Hurricane Ike (Offshore)

Landfall | Summary
Posting Date: September 13, 2008, 1:00:00 PM

Hurricane Ike made landfall at Galveston, Texas at 3:10 am EDT, Saturday, September 13, as a strong Category 2 hurricane. Maximum sustained winds at landfall were 110 mph, just shy of Category 3 on the Saffir-Simpson intensity scale. As of 2 pm EDT, Saturday, September 13, Ike is located about 50 miles south of Tyler, Texas. Maximum sustained winds have dropped to 60 mph and Ike is now a tropical storm. The center of the system is moving to the north at 16 mph. According to the U.S. Minerals Management Service, 596 production platforms in the Gulf of Mexico had been evacuated by yesterday morning, or about 83% of all manned platforms in the Gulf. Another 101 rigs were evacuated, among them jackups, submersibles and semisubmersibles. Approximately 97.5% of oil production and near 95% of natural gas production in the Gulf has been shut-in. While Hurricane Gustav, which plowed through the Gulf just two weeks ago, tracked through some of the more densely configured oil and gas fields with similar wind speeds, it was a smaller storm than Ike. Gustav's hurricane force winds extended just 70 miles from the center, while Ike's extended to 120 miles. Fortunately, dire predictions of a 20+ foot storm surge appear not to have materialized. In information released this morning, a spokesperson from the National Weather Service reported that the highest surge was 13.5 feet, seen at Sabine Pass, TX. Galveston Island recorded an 11 foot surge. Hurricane force winds can cause damage to topside equipment. However, wave height—or more specifically, the difference between the total wave height and the height of the structure’s lowest deck—is the primary driver of structural damage to offshore assets. To obtain total wave height, surge height must be added to the height of wind-driven waves. If the total wave height, including surge height, reaches or exceeds the height of a platform's deck, significant damage is likely to result. Damage survey data will be slow to develop. On Thursday, the U.S. Minerals Management Service issued a preliminary report on the damage to offshore assets caused by Hurricane Gustav. According the report, only one platform—which was unmanned—was destroyed. In addition, five platforms sustained moderate damage (estimated to take one to three months before production can be restored) and 35 platforms received minor damage (up to one month for repair and restoration). The report further defines “moderate” and “minor” as follows: “Damage that would be considered moderate may include major topside damage to critical process equipment such as the platform’s compressor or damaged risers or flex joints where pipelines connect to the platforms. Examples of damage that would be considered minor might include missing heliport skirting, pieces of grating or damaged boat landings” .(Read the full MMS press release here: http://www.mms.gov/ooc/press/2008/press0911a.htm) Onshore, of particular concern are the many oil and chemical industrial facilities along the Texas coast, including Freeport, Texas City, Deer Park, Baytown and Port Arthur, which may sustain damage from both storm surge and wind. Surge, if forced up the Houston Ship Channel, the port of Houston—the nation's second busiest—could also sustain significant flood damage. AIR’s industry exposure database used to develop industry insured onshore loss estimates includes a comprehensive database of industrial facilities broken down by building, equipment, inventory, contents and business interruption. For offshore exposures in the Gulf of Mexico, AIR estimates ground-up losses (prior to consideration of any insurance terms and conditions) between $3.0 billion and $3.8 billion with an expected (mean) value of $3.4 billion. These losses reflect wind and wave damage to the platforms and direct and indirect loss of revenue attributable to reductions in oil and gas production. AIR estimates insured losses will be between $600 million and $1.5 billion with an expected (mean) of $1.0 billion. AIR’s expected, or mean, loss is truly the expected value of the full loss distribution and will not exactly match the “50% probability loss” in the posted scenarios, since the latter is the median loss scenario. Note that while the range of losses is considerably narrower than yesterday’s, AIR still provides a range, which reflects the still-existing uncertainty with respect to Ike’s actual meteorological parameters and surge height as it made its way through the Gulf. Additional information on AIR’s loss estimates for offshore assets: AIR maintains a very detailed industry exposure database (IED) of offshore assets in the Gulf of Mexico. This database includes not only location and type of offshore platform but also includes the physical characteristics of each asset that are important for estimating physical damages and loss of production. The model has been thoroughly validated with the historical data from hurricanes Katrina, Rita and Ivan. Since the 2004-05 hurricane seasons, the policy conditions for these risks have changed significantly. In particular, underwriters have restricted coverages, especially for business interruption in order to minimize exposure. The new market conditions add uncertainty in estimating a total industry wide insured loss. The industry ground-up losses are generated based on AIR’s offshore Industry Exposure Database. GU losses include total damage and loss potential for the four primary coverages for offshore, namely Physical Damage (PD), OEE (Operator’s Extra Expense) ROD (Removal of Debris), and BI (Business interruption). These losses are posted on the ALERT event summary page and are also provided in the form of CATRADER event sets. On average, the BI losses account for about 40 to 45% of the total GU loss. A significant proportion of this GU loss is not going to be covered by insurance carriers because of the policy terms that are currently in place. The BI contribution and total insured losses are computed by assuming a waiting period of 45 days and a limit of 180 days. This range reflects uncertainties associated with estimating the meteorological parameters of the storm, the physical damage to offshore assets, loss of production and the impact of policy terms in reducing the insured’s losses. Note that current users of the AIR’s offshore model will be able to accurately compute for their portfolios of assets the insured losses using the current policy conditions, which may deviate from the average conditions applied for the entire industry to obtain the insured loss estimates reported above. Ground-up loss estimates may appear to be high for the following reasons: • The current oil price considered in AIR’s BI loss estimation for Ike is $100 per barrel. In reality, the actual payouts in most policies will settle for considerably less than $100 per barrel. At the time of Katrina oil was approximately $50 per barrel. Thus if Katrina had occurred at today’s oil prices its insured losses would have been higher. • AIR's BI ground up loss takes into account downtime because of the mandatory evacuation orders and shut-in (waiting time) in the Gulf, which are not covered by the insurance policy (deducted). • AIR's ground up BI loss covers BI and CBI (Contingent Business Interruption) as well, but the recent changes in offshore policy terms after Katrina and Rita tend not to cover CBI, which becomes very significant in the course of a large event. • The combined single limits by individual platform and account limits in current policies have changed since Katrina and Rita in order to minimize the insured’s losses. As clients review their estimated losses from this storm, AIR recommends to always communicate the range of loss estimates produced by the “All simulated scenarios” event sets provided on the ALERT site, rather than any single loss estimate or maximum estimate.

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Posting Date: September 13, 2008, 1:00:00 PM