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International Herald Tribune: Offshore Rigs in an Insurance Quandary

Full Headline: Offshore Rigs in an Insurance Quandary Still Hampered By Hurricane Damage, Drillers Say Protection is Getting Scarce
By Jim Kennett

The Deepwater Nautilus rig owned by Transocean should have spent the past two months drilling for oil and natural gas in the Gulf of Mexico, earning $220,000 a day. Instead, the vessel sat idle in a Texas shipyard.

Workers last week finished the latest round of repairs on the Nautilus: Hurricane Katrina tore the 50,277-ton rig from its moorings and Hurricane Rita grounded it almost a year ago. The 2005 storms have cost Transocean, the largest offshore driller, about $135 million in repairs, downtime and equipment upgrades.

At least Transocean has finished counting. A year after Katrina, the biggest natural disaster to hit the energy business, many companies are still tallying the damage caused by the hurricanes. The price tag so far, according to big insurance brokers and a power- industry group, is $17 billion

“Hurricanes come every year, and we are accustomed to dealing with them,” said Roger Plank, chief financial officer of Apache, an oil and gas producer based in Houston that suffered as much as $700 million in storm damage. “But what, as an industry, we are not accustomed to are 100-year storms, and we had two of them last year.”

The billions of dollars spent on rebuilding is money that might have gone to drilling wells and tapping new oil and gas deposits. More supply is needed worldwide to keep pace with demand and control prices.

The storms “couldn’t have been pinpointed with more accuracy to cause maximum destruction,” said Brian Gambill, an analyst at Manning & Napier Advisors in Rochester, New York.

Katrina in late August and Rita in September tore through the Gulf of Mexico’s offshore oil and gas fields, toppling production platforms, setting rigs adrift and rupturing pipelines. As of the latest U.S. government report, on June 19, about 10 percent of oil and gas output was still off-line.

As the storms moved ashore, high winds and flooding also damaged gas-processing plants. Seven refineries representing more than 10 percent of U.S. fuel-making capacity sustained damage that kept them shut down for weeks or months. More than 170,000 miles of power lines were downed.

Damage estimates probably will rise as reports trickle in with each field that is restarted, each pipeline reactivated or platform scrapped, said Caryl Fagot, a spokeswoman for the U.S. Minerals Management Service in Washington, which oversees offshore production.

Demolition work, the final stage of hurricane recovery, will continue until at least 2010, said Jack Jurkoshek, a spokesman at Oceaneering International, a Houston company that supplies divers and robotic submarines to the offshore oil industry.

“The amount of the remediation work in the Gulf and the duration is going to be a lot longer than we would have estimated just 90 days ago,” he said.

Aon and Willis Group Holdings, two of the largest insurance brokers, separately estimated damage from Katrina and Rita to oil and gas producers, drillers, pipeline operators and refiners at $15 billion. The Edison Electric Institute, an association of electric companies, estimated damage to power networks at $1.43 billion from Katrina and $500 million from Rita

The estimates reflect insured and uninsured damage, infrastructure destruction and lost business. Aon did not track claims of less than $1 million, so its estimate is conservative, said Bruce Jefferis, a managing director at the company’s Aon Natural Resources Group in Houston.

Offshore producers suffered the most, accounting for 77 percent of storm costs, according to Aon. Oil and gas producers and pipeline operators had $6.9 billion in damage and almost $4 billion in lost sales, Willis said in a May report. Drillers had costs of more than $1 billion, and refiners were hit with $3.3 billion in damage, according to Willis.

At Oil Insurance, a self-insurance pool that counts Chevron, Royal Dutch Shell and Apache among its more than 80 members, claims totaled $3.17 billion, according to a July report.

Those claims could not be paid in full because the group had a $1 billion cap for each storm. After posting an underwriting loss of $225 million in 2005, Oil Insurance lowered its claim cap for this year’s storms to $500 million

Chevron, the second-biggest U.S. oil company behind Exxon Mobil, had costs of $800 million in this year’s first six months just to remove infrastructure destroyed by the storms. In May, the company created an artificial reef by sinking its $250 million Typhoon production platform, which was irreparably damaged by Rita.

In all, Katrina destroyed 46 offshore platforms and Rita 69, the Minerals Management Service reported. Fifty-two platforms were damaged by the two storms.

Costs to the industry of the damage by Katrina and Rita have been offset by the increase in prices that resulted from the disruption of Gulf of Mexico oil and gas supplies. The region is the largest domestic source of oil and gas for the United States. Apache followed the third-quarter hurricanes with record net income in the fourth quarter. For all of 2005, the three largest U.S. oil companies Exxon Mobil, Chevron and ConocoPhillips earned more than $63 billion combined

Insurers are trying to make up for their losses by raising premiums. Coverage for wind damage to offshore facilities costs three or four times as much as before Katrina, Aon said. The amount of coverage offered has dropped about 70 percent.

“The harsh reality is that there’s just not as much insurance available this year as there was last year,” said Al Reese, chief financial officer at ATP Oil & Gas, based in Houston. “There are some companies that only got limited coverage or were unable to obtain coverage at all this year. It’s very, very scary.”

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