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Oil rig claims may top $1B

Massive spill follows blast, sinking

 

Oil skimmers last week aided efforts to clean up a huge oil slick caused by the explosion of the Deepwater Horizon rig in the Gulf of Mexico. PHOTO: THE TIMES-PICAYUNE/LANDOV

VENICE, La.—When cleanup is complete after the blast that sank the Deepwater Horizon oil drilling rig—leaving 11 workers missing and feared dead and a well gushing tens of thousands of gallons of oil a day into the Gulf of Mexico—insurers will have a loss of more than $1 billion, energy market sources say.

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U.S. Coast Guard crews late last week began experimental burns on portions of the 600-mile oil slick as it drifted toward the Louisiana coast.

A well that erupted on the floor of the Gulf of Mexico after the rig began burning April 20 and sank two days later was gushing what the National Oceanic and Atmospheric Administration estimated was 5,000 barrels of oil a day.

Burning the crude was one way to keep the oil from reaching Louisiana’s coast, where experts feared significant damage to the seafood-rich region and wildlife, and reduce it to a waxy residue that could be skimmed from the water.

Energy market sources say insurance coverage that will respond to claims on the property loss, death and injuries, and environmental damage is spread throughout the London, Bermuda and U.S. markets.

The loss already is large enough that it should halt softening energy rates, sources say.

“People are talking about $1 billion to $2 billion,” said Simon Williams, head of marine and energy at Hiscox Ltd. in London. “There’s no question it will be $1 billion” and could go higher depending on the size of liability claims that are filed, he said.

The loss is almost certain to firm rates in the energy market, particularly because there have been several large losses in the sector during the past 18 months, sources said.

If the market doesn’t turn after this, it would be hard to imagine what it would take to convince underwriters to raise rates, Mr. Williams said.

The rig’s owner, Transocean Ltd., a Zug, Switzerland-based drilling contractor, said the insured value of the rig is $560 million. In its most recent annual report, the company said deductibles on the loss of any unit in its 139-rig fleet ranged from $500,000 to $1.5 million on coverage written by the commercial market and captive insurers (see related story).

Lloyd’s of London is expected to bear a sizeable portion of the property loss and some of the liability claims, sources say.

At least one lawsuit already has been filed against Transocean and BP P.L.C., which operated the rig. Allegations in the suit, filed in U.S. District Court in New Orleans by the wife of one of the missing workers, include negligence on the part of Transocean and BP for failing to properly train and supervise crews on the rigs. The April 21 suit seeks an undetermined amount of damages.

Transocean said in its 2009 annual report that it carries a $10 million per-occurrence deductible on personal injury liability and a $5 million per-occurrence deductible on other third-party noncrew claims.

Transocean also carries $950 million in third-party liability insurance exclusive of personal injury liability deductibles, third-party property liability deductibles and other retention amounts, according to the annual report. The company retains the risk for liability losses above $950 million.

The drilling company said it does not carry coverage for loss of revenue unless contractually required.

BP CEO Tony Hayward told Reuters Friday that the oil company will compensate anyone with damages from the spill. “We are taking full responsibility for the spill and we will clean it up and, where people can present legitimate claims for damages, we will honor them,” he said.

BP self-insures its risks except in cases where regulations require the company to purchase insurance, according to the company’s annual report. Its self-insurance program includes Jupiter Insurance Ltd., a Guernsey-based captive insurer.

Anadarko Petroleum Corp. holds a 25% interest in operation of the well, according to the energy market source. Anadarko, based in The Woodlands, Texas, purchased operators extra-expense insurance covering up to $62.5 million in costs the company incurs from the accident and cleanup, the source noted.

Transocean’s drilling contract with BP is written so that Transocean is not liable for costs related to seepage and pollution from the well, the source said, but is responsible for pollution that originated from the rig.

In its annual report, Transocean acknowledged that “pollution and environmental risks generally are not totally insurable.”

“There are going to be hundreds of millions in costs” in each of the categories of environmental damages, death and personal injury, and the loss of the rig, said Keith Hall, an attorney who represents energy companies with New Orleans law firm Stone Pigman Walther Wittmann L.L.C.

Environmental regulations have been tightened since the 1989 Exxon Valdez spill in Alaska, Mr. Hall noted, which could mean responsible parties in the sinking of the Deepwater Horizon could be assessed significant fines and other costs by the U.S. government.

Any oil that reached the U.S. coast could result in “material resources damage,” Mr. Hall said. “The government could put a dollar value on it” or force those found responsible to create new wetlands, he said.

The U.S. Coast Guard and U.S. Minerals Management Service were investigating to determine the cause of the explosion and whether criminal or civil offenses were committed.

Energy companies will pay more for insurance at their next renewals as a result of the loss, experts agree.

“Yes, we consider this event to be a market-changing event concerning energy rates,” said Thomas Artmann, Munich-based product line manager-marine at Munich Re. “Quotations in the last week already showed a trend of increasing prices,” he said in an e-mail.

Despite significant recent losses, energy rates have remained soft because coverage is well-distributed among global insurers, but the Deepwater Horizon loss will be large enough to affect the entire market, Mr. Williams said. “This loss involves so many different companies; very few haven’t incurred some loss from this event.”

“A significant amount of offshore business comes up (for renewal) this time of year,” said David Croom-Johnson, chief underwriter at AEGIS London, the U.K.-based subsidiary of Associated Electric & Gas Insurance Services Ltd. “I would expect rates in the market will start moving up in light of this loss.”


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