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Moody's Releases Analysis of Oil Rig Losses

Posted on 04 Jun 2010

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Moody's has released a detailed report that indicates the plethora of claims that will likely arise from the Deepwater Horizon oil rig disaster, as well as demonstrating the impact on costs for offshore energy-related insurance coverages, which have already risen by 50% for deepwater rigs.

Total insured losses from this event are estimated to be between $1.4bn and $3.5bn at the moment, making Deepwater Horizon the largest single oil drilling rig loss since the 1988 Piper Alpha platform disaster in the North Sea, which resulted in approximately $3.6bn of insured losses (in 2009 dollars).

So far, insurers and reinsurers have reported at least $611m in estimated losses (see table) with losses primarily affecting global reinsurers, Lloyd’s and Bermuda market players.

Moody’s notes that insured losses would be much higher if BP, the operator and majority owner of the project, had purchased liability insurance in the commercial market instead of self-insuring its risks through a captive insurance program.

Efforts to stem the flow of oil from the well have been unsuccessful so far, with an estimated 12,000 or more barrels of oil per day spilling into the ocean, creating a large oil slick that is threatening to cause environmental damage to wetlands, beaches and fisheries along the US coastline.

Claims are expected to come from a number of lines including marine hull, marine liability, general liability, environmental/pollution liability, control of well, business interruption, D&O liability and workers’ compensation.

The property losses are fairly straight-forward, said Moody’s. A total loss of $560m has been declared by underwriters.

However, the liability portion of the losses is going to be far more complicated. With several parties involved in the drilling work, dozens of class action lawsuits filed and the ultimate extent of environmental damage unknown, the complexities associated with loss claims are substantial and could take many years to be resolved, the report warned.

Clean-up costs

As the operator of the project, BP is the primary party responsible for clean-up costs.

The Oil Pollution Act of 1990 limits liability for private economic and public natural resource claims to $75m, although this limit could be exceeded in the case of “gross negligence, willful misconduct or the violation of safety rules”. Moody’s believes it is likely that some of these costs will be recovered from the junior partners in the project, Anadarko and Mitsui.

It is likely that clean-up costs are going to be at least $1bn, and will probably far exceed those associated with the Exxon Valdez spill, which had clean-up costs, compensatory payments and fines of approximately $3.4bn.

The other parties involved (see table) could be determined to have liability. However, Moody’s points out contractual indemnifications as well as the difficulties substantiating alleged equipment failures 5,000 feet below the ocean surface could limit their exposure to environmental remediation costs.

According to Securities and Exchange Commission filings, Transocean, Anadarko and Cameron International carry liability insurance limits, net of deductibles, of $950m, $162m, and $500m, respectively.

Moody’s believes business interruption claims represent the largest unknown for insurers. Pollution damage claims could push industry insured losses toward the upper end of the estimated range. And if a hurricane storm surge pushes large amounts of oil inland this summer, additional claims could “blow out” the top end of insured loss estimates, said Moody’s.

Energy coverage costs will rise

Moody’s believes this event will also have a meaningful impact on the market for offshore energy-related insurance coverages. Early reports indicate that property coverages are already 15 to 25% higher for rigs operating in shallow waters and up to 50% higher for deepwater rigs.

With the hurricane season now in upon us, any additional losses in the Gulf of Mexico this year could further increase pricing, said Moody’s.

“Likewise, pricing for offshore energy liability insurance is sure to trend higher as insurers and reinsurers take stock of their losses and re-evaluate the complex risks associated with drilling in deep waters,” the report said.