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Saturday, August 30, 2008

Hurricane's Gustav and Hanna Causing Damage throughout the Atlantic and Gulf of Mexico

As it heads straight for the US Gulf coast, gathering strength, Hurricane Gustav looks increasingly likely to become the first storm of the 2008 Atlantic hurricane season to cause major damage to US oil and gas installations.

Hurricane watchers over the weekend were betting on the central Louisiana shore as the most likely point for Gustav to strike land, possibly on Tuesday, putting the low-lying Louisiana coast with its unfinished levee system in great danger. The threatened region contains oil refineries and communities whose industrial base serves the offshore oil industry.

Before making landfall, Hurricane Gustav is also likely to find bigger oil platforms in its path than its predecessors, Katrina and Rita, did in 2005. In the past three years, Gulf oil and gas production has shifted to deeper water off Louisiana’s coast, becoming concentrated at a handful of giant platforms instead of being spread around dozens of small, shallow-water facilities. A direct hit on any of those platforms could have a major impact on US Gulf oil output. However, the new platforms are expected to be more resistant to hurricane damage than their smaller predecessors.

Katrina, followed soon afterwards by Hurricane Rita, devastated communities along a wide stretch of the Louisiana and Alabama coasts, including the city of New Orleans, knocking offshore oil rigs off their moorings, destroying 115 of the Gulf’s 4,000 offshore oil and gas platforms and damaging 52 others.

Gustav is also part of a two-storm system, with tropical storm Hannah, northeast of the Bahamas, set to extend the area of potential US storm damage.

Royal Dutch Shell, BP and Exxon Mobil were among the major oil producers suspending operations at oil and gas production platforms and evacuating staff ahead of the expected hurricane. Shell and BP, the biggest offshore Gulf producers, planned to shut down the equivalent of 800,000 barrels per day of oil output. Most of the 10 oil companies that account for about two-thirds of Gulf oil and gas production have announced plans for the partial or complete shutdown of their operations until the storm passes.

Exxon Mobil said it had not cut output from refineries and chemical plants along the Gulf coast, but was preparing them to weather the storm.
Oil production of 1.4 million barrels per day (bpd) and gas output of 7.3 billion cubic feet per day from the Gulf of Mexico account for 26 per cent and 14 per cent respectively of total US oil and gas production.

Although Katrina and Rita triggered oil price spikes, it is unclear whether Gustav will have the same immediate effect. Crude prices held steady on Friday at around $115 a barrel as traders bet that releases from the US Strategic Petroleum Reserve would cover any oil supply shortfall. A US official said 4.4 million bpd could be released from the reserve in the event that oil supply was disrupted by the storm.

However, noting that US oil and gas inventories are much lower than three years ago, some analysts predicted severe price consequences that could send US petrol prices soaring.

Hurricanes to effect insurance rates

The first active hurricane season in three years could have unfortunate implications for homeowner insurance rates.

Private market reinsurers, which provide insurance for insurance companies, will likely raise rates next year if insured property damage from potential hurricanes are significant.

The reinsurers had increased rates by more than 100 percent in some cases after the 2004 and 2005 storms. But rates have come down significantly since then due to two storm-free seasons.

Insurance companies build reinsurance rates into their premiums, though any increase would still be subject to approval by state regulators in Florida.

There is also the issue of up to five percent insurance surcharges on every homeowner and auto policy in Florida for years to come. Florida’s reinsurance fund, which provides some subsidized reinsurance coverage for every insurer, has less than $3 billion of its own money but liabilities of around $30 billion. The fund went broke after the 2005 season requiring one percent surcharges on auto and home policies that run through 2013.

State-sponsored Citizens Insurance Corp. can also surcharge all homeowner policyholders if it runs out of money and is still doing so from the 2005 storms.

While Tropical Storm Fay was much smaller than expected, Gustav has hurricane written all over it and is setting its sights on New Orleans and the Gulf Coast. Tropical Storm Hannah, meanwhile, is forming in the Leeward Islands with potential landfill in South Florida late next week.

And even then its still only early September with much of the hurricane season still in front of us.

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