Impact of Strait of Hormuz Disruption on Offshore Projects

The disruption to the Strait of Hormuz, triggered by the US-Israel war on Iran in late February, has severely impacted procurement and logistics for critical offshore oil and gas projects in the United Arab Emirates, Qatar, and Saudi Arabia. Rising insurance premiums for offshore logistics and support vessels transiting this crucial chokepoint have increased uncertainty around project costs for contractors.

Rising Insurance Premiums and Cost Escalations

Several vessels have been hit by Iran in the Strait, leading to a higher risk premium on shipping. Contractors report that commercial offers for new offshore engineering, procurement, construction, and installation (EPCI) projects now factor in a surge in insurance premiums, while existing projects face cost escalations. Insurers are either denying premiums or demanding rates that are two to three times higher in some cases. The cost of insuring offshore logistics is typically incorporated into the contractor's lump-sum EPCI project cost, but with premiums rising substantially, contractors are bearing these costs without certainty of reimbursement from operators.

Key Operators and Contractors Affected

Major operators affected include Abu Dhabi National Oil Company (Adnoc), QatarEnergy, and Saudi Aramco, which are spending billions on offshore projects to maintain and expand oil and gas production. Leading offshore contractors likely impacted by logistical challenges and rising insurance costs include NMDC Energy, Saipem, McDermott International, Lamprell, Larsen & Toubro (L&T), and China Offshore Oil Engineering Company (COOEC).

Logistical Challenges and Project Delays

Beyond insurance, the conflict has left offshore modules and critical project equipment stranded at sea, unable to transit through Hormuz, leading to increased project costs and delays. Insurers are also offering shorter duration coverage for offshore vessels, creating wider cost uncertainty.

Expert Analysis on War Risk Insurance

Torbjorn Soltvedt of Verisk Maplecroft noted that securing war risk cover will remain a major challenge unless there is a comprehensive agreement to end the conflict or a significant reduction in Iran’s strike capabilities. He stated that the repricing of war risk premiums is unsurprising given the damage inflicted on energy infrastructure, and that insurance pricing will remain volatile as underwriters reassess exposures weekly.

Erik Grundt of Rystad Energy reported that insurance premiums for offshore vessels have risen by five to ten times for high-risk areas in and around the Middle East, with many insurers not covering vessels transiting the Strait of Hormuz. He explained that war risk insurance is a standalone product covering losses from war, piracy, and terrorism, with additional premiums calculated as a percentage of hull value and priced dynamically based on geopolitical conditions. Insurers can cancel or revise cover with as little as seven days' notice.