Gustav Causes Billions in Damage

Insurance claims will be widespread, but less than original estimates.

September 17, 2008, 6:39 AM

Sept. 2, 2008— -- Hurricane Gustav will likely cause billions of dollars in damage as it completes its path through the Gulf region. But the financial impact appears to be a lot less worse than many feared.

"Clearly, this is not a repeat of Katrina, which is a fortunate thing," said Bob Hartwig, president of the Insurance Information Institute, which represents the industry. "Katrina was the most expensive insurance disaster in world history with $41 billion in insured losses, plus another $18 billion in flood insurance losses."

Hartwig said that, between Gustav's path and the improvements to infrastructure since Katrina three years ago, "we would not expect anything remotely close this time around."

The biggest concern for the economy is oil production.

The Gulf is home to about 1,000 oil platforms and rigs, almost all of which were abandoned as Gustav approached during the weekend. The region accounts for about a quarter of U.S. oil production and 15 percent of its natural gas production. Refineries along the coast produce more than a third of the nation's fuel.

During hurricanes Katrina and Rita in 2005, the industry sustained massive losses, and consumers across the country saw a run-up to then-record gas prices.

"But there have been many changes to the offshore energy infrastructure since then, including modernized rigs, rigs that are secured in a better way, and the burying of underwater pipelines," Hartwig said. "It's not likely that we would see the same type of losses this time around."

Oil prices fell more than $4 a barrel in electronic trading Monday as investors became convinced of less damage to the oil and natural gas infrastructure.

Risk modeling firm EQECAT estimated that initial onshore insured losses from Gustav could range from $6 billion to $10 billion, primarily in Louisiana, and that oil and natural gas capacity could be cut by 5 percent for the next year.

"This, as tragic as this is, is a sigh of relief," said Tom Larsen, a senior vice president with the company. Only a few days ago, EQECAT was looking at "a little more ominous" estimates of $20 billion to $30 billion in losses.

Oil and Gas Estimates

Larsen warned that the estimates could still change as experts learn more about the storm.

"There are tremendous things that we don't know that we're working like crazy to learn," Larsen said. "It's still pretty fresh."

For the oil companies, Larsen said, the biggest risk is old platforms collapsing on underwater pipelines or underwater landslides breaking the pipes.

On land, most of the damage will come where the winds have torn off home and office roofs.

Another firm, Risk Management Solutions, places damages between $4 billion and $10 billion.

Charles T. Maxwell, senior energy analyst for Weeden and Co., said the hurricane's impact "will be very slight" and that a two- or three-day shutdown of oil production won't make too much of a difference.

"There will not be major damages to the refineries," Maxwell said. "The hurricane [hit] an area of oil and gas activity that is better prepared and equipped."

During Katrina, nine oil rigs went down, Maxwell said. This time, he expects fewer.

In preparation for the storm, the oil and gas companies shut down virtually all production. The region accounts for 1.3 million barrels of crude oil production on a normal day. But Mineral Management Service said no oil was produced Monday and 95 percent of the gas operations were also shut down.

The focus now, for many in the industry, is the area around Houma, La.

Houma is a major staging area for the oil and natural gas industry. Helicopters and supply ships are based there, and much of the equipment used to maintain the oil platforms is stored there.

Michel Claudet, president of Terrebonne Parish, which includes Houma and nine other communities, said that most of the helicopters were flown out and ships secured before Gustav arrived.

"These are people who really know how to prepare for storms," Claudet said.

Kevin Belanger, CEO of the South Central Planning and Development Commission, said that roughly 80 percent of the region's economy is directly linked to the oil and gas industry.

Storm's Impact; Oil Workers Evacuated

Port Fourchon, just outside Houma, is a massive hub for the industry. Oil is piped underwater to the area and the port, itself, is home to many of these ships and helicopters.

The port commission released an economic impact study in April, saying that if Port Fourchon had a three-week loss of service for any reason, it would equate to a national economic impact of $9.9 billion in lost sales, $2.9 billion in lost household earnings and more than 77,000 jobs lost nationally. Oil prices have nearly doubled since then, meaning an even deeper impact.

Belanger said that a lot of the equipment is properly secured, but that, if debris clogs the port, there would be no way to get ships in and out of the harbor.

"We're going to have to assess where any debris is located before going back out to service the wells," he said Monday.

The largest operator of helicopters in the gulf is Air Logistics, part of the larger Bristol company. They, along with four other helicopter companies, have large operations at Port Fourchon.

Air Logistics works exclusively for the oil and gas industry and has the capacity to move 600 to 700 people a day, according to director Danny Holder.

For most of last week, Air Logistics was busy shuttling workers off platforms. Then, on Sunday, it moved all its helicopters out of the storm's path. It also trucked supplies -- everything from spare parts, fuel and even office computers -- to other locations.

Chevron -- the oil company with the largest fleet of its own helicopters -- moved them all out to northern Mississippi in advance of the storm, according to Mickey Driver, a spokesman for Chevron.

The company expects to start its damage assessment today.

"Right now, we're not seeing anything because all our folks evacuated southern Louisiana," Driver said. "Our employees took off to the east, west and north to get out of harm's way."

Hurricane's Aftermath Unknown

Chevron has its own facility in Houma near Port Fourchon.

"It definitely will be one of the high points of interest as to how much damage -- if any -- did the vessels and facilities at Port Fourchon receive," Driver said.

If the port is closed, he said, "we would find other resources to get done whatever we need to get done."

Zunaira Zaki contributed to this story.