasingly moving through Salalah and Khor Fakkan, followed by land-bridge connections into the Gulf, Maersk’s Aug. 14 operational update said.
The focus is flexibility and balance, McKelvy added, as oil companies deal with the “certainty of the uncertainty” by either reducing their presence in the Middle East or diversifying their product strategy to create more optionality.
“I don’t think it will ever be the way it was,” he said. “Assuming it comes down to a steady state, if it (supply disruption) happens again in five or 10 years, we’re going to be really upset at ourselves that we didn’t do what we needed to do strategically to give us that flexibility when it happens.”
The global average crude freight rate surged above $20/bbl from $3/bbl a year ago, according to Goldman Sachs. A high war risk premium in the Strait of Hormuz accounts for $7/bbl or one-third of the increase in the global average crude freight rate.
In June, global risk insurance marketplace Lloyd’s announced a consortium to provide additional marine war risk insurance capacity for vessels and cargo transiting the Strait of Hormuz. The new marine war risk consortium will issue primary policies for vessels and cargo, and provide up to $200 million of capacity separately for hull and P&I risks, with an additional $200 million of dedicated cargo capacity.
Dawn Miller, Chief Commercial Officer at Lloyd’s and CEO of Lloyd’s Americas, said the consortium, with insurer Chubba, was aimed to “swiftly put capacity to put together out there” by working with insurers so that individual programs and client deals in the marketplace remained “as swift as possible.”
Miller added that energy companies are building resiliency by familiarizing themselves with the new exposure and prioritizing innovation in market risk and business decisions. She highlighted energy offtake agreements, such as those in cybersecurity, where she has noticed innovation from companies, especially dealing with the need to familiarize themselves with the changing agreements from an insurance perspective.
“We’re sitting thinking to ourselves, ‘Are we strategic enough in our thinking?’,” she said, adding, “Have we bifurcated out preventative planning, resilience and that strategic outlook going forward?”
By midday Wednesday, freight costs for Very Large Crude Carriers carrying 270,000 metric tons of crude oil from the Middle East to Singapore stood at $166.11/mt, according to data from the Baltic Exchange. Freight rates for the route have moved from around $50/mt in May to upwards of $180/mt in early October, the data showed. Additionally, costs for moving crude oil from the Middle East to China stood at $245.68/mt on Wednesday.
Despite the surging costs throughout the Middle East, McKelvy said regional companies are increasing their production in the Gulf Coast and expediting their projects as global interest remains, especially in LNG production.
“They’re not planning to shut down and they’re not planning for this this new normal to really be a detriment to their outcomes for years to come,” he said. “They’re continuing to invest in infrastructure planning not only to come back to normal but to catch up from this new normal, once things settle.”