Insurance and Surety Bonds: A Case Study of Petrochemical, Oil and Gas Projects in Myanmar and Thailand

Human beings, business firm, organization, government and society want security but everybody and property cannot be fixed and established because risk is generally underlying those. Risks can be easily understood among the projects, but they are difficult to describe. Construction projects require many resources such as financial capital, human resources and material resources. It is very important to mitigate the construction risks, and complete the project with target time and necessary quality. Analyses of the various risks and understanding of these risks are very important to mitigate these risks. The insurance company is of primary significant of the risk management. It shows that insurance is a form of risk management primarily used to avoid against the risk of a contingent loss (Tsanakas and Desli, 2005 cited in El-adaway and Kandil, 2009). Insurance is determined as the equitable risk transferring. The insured need to pay equitable insurance rates called premium to insurance company (Harrington and Niehaus, 2004 cited in El-adaway and Kandil, 2009).

The insurance premium payment is a major cost of project. If insurance is used, the premium must be paid in advance. If any losses happen in project, the project can get indemnification. However, the using of insurance can get loss of premiums. Therefore, the contract manager and risk manager need to consider about insurable risks. All kinds of insurable risks are not insured. Bunni (2003) mentioned that classification of risks on the basic insurability is shown in figure below.


There are many risks in the construction project. Each project activity may be its own risks such as occurrence of physical damages, accidents, materials delivery delays, unforeseeable problems, unforeseeable site conditions, natural hazards, political affects, etc. These risks will affect to the client, contractor, design professional, employees, third party and public. For instance, the contractor cannot be able to finish the project with contract price because of the economic situation and changes, the site condition changes, the difficulties of resources and others. Therefore, contractor’s default is one of the most important risks in construction projects (Arditi et al. 2000 cited in Al-Sobiei et al. 2005).

Contractor’s risks cannot be eliminated by the client, but it can be partly or totally transferred to the bonds (Al-Sobiei et al. 2005). When the project meets the unforeseeable contractor’s failure, it is very difficult to finish on time because the projects may have financial difficulties, delays and others. However, the surety bonds can provide to the client as a guarantee to complete the project and defaulting financial payment from the contractor (Russell, 1990; Mills, 2001).

Ms. Kyawt Phyu Phyu made a case study which objectives were to : (1) study insurable risks which can be managed using insurance and surety bonds; (2) study the insurance and surety bonds in oil & gas and petrochemical projects; and (3) develop a framework on risk and insurance

Conclusions

Objective 1

It was found out that there are many kinds of risks in oil and gas and petrochemical projects. Their risk management (risk transfer) approaches are the insurance, surety bonds and other approaches. However, most of the appropriate risk transfer approaches are the insurance and surety bonds and the detailed conclusion for objective-2 are described in table below.


Objective 2

it was found out that most of the projects don’t have the same insurances and surety bonds because of their project nature, project types, different project parties, different risks management system. The insurance premiums are also different relating with risks, project types, company background and others. If the risks are high, insurance premiums are also high. There are eleven (11) kinds of insurance and four (4) kinds of bonds on petrochemical and oil & gas project in this research according to case study.

(i) Recommendation Insurances for offshore pipeline project

The recommendation insurances for offshore oil and gas projects according to case study are:
1. Construction All Risk Insurance
2. General Third Party Liability Insurance
3. Marine Hull and Machinery Insurance
4. Protection and Indemnity Insurance
5. Worker’s Compensation Insurance
6. Transportation Insurance

(ii) Recommendations Insurances for Transportation and Installation Offshore
Facilities Projects

The recommendation insurances for transportation and installation offshore facilities projects according to case study are:
1. Construction All Risk Insurance/ Erection All Risk Insurance
2. General Third Party Liability Insurance3. Worker’s Compensation Insurance
4. Marine Hull and Machinery Insurance
5. Protection and Indemnity Insurance
6. Transportation (Marine Cargo) Insurance
7. Builder All Risk Insurance

(iii) Recommendation Insurances for Urea Fertilizer Factory Projects

The recommendation insurances for Urea Fertilizer Projects according to case study are:
1. Construction All Risk Insurance/ Erection All Risk Insurance
2. Transportation Insurance
3. Fire and Exploration Insurance
4. Worker’s Compensation Insurance
5. General Third Party Liability Insurance

(iv) Recommendation Insurances for Refinery Projects

The recommendation insurances for refinery projects according to case study are:
1. Construction All Risk Insurance/ Erection All Risk Insurance
2. General Third Party Liability Insurance
3. Worker’s Compensation Insurance
4. Construction Plant and Equipment Insurances
5. Business Interruption Insurance

(v) Recommendation Surety Bonds for Petrochemical and Oil and Gas Projects

In petrochemical and oil and gas projects, bid bond is needed in the bidding stage. In the construction and operation phases, performance bond (bank guarantee) and advance payment bond are important according to case study.

Objective 3

Main types of insurable risks in petrochemical and oil and gas projects are loss of life and personnel injury, material damage, material in transit and contractor’s risks. The insurable risks for oil and gas projects are collusion, oil pollution related with marine property. The researcher shows the detailed level of respective insurable risks in below figure. The project’s participants transfer these kinds of insurable risks to insurance and surety bonds, and the detailed descriptions are mentioned in figure below.




Her thesis abstract is copied and posted.
Abstract

There are many uncertainties, risks and probability and possibility of loss of chance in every firm, business, projects and human beings. The oil and gas project and petrochemical projects have many uncertainties and risks because these projects are related with geological risks, probability of existing oil, oceanography, and others. Insurance and surety bond are very important in projects because they can protect the risks, contractor’s default, and the project can get the financial and performance security. This study is emphasizing on insurable risks with appropriate types insurance and surety bonds.

This study emphasizes on the case study approach on petrochemical and oil and gas projects. The study was conducted to two oil and gas projects from Myanmar, two urea fertilizer projects from Myanmar and two refinery projects from Thailand to study types of insurable risks, insurance and surety bonds.