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Mon 18 Feb 2008 12:11 PM

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Oil companies at critical risk from underinsurance

Massive industry demand has sent replacement costs soaring.

Marsh, a leading insurance broker and risk adviser, has today issued a stark warning to the Middle East's oil companies of the risk of underinsurance driven by record high oil prices.

"An increase in activity in the oil sector means that any major loss will cost more than ever to replace," said Andrew George, managing director at Marsh. Speaking in advance of the annual National Oil Companies conference which Marsh will be hosting in Dubai next week, George stressed that the massive worldwide investment in Oil and Gas infrastructure may leave many companies vastly underestimating their risk exposure.

"In recent years there have been many more projects commissioned such as offshore infrastructure including rigs and platforms, refineries and petrochemical plants, which may have been less viable with lower oil prices. This increase in demand, which has shown little sign of abatement in the Middle and Far East, directly impacts replacement values and project lead times," explained George.

He added that while many clients have been actively addressing this issue, many remain significantly underinsured. "With triple-digit percentage increases in replacement value now common, oil companies need to address their strategy for managing risk, including their insurance limits, to ensure that a major incident does not become a needless financial burden."

The risk burden is further accentuated because the immediate fabrication of replacement assets is simply not possible given the fact that order books at most of the world's major yards are full for years to come.

"As the demand for commodities has increased, lead times for replacements have also increased. Oil companies also need to ensure that their business interruption insurance policies and contingency plans reflect the latest market developments. Today, rebuild times for major plants that may have been 24 months, could be 36 to 48 months or even more."

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