If aggregate limits of insurance coverage are reached in the first bad storm of 2006, there will be no coverage left for a second storm. "It's in Mother Nature's hands," James R. Pierce, responsible for global marine and energy insurance for insurance giant Marsh, told Houston Energy Finance Group members recently. Upstream companies are seeing premiums and deductibles soar, while coverage is reduced. A few majors and very large independents operating in the Gulf of Mexico have decided to abandon the traditional insurance companies and self-insure instead. And E&P start-ups are not in an enviable position. "They will have to sell themselves to the insurers just as they would to investors on a road show," Pierce said. "It's a seller's market out there as there simply aren't that many companies offering insurance to the upstream, and they have finite capital. Luckily, E&P companies have strong balance sheets right now." Capital will follow opportunity, however. Pierce said private-equity providers such as First Reserve Corp. and Warren Buffet of Berkshire Hathaway are looking into investing in upstream insurance providers. Insurance underwriters are in survival mode. In 2005, some $1.5 billion in premiums were paid into the worldwide upstream insurance market, yet the claims were about $8 billion, creating "the most challenging insurance market for upstream we've ever seen. That doesn't sustain itself under any business model. Do the math," said Pierce.

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