Many energy companies are facing the late-blooming Gulf Coast hurricane season without insurance against storm damage to their offshore platforms, pipelines and drilling rigs.
Although the annual storm season has been mild so far, the first hurricane, Bill, brewed up in the Atlantic last weekend, and federal forecasters are predicting three to six hurricanes this year, one or two of which will probably qualify as major.
Consumers are less likely than in earlier years to see spiking prices if hurricanes hit, experts said, because big stockpiles of oil, natural gas and gasoline have built up in the U.S. since the recession began.
But for small and midsize energy companies, a storm's impact could be serious, because they would have to pay for repairs out of their own pockets at a time when revenues have been shrinking because of the global slump in oil and natural-gas prices.
"The offshore sector is a lot more exposed than people realize," said Howard Mills, director of Deloitte LLP's insurance industry group.
Rate increases of as much as 60% kept many energy companies from buying as much insurance as in years past, brokers said.
And even companies willing to pay higher prices couldn't always do so. Insurers slashed the $5 billion of primary coverage they had offered last year by as much as 40%, brokers said, because of losses after two 2008 storms, Gustav and Ike. Over the past five years, Gulf Coast insurance on offshore energy assets produced about $4 billion in premiums and $12 billion in claims, said Bertil Olsson, director of insurance broker Marsh's U.S. energy practice.
Many energy companies acknowledge that they have bought less insurance this year, or moved completely to self-insurance. But they say improved technology and increased regulations make damage less likely and insurance less necessary.
That is the view at Rowan Companies Inc., which operates nine drilling rigs in the Gulf of Mexico, said spokeswoman Suzanne McLeod. The company dropped windstorm coverage this year on some of its smaller, older rigs, she said. Its insurance coverage "may be inadequate," the company acknowledged in its most recent quarterly filing with the U.S. Securities and Exchange Commission.
Diamond Offshore Drilling Inc., which operates 11 drilling rigs in the Gulf of Mexico, and Devon Energy Corp., which owns several platforms and rigs, both chose to go without wind coverage this year, according to SEC filings.
The two companies were among those saying that they need less hurricane insurance because they now use more durable structures and stronger mooring lines. Companies also employ more advanced global positioning systems, so they can more easily move rigs out of harm's way. And if a rig breaks loose, they can find and retrieve it quickly, limiting the damage it would receive or cause by crashing into something.
Only 15% of moored drilling rigs went adrift in last year's hurricanes, compared with 63% during hurricanes Katrina and Rita in 2005, according to the federal Minerals Management Service.
TransOcean Ltd., which operates 12 drilling rigs in the Gulf, shifted almost completely to windstorm self-insurance after Hurricane Katrina, said spokesman Guy Cantwell. The company uses deepwater rigs and platforms that aren't as susceptible to hurricane damage, he said.
But analysts are concerned about some companies' decisions to drop or reduce their insurance coverage. Tudor, Pickering, Holt & Co., a Houston-based energy investment bank, recently issued a research note pointing out that Williams Partners LP and DCP Midstream Partners LP dropped windstorm coverage on their jointly owned Discovery pipeline.
The note, entitled "Riskier Business," said the companies' insurance costs have more than doubled since last year, "so can't really fault them" for going without. But the analysts advised investors to "keep eyes peeled if/when storm rolls through the gulf."
Both companies declined to comment.
The Gulf Coast accounts for about a quarter of U.S. domestic oil output and about 11% of domestic natural-gas production, according to the federal Energy Information Administration.
In the past, prolonged delays in resuming energy production there reduced supplies and drove up prices. In 2005, when Hurricanes Katrina and Rita caused shutdowns that constricted the supply of natural gas, gas prices soared to all-time high above $15 per million British thermal units.
This year, global stockpiles of oil and natural gas remain high, and analysts said the global slump in oil and natural-gas demand because of the recession could cushion the effect of a hurricane and keep prices low.
"There is greater tolerance in the system to take on a major storm," said Michael Wojciechowski, a senior analyst at Wood Mackenzie, an energy consulting firm.
Copyright (c) 2009 Dow Jones & Company, Inc.
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