We've gone Greek
Posted by Heading Out on October 22, 2005 - 5:35pm
..ALPHA BECOMES THE TWENTY-SECOND NAMED STORM OF THE SEASON ANDWhile neither Wilma nor Alpha currently threaten immediate oil production it is a concern that if this level of activity prevails, then we could be moving into a significantly more serious condition. If more hurricanes can be anticipated and the National Geographic, in their Katrina Special Edition shows how much hurricane intensity has increased over the past decade, compared with the one preceding it, then putting valuable investments in harm's way is not the path to easy insurance. We have already heard from folks in the industry that this problem is arising. Simply put owners must prove, with an acceptable computer model, that the platform/rig can withstand a storm of a given intensity.
BREAKS THE ALL-TIME RECORD FOR THE MOST ACTIVE SEASON ON RECORD...
This may well change the pattern of drilling in the GOMEX, and possibly elsewhere where hurricanes or typhoons can be anticipated. It will therefore act to delay production as this exercise is completed, and when needed structures are strengthened. So, first the insurance industry has to identify where it expects storms and at what intensity in what areas, and then the production industry has to prove that their structures can withstand those storms.
I knew there was a reason why we were graduating all those lawyers. Now if only we were graduating enough engineers to give credibility to all those models (grin).
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I thought I read here a couple weeks ago that the additional cost to have a platform withstand a Cat 4 or 5, instead of a 3, was a significant order of magnitude. I could easily see where the cost of engineering upgrades make a project unprofitable--while at the same time insurance is unavailable at any price without the upgrades. (Unless we get a 4-5 year lull in hurricanes at which point the insurers forget what the hullabaloo was about.) Self-insurance, captives, reciprocal arrangements have been a safety valve of sorts where insurance is unavailable in other industries. However, these arrangements work when a company or a group of similar firms feel that the insurance market has painted their industry with too broad a brush, and with superior loss control measures, they can do the loss financing on their own. However, in the case of GOM oil platforms, I don't see the oil producers viewing their property particularly at any less risk than their insurers will.
Most reinsurance contracts renew Jan 1, so we probably won't know until then the full effects of Katrina/Rita on the insurance market.
<img>http://www.nhc.noaa.gov/storm_graphics/AT24/refresh/AL2405_PROB34_F120_sm2+gif/210955.gif</img>
If they merge into a supercane, will they call it Wilmalpha?
Were this say 3 months ago, and this part of the Atlantic was a bit warmer, maybe a nasty thing, but only if you are in shipping.
PS, Have been a storm watcher for decades.
I suppose the odds are still against this happening. But I rather expect that it will.
A related question: How many seasons of exhausting the reserved hurricane name list will it take before folks decide to stop building in the potential path of a hurricane? Or perhaps the question should be how much of this will it take before folks are financially discouraged from building this way?
-john
Free markets only work when the data in the market is accurate and readily available. Government intervention on behalf of insurance companies distorts the message sent to the market (like a painkiller) and since we don't feel sufficient pain, we do it again.
"Hey doc! It hurts when I do this..."
"Then don't do that!"