Energy Review 05-2019

05 June 2019

Recently, several leading journalists have noted that “the silly season” has started early this year. There is very little in the way of interesting news and so, what would have previously been regarded as nothing special, creeps into the headlines.

Even the proposed takeover of Anadarko by Occidental did not seem to surprise many people. The upgraded sanctions against Iran appear to have had the anticipated effect and the presence of a US aircraft carrier with nuclear weapons heading towards the Persian Gulf was not unexpected. Climate change activists achieved more headlines than they hoped for because there was little else to report on.

One item of news that did attract attention was the Druzhba pipeline contamination. The Druzhba pipeline is the biggest oil pipeline which comes into Europe from Russia. There could be around 30 million barrels of contaminated crude oil – enough to fill 15 supertankers – which has to be removed. Once again, Europe’s reliance on Russian energy exports has been highlighted.

In the United Kingdom people are experiencing the calm before the storm, while little progress has been reported. Theresa May was until recently still working behind the scenes to get her Brexit plan accepted by Parliament although the House of Commons has rejected it twice. The Prime Minister eventually announced on 24th May that she will be stepping down as leader of the Conservative Party, in the middle of the pan-European EU elections.

Having granted an initial extension of the Article 50 process until 12th April 2019, EU leaders have now backed a six-month extension until 31st October 2019. However, the UK will leave before this date if the withdrawal agreement is ratified by the UK and the EU before then. Mrs May was trying to a) achieve this and b) avoid a general election which could lead to Labour winning and they are likely to call for a second referendum. Authoritative newspapers in the EU seem to be split into two groups: one is frustrated by the cost of uncertainty as the UK stumbles blindly towards a No Deal Brexit which no-one really wants. The other group cannot understand how the UK really thinks that it can negotiate better trade deals from, say, Japan, than the EU can. During his recent official visit to the UK, President Trump advised that the US would be committed to ‘a phenomenal trade deal’ with the UK after Brexit, but the terms of this deal remain a mystery.

There are signs, however, that the insurance markets are not standing around, twiddling their thumbs: the German financial services watchdog BaFin and the UK’s Prudential Regulation Authority (PRA) have penned an agreement to secure continuity of oversight for insurance firms operating in the UK and Germany post-Brexit. This will provide a good example to those other EU markets with significant interaction with the London insurance market.

With new leadership, Lloyd’s has announced ambitious plans to “get into the 21st century before it is too late,” as one market cynic has commented. The reputation Lloyd’s enjoys is always difficult to maintain because Lloyd’s does not actually do the business. But the environment where the underwriters operate and the rules they must abide by are set out by some very savvy businessmen and women and people are watching to see how the plans work out.

There has been quite a lot of movement in the international markets where resignations by far have outstripped appointments. The one major exception has been Lloyd’s who is to recruit 200 industry professionals to drive its bold transformation plan.

We hope that this news is useful and look forward to hearing how we can help you with your energy-related insurance and risk management needs around the world.

Energy Casualties

Five injured as fire engulfs two Iranian pipelines

An oil pipeline in the Khuzestan province of Iran exploded, injuring five, according to a statement by Iran state news agency IRNA on 6th May.

The Governor of the province, Gholamreza Shariati, said that the blaze occurred when the pipeline was under repair, when a loader crashed into the pipeline, spilling oil.

The 42-inch pipeline transports crude from Omidiyeh to Ahwaz. The valve of an adjacent, 12-inch pipeline was closed to prevent the fire from spreading, the statement from IRNA said, but it was necessary “to burn the oil and gas in the pipes completely, so that repairs can begin.”

Because of the proximity of the 12-inch pipeline to the explosion, it also “suffered an accident,” the statement wrote.

Explosion on oil-industry ship in Caspian Sea injures 14 people

An explosion struck an oil-industry vessel in the Caspian Sea, injuring 14 people, the ship’s operator, Italian engineering firm Saipem, said on 10th May.

The ship, the Israfil Huseynov, was involved in maintenance work linked to the Shah Deniz II project, part of the Southern Gas Corridor pipeline stretching from Azerbaijan to Europe.

Saipem said seven of those injured in the explosion were being treated in intensive care for burns.

Smoke incident at North Sea Snorre platform

Operations returned to normal at the Snorre B platform in the Norwegian North Sea, following a smoke alert on 1st May.

According to operator Equinor, smoke developed in a separator on the processing plant during maintenance.

Over 120 personnel were on the platform when the incident occurred.

Blue Marlin suffers damage during hijack offshore West Africa

A coordinated response by the navies of Equatorial Guinea and Spain has ended the hijacking of the heavy transport vessel Blue Marlin.

According to owner Boskalis, the vessel had been hijacked and boarded on 5th May by armed pirates around 80 nautical miles offshore Equatorial Guinea.

The vessel had been sailing north to Malta after unloading a cargo in Equatorial Guinean waters.

When the pirates started to come onboard, the Blue Marlin’s 20 crew members managed to secure themselves in the ‘citadel’, a secured space in the vessel equipped with communications and emergency rations.

Once the local authorities and the NATO mission MDAT-GoG (Maritime Domain Awareness for Trade – Gulf of Guinea) had been alerted, two helicopters were mobilised from Equatorial Guinea followed by one of the country’s naval vessels and another from the Spanish navy, part of the MDAT-GoG mission.

Early on the morning of Monday 6th May the teams boarded the vessel and conducted a search but found no pirates.

Although the crew were all were in good health, the pirates had fired shots several times during their time onboard causing damage on the bridge which prevented the ship from being sailable.

As of 10th May, the vessel was around 40 miles (64 kilometres) off Equatorial Guinea, in international waters.

One of the naval vessels left five armed guards on board to protect the Blue Marlin, and Boskalis had mobilised an oceangoing tug to take the vessel to a safe location.

Gunmen kidnap expatriates from an oil rig in Niger Delta region

Gunmen kidnapped two foreign workers from an oil rig in Nigeria’s Delta region on 27th April, the military has said – the second abduction there in less than a week.

The attackers raided the rig owned by Niger Delta Petroleum Resources at around 8am, the spokesman for the area’s military operations, Major Ibrahim Abubakar, said.

Authorities said the kidnapped expatriates are a Scot and a Canadian.

Troops were searching surrounding swamps, Major Abubakar said.

“When we heard about the incident, we mobilised to comb the swamp but to no avail; we couldn’t arrest the perpetrators,” he added.

Major Abubakar said efforts have been intensified to rescue and arrest culprits, “but we have also advised the management to provide adequate security to their operations”.

Authorities have not released the identities of the victims.

The Niger Delta produces the bulk of Nigeria’s crude. It has been plagued by criminal gangs and by armed groups demanding a greater share of oil revenues.

On 25th April, two Royal Dutch Shell oil workers were kidnapped and their police escorts killed in Rivers State while returning from a trip.

The workers were in Rivers State, returning from an official trip to Bayelsa State, when they were attacked.

A Rivers State police spokesperson said that efforts were underway to rescue the workers.

Russia’s Druzhba pipeline system closed

Russia’s giant Soviet-era oil pipeline is a vital piece of Europe’s energy infrastructure, carrying crude to refineries across the region. During the week of the 21st April it was hit by probably the biggest crisis in its 55-year history: both branches of the Druzhba pipeline have been closed due to the presence of contaminated crude oil which can cause serious damage to refineries.

What is the Druzhba pipeline?

The Druzhba, or Friendship, pipeline system is a Soviet-era behemoth, originally designed to carry crude from the USSR to allied countries in eastern Europe. The line starts at Almetyevsk in the Republic of Tatarstan, a town which was founded in 1953 as an oil-processing centre for the giant Romashkino oil field, then the mainstay of the Soviet oil industry. It is now also a major pipeline junction, where conduits from the Volga-Urals region, West Siberia and the Caspian Sea meet.

The Druzhba pipeline carries oil westwards to Mozyr in Belarus, where it splits into two branches. One continues westwards across Poland and into Germany. It delivers crude to refineries at Plock and Gdansk in Poland and Schwedt and Leuna in Germany.

A southern branch crosses Ukraine to Uzhgorod on the border with the Slovak Republic, where it again splits. One leg delivers crude to the Százhalombatta refinery near Budapest.

The other supplies refineries in Slovakia and the Czech Republic. The total length of the line, including all its branches, is around 5,500 kilometres (3,420 miles).

Construction of the system began in 1960 and the line was put into operation in October 1964.

A spur line from Unecha in Russia that crossed Belarus to an export terminal on the Baltic Sea at Ventspils in Latvia was completed in 1968 but was closed in 2002 after Russia halted crude exports through Latvia, following the construction of its own Baltic export terminal at Primorsk.

A new spur line from Unecha, bypassing Belarus to a second Russian Baltic export terminal at Ust-Luga, came into operation in March 2012.

The importance of Druzhba

Druzhba can carry between 1.2 million and 1.4 million barrels of crude a day, according to the International Association of Oil Transporters, with the possibility of boosting that to around two million barrels. It forms a vital source of supply for the refineries along its route in Poland, Germany, Hungary, Slovakia and the Czech Republic.

During 2018, the Druzhba network was used to deliver about one million barrels a day of Russian crude to those five countries, with a further 500,000 barrels a day pumped to Ust-Luga for export by sea.

While most of the refineries along its length can source at least some of their crude requirements via other routes, Druzhba has provided most of their feedstock and most were designed specifically to process the Russian Urals crude delivered through the pipeline.

The contamination

Europe’s oil refineries have stopped accepting piped deliveries of Urals crude from Russia after flows were found to be contaminated with abnormally high levels of organic chlorides that, when refined, become hydrochloric acid that can damage the plants.

The issue was first raised by Belarus and has also affected supplies from the Russian port of Ust-Luga, according to a person familiar with the matter.

There are no signs that shipments from Novorossiysk or Primorsk, two other Russian tanker-loading facilities, have been disrupted. This suggests that the source of the contamination may lie along the route of the pipeline, rather than in Russia’s oil fields.

Organic chlorides are generally not present in crude oils but are used to dissolve wax and during cleaning operations at production sites, pipelines or tanks.

The Russian oil pipeline operator, Transneft PJSC, completed scheduled repairs on parts of its network just before the contamination was discovered.

In a later report from the Reuters news agency, pipelines in Russia, Belarus, Ukraine and Poland are estimated to contain five million tonnes of contaminated Russian oil, Belarus’s state news agency BeITA said, citing an operator of the Belarusian section of the Druzhba pipeline on 30th April.

CSB calls on EPA to update HF study in wake of the 2017 Husky refinery fire

On 24th April, the US Chemical Safety Board (CSB) released a letter calling on the Environmental Protection Agency (EPA) to review its existing Hydrofluoric Acid (HF) study to determine the effectiveness of existing regulations as well as the viability of utilising inherently safer alkylation technologies in petroleum refineries.

CSB Interim Executive Kristen Kulinowski said, “In the last four years, the CSB has investigated two refinery incidents where an explosion elevated the threat of a release of HF.

“Refinery workers and surrounding community residents are rightly concerned about the adequacy of the risk management for the use of hazardous chemicals like HF.  The EPA should review its 1993 HF study to ensure the health and safety of communities near petroleum refineries utilising HF.”

HF is a highly toxic chemical which can seriously injure or cause death at a concentration of 30 parts per million (PPM), which is used in about fifty of the US’s approximately 150 refineries, as well as many other industries.

In a refinery, the chemical is used as a catalyst in the creation of a blending agent for high octane gasoline. In both of its investigations, the CSB conducted a public hearing in which members of the surrounding communities expressed their concerns about the adequacy of the risk management strategies for the use of HF and the effectiveness of community notification procedures in the event of a catastrophic release.

Ms Kulinowski said, “The EPA is the appropriate agency to assess the adequacy of risk management for the use of chemicals like HF. Refiners, their workforce and communities that surround the refineries need assurances that the risk plans are adequate to prevent a catastrophic release.”

The CSB is an independent, non-regulatory federal agency whose mission is to drive chemical safety change through independent investigations to protect people and the environment. The agency’s board members are appointed by the President and confirmed by the Senate.

CSB investigations look into all aspects of chemical incidents, including physical causes such as equipment failure as well as inadequacies in regulations, industry standards and safety management systems.

Insurance News

Convex Group launches with London and Bermuda regulatory approval

Stephen Catlin has formally unveiled his new international specialty (re)insurer with US$1.8 billion of initial committed capital, an AM Best A- (excellent) rating and regulated platforms in Bermuda and London approved to begin underwriting from 1st May.

Convex will underwrite insurance and reinsurance for complex specialty risks across a diversified range of business lines.

The invested capital comes from Convex’s management team, Onex Partners V, Onex Corporation’s large-cap private equity fund, PSP Investments, and a consortium of co-investors.

Mr Catlin, who founded the Catlin Group and is regarded as one of the biggest names in commercial insurance, believes that his latest venture is well-equipped to prosper in a challenging market.

The company’s management team will include Mr Catlin as Chairman and Chief Executive Officer, Paul Brand as Deputy CEO, Benjamin Meuli as Chief Financial Officer, Robina Malik as General Counsel, Adrian Spieler as Chief Operating Officer, Doug Howat as Chief Underwriting Officer Insurance, Matt Paskin as Chief Underwriting Officer Reinsurance, and Mark van Zanden as Head of Portfolio Optimisation.

Talanx and Hannover Re change underwriting policies for coal-based risks

Germany-based Talanx Group and Hannover Re have tightened their underwriting policies to reduce reinsurance cover for coal-based risks.

The move is part of wider efforts at the company to cut its long-term exposure to coal-fired power plants and coal mines. It said that for stand-alone risks, the company will not reinsure any planned new coal-fired power plants or coal mines.

However, in countries where coal accounts for a large proportion of the energy mix and where access to alternative energy sources is insufficient, exceptions would be made, but only after a review of technical standards.

From 2038 onwards, Hannover Re plans to stop reinsuring coal-based power-generation risks in its property and casualty portfolio. It said the longer timeframe “makes allowances for the fact that the phase-out of fossil fuels can only take place over the medium to long term”.

The group emphasised its support for the Paris Agreement goals on climate change and reiterated that, in Europe, 17 of 28 EU member states have decided to phase out fossil fuels or are considering it.

To support the Paris Agreement, the reinsurer no longer invests in issuer securities which generate 25% or more of their revenues from coal-based energy production. It also backs a broader transition to renewable or alternative energy by writing more risks for this burgeoning sector.

Talanx also confirmed that it will “continue to progressively expand its investments in renewables and climate-friendly technologies”. It said it has already made direct investments of more than €1.3 billion in renewable energy sources such as wind and solar power.

AmTrust at Lloyd’s and Canopius sign merger agreement

Specialty re/insurer Canopius has signed a definitive agreement to merge its Lloyd’s business with AmTrust at Lloyd’s, a division of AmTrust Financial.

From 1st January 2020, Canopius will merge its Syndicate 4444 with AmTrust Syndicate 1861 under the management of Canopius Managing Agents.

As part of the deal, AmTrust Financial Services will become a significant minority shareholder in Canopius.

The transaction is expected to complete in the third quarter of 2019, subject to regulatory approvals.

Together the companies aim to create a top-five insurer at Lloyd’s with combined premiums of approximately US$2.2 billion.

Former TMK marine team set to launch MGA Amphitrite

A four-strong team made up of former Tokio Marine Kiln employees is gearing up for the launch of a new London-based marine MGA.

Cefor releases 2018 marine hull claims trends from the Nordic Marine Insurance Statistics (NoMIS) database and elects new Chair and members of the Board

Sea of tranquillity?

“2018 was the third consecutive year with an exceptionally low claim cost, but the start of 2019 could mark the end of this,” says Helle Hammer, Managing Director of Cefor.

“Following an extraordinary three-year period without claims in excess of US$30 million, which also should be seen in the context of low insured values in the same period, the situation seems to turn in 2019.

“Two of a number of severe casualties which incurred in the period January to March 2019 are partly covered by the Cefor market and may end the three-year period without claims in excess of US$30 million,” warns Ms Hammer.

“The claims frequency has stabilised at a low level, while the total loss frequency reached a record low in 2018,” Helle Hammer continues.

“With the absence of costly total losses in the last three years, often being groundings or fire/explosion claims, a higher proportion of the overall claims cost originated from medium size to low cost claims, especially machinery.”

Coastal claims on the rise

“The positive downward trend in the claim cost per vessel for coastal and fishing vessels came to an end in 2016. Especially the grounding of the fishing vessel Northguider in Arctic waters and fires on fishing vessels cause concern,” says Ms Hammer.

Detentions beware

A new analysis by the Cefor Statistics Forum reveals a clear relationship between detentions and casualties:

“Vessels which had been detained in a three-year period prior to a claim have a higher claims frequency across all age groups and types of casualties than vessels without detention(s). Detention data is thus a clear indicator of the risk of a vessel incurring a casualty and to understand the cause of potential future casualties, as these tend to be related to the causes of the detention of the vessel.

“To utilise the information, access to detention data in an easily accessible data format is important for insurers to assist in the overall risk assessment of a fleet they insure and in their loss prevention measures,” concludes Helle Hammer.

Newline Group launches insurance hub in Germany

Following the authorisation from the German Federal Financial Supervisory Authority, speciality London-based insurer Newline Group has announced the launch of its new European establishment in Cologne.

Newline Europe Versicherung AG (Newline Europe), a subsidiary of Newline Insurance Company, will be led by Manuel Wirtz as newly-appointed CEO.

Mr Wirtz was previously Newline’s general representative for Germany. Although it remains uncertain exactly when the UK will leave the EU, the new unit in Europe is to ensure continuity of services post-Brexit.

Carl Overy, CEO of Newline Group commented: “Newline’s history of underwriting German-based insurance risks dates back to 2002, so we are delighted to strengthen our footprint in Cologne and expand our platform by providing seamless and continuous service to our clients throughout Europe in the post-Brexit environment.”

Mr Wirtz added: “We are very pleased that BaFin has approved our application. We have already seen the benefit of having local underwriting and claims handling teams, and this approval will allow us to continue providing our insurance solutions in Germany as well as in our neighbouring countries in the European Economic Area.”

Exxon will pay US$1 million penalty for Montana oil spill

Exxon Mobil Corporation has agreed to pay a US$1.05 million penalty to settle alleged federal water pollution violations from an oil pipeline break into Montana’s Yellowstone River, according to court documents filed on 26th April.

Approval of the agreement by US District Judge Susan Watters would resolve the last outstanding federal enforcement case against the oil giant stemming from the 2011 accident that spilled 63,000 gallons of crude.

Terms of the settlement were detailed in a consent decree filed in federal court in Billings. It is subject to a 30-day public comment period.

The spill near the town of Laurel, about 15 miles west of Billings, came after flooding along the Yellowstone scoured the river bottom and exposed the buried pipeline, causing it to break and release crude directly into the waterway.

The accident occurred downstream of Yellowstone National Park along a stretch of river popular among fishers, boaters and other recreational users. About 140 people were temporarily evacuated because of health and safety concerns.

Exxon previously paid US$12 million in natural resource damage compensation and US$2.6 million for pipeline safety and state pollution violations. The Irving, Texas-based company also spent an estimated US$135 million on a months-long clean-up and repairs.

The latest penalty stems from violations of the Clean Water Act. Oil swept downstream by the raging river entered tributaries and nearby wetlands and fouled more than 14 square miles (36 square kilometres) of riverfront, according to court documents.

Exxon spokesman Jeremy Eikenberry said the settlement “provides for an acceptable outcome which avoids protracted litigation between the parties.”

The 12-inch Silvertip pipeline had been installed just a few feet beneath the riverbed, sparking a national discussion over the adequacy of safety rules for thousands of pipelines crossing beneath waterways.

In the years since the Yellowstone spill and at the urging of safety regulators, companies including Exxon have re-installed some lines at greater depths to reduce the risk of accidents.

There are still no federal regulatory mandates for lines to be deeply buried.

CNOOC fined for fatal 2016 blast at Canada oil sands site

CNOOC Petroleum North America, formerly known as Nexen Energy, has been fined US$450,000 after pleading guilty to charges following the deaths of two oil sands workers at its Long Lake facility in northern Alberta.

The two men died from an explosion at the Long Lake SAGD and upgrader facility near Anzac on 15th January 2016.

The Chinese-owned group had earlier denied responsibility for the incident, saying the men were working outside the scope of their approved work activities changing valves on a compressor when the explosion happened.

Nexen Energy was charged by Alberta Labour in 2017 with workplace offences under the Occupational Health and Safety Act. Some of the charges related to ensuring a compressor was properly serviced and that staff in charge of the equipment had read its operating manual and safety rules.

The company initially pleaded not guilty in March last year, but on 18th April at Fort McMurray provincial court changed this to a guilty plea in failing to ensure the health and safety of the men.

People on the Move

McLarens creates new global role for Cunningham Lindsey CEO

Global loss adjuster McLarens has hired David Pigot for the newly-created role of Director of London Markets & Global Head of Specialty.

Convex continues talent roll-out with AXA XL property hires

Stephen Catlin’sUS$1.8 billion nascent international specialty (re)insurer Convex has continued to build its underwriting capabilities with the hire of AXA XL’s Head of Property Roy Foster and Head of US Property Sam Ashard, who are understood to have resigned recently.

Lloyd’s to recruit 200 industry professionals to drive bold transformation plan

Lloyd’s CEO John Neal’s rallying call to the market to support his transformation project will lead to 200 industry professionals being seconded from brokers and underwriters to assist with his initiative.

Lloyd’s has put forward six fresh ideas. These include: a digital platform for complex risk which makes doing business easier for the most difficult-to-cover risks; the creation of Lloyd’s Risk Exchange which will handle less complex risks, so they can be placed in minutes and at a fraction of today’s costs; flexible capital which can access a diverse set of insurance risks on the Lloyd’s platform; a syndicate-in-a-box, which offers a streamlined opportunity for innovators to bring new products and business into the market; a next generation claims service to improve customer experience and increase trust by speeding up claims pay-outs; and an ecosystem of services which helps all market participants develop new business and provide outstanding service to their customers.

Lloyd’s said the work on building and delivering prototypes for the changes is expected to begin in October 2019, with some operational in early 2020.

Aspen Bermuda CEO, Group COO and head of international exit

Aspen has parted company with several senior executives as recently-installed Group CEO and Executive Chairman Mark Cloutier oversees a restructure of the Bermudian under its new Apollo ownership.

Aspen Insurance Holdings Limited, which earlier this year saw the exit of Chairman Glyn Jones and Group Chief Executive Officer Chris O’Kane, has announced further changes to its executive leadership team effective immediately.

Now wholly-owned by affiliates of certain investment funds managed by affiliates of Apollo Global Management, LLC, the insurance group said the management shake-up will “best position Aspen to capture new opportunities for profitable growth and value creation.”

Former Group General Counsel Mike Cain will now hold the position of Group Chief Operating Officer while remaining as CEO of Aspen UK for a transition period. He replaces group COO David Schick, who is leaving to pursue opportunities outside Aspen.

Group Chief Risk Officer Tim Aman, meanwhile, will assume lead responsibility for outward reinsurance/retro analysis, structuring, and placement on top of his current role. Widening his remit as well is Global Head of Insurance Marketing and Distribution, Jonny Atkinson, who has been named Head of Insurance London.

Christian Dunleavy, Managing Director of Aspen Re and Chief Underwriting Officer of Aspen Bermuda Limited, will now also serve as the latter’s Chief Executive. He succeeds Kate Vacher, who will be pursuing personal interests.

Aspen also gets a new Chief Strategy Officer in the form of Marcus Foley, who was Group Head of Capital Management. He is also appointed to the group executive committee.

Joining the group executive committee as well are Group Chief Investment Officer Bryan Astwood, Group Chief Actuary Paul Frydas, and Silvia Martinez who is now Group General Counsel and Company Secretary.

Zahir Petiwalla, Performance Officer and Chief Operating Officer of Aspen Re has become Deputy Group COO. Meanwhile International Head of Financial Institutions Sarah Stanford is taking on the additional position of Lloyd’s Active Underwriter of Syndicate 4711.

“As we continue our focus on operational improvement and strengthening Aspen’s competitive position, it is essential we have the right talent to execute on our strategy, serve brokers and customers and drive to enhance the long-term value of our business,” stated Executive Chairman and group CEO Mark Cloutier.

Meanwhile Donald Harrell, former Head of International Insurance and Global Head of Marine, is also exiting effective immediately to pursue opportunities outside the company.

“I want to thank David, Kate, and Donald for their service and commitment to Aspen over the years,” said Cloutier. “Our business is well positioned thanks to their many contributions, and we wish them well in their future endeavours.”

It has been revealed as well that Aspen Risk Management Limited is expected to be placed into runoff after Aspen Insurance UK Limited served notice of termination of their agency agreement. In addition, Aspen said it has begun the process of closing its office in Dublin as a result of the proposed move of its Dublin Excess Casualty underwriting business to London.

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