Offshore operators have prepared and beefed up installations since Hurricanes Katrina and Rita cut a swath through the Gulf Coast petroleum infrastructure in 2005.
Don Stowers Editor, OGFJ
If you really want to see oil and gas prices spike, watch what happens if another Category 5 hurricane like Katrina or Rita enters the Gulf of Mexico and takes aim at the offshore infrastructure off the Texas and Louisiana coast. Commodity traders, who seem to react to earthquakes in China and bellicose statements from Hugo Chavez, will go berserk.
June 1 marks the beginning of the six-month-long tropical storm season in the Atlantic Basin, Caribbean Sea, and Gulf of Mexico. Forecasters are not predicting a particularly active year for storms, but they’ve been wrong before. The past two years since the monster storms of 2005 have not produced major hurricanes that threatened the Gulf Coast, although meteorologists had predicted otherwise.
On April 9, the Department of Atmospheric Sciences at Colorado State University increased its seasonal forecast from its initial early December prediction. William M. Gray and Philip Klotzbach said their research now indicates a “well above-average Atlantic Basin tropical cyclone season in 2008.”
Their research indicates the probability for at least one major (Category 3, 4 or 5) hurricane landfall on the entire US coastline is 69%. The average for the last century is 52%. In addition, the probability for landfall along the US Gulf Coast from the Florida panhandle westward to Brownsville, Tex., is 44%. The average for the last century is 30%. So the odds are nearly 50/50 that a major hurricane will again strike on or near the heart of the US offshore petroleum infrastructure between now and Nov. 30.
The Houston-based Weather Research Center, a non-profit organization that manages a worldwide forecasting operation and provides research to scientists around the world, forecasts that the 2008 hurricane season will have at least 11 named storms with six intensifying into hurricanes. They predict four of the storms will make landfall in the US.
Jill Hasling, WRC president and chief meteorologist, says the risk of tropical cyclones in the Atlantic by month is: May – 30%; June – 60%; July – 70%; August – 100%; September – 100%; October – 100%; November – 50%; December – 10%; and January – 10%.
Houston-based Weather Insight provides weather information for financial markets, including the offshore energy industry. That firm’s Steve Mitchell and Aaron Studwell visited with Oil & Gas Financial Journal recently to demonstrate their new premium tropical weather service, a web-based service that they offer subscribers for $18,000 per season.
“We have a JV partnership with Wilkens Weather Technologies, and I’d estimate that 85% of offshore producers subscribe to our service,” said Mitchell. “We provide continuing updates on tropical storm activity, projected paths based on several models, and we overlay this with a comprehensive map of oil and gas installations in the Gulf of Mexico. All this is shown on the viewers’ screen in real time, even the position of oil tankers and other ships.”
Mitchell said that petroleum companies have long recognized the economic benefit of incorporating weather and climate forecasts into such things as gas production and storage strategies and that Weather Insight’s tropical storm forecasting and tracking services have been widely accepted by companies engaged in offshore activity.
Some believe that 2005 was an anomaly. Never before had the Atlantic seen 27 named tropical storms in one season – so many that the list of storm names had to be extended with Greek letters, including four Category 5 hurricanes (Emily, Katrina, Rita and Wilma). Wilma was highly unusual in that the storm originated in the northwestern Caribbean and moved in a generally northeastward direction over the southern tip of the Florida peninsula and into the Atlantic.
Although the accuracy of tropical storm forecasting has improved immensely in recent years, the science is still inexact due in part to weather patterns that arise and fluctuate after the annual storm forecasts are made. Examples are a strengthening or weakening El Nino or La Nina over the eastern Pacific Ocean or dust storms in the Sahara Desert. Ocean temperatures in the Atlantic and wind shear at different altitudes are other factors that may trigger or impede storm development and direction.
Is global warming a factor?
Global warming also has been cited by some as a reason some recent storms have been so intense. However, a new paper authored by prominent scientists in the National Oceanic and Atmospheric Administration casts some doubt on the role of climate change. The NOAA scientists found that we’ve had 27% fewer tropical storms and 18% fewer hurricanes since the 21st century began. Researchers found that the strongest hurricanes only had slightly higher wind speeds than previous large storms.
The study does not support the idea that greenhouse gases have caused a significant increase in tropical storm activity or intensity to date, said lead author Tom Knutson, a Princeton-based research meteorologist for NOAA.
Colorado State’s Gray and the National Hurricane Center’s Christopher Landsea have been vocal in their disagreement with scientists who claim global warming is at least party responsible for the intense killer hurricanes of 2005. They say that data from past storms is unreliable because many tropical storms at sea went unrecorded until weather satellites became common in the 1970s and that changes in sensing technology have made it difficult to compare hurricane strengths.
However, hurricane forecasters note that tropical storms will form when sea surface temperatures reach 80 degrees Fahrenheit. So a warming Atlantic Ocean would mean longer periods of favorable conditions for tropical storm formation. For the past two years at least, an increase in wind shear in the tropical Atlantic seems to have prevented these storms from intensifying.
Stronger offshore facilities
The US Department of the Interior’s Minerals Management Service, which oversees America’s offshore energy industry, held a media forum in Houston on May 15 with representatives from the US Coast Guard and the American Petroleum Institute to discuss actions being taken to reduce risk of severe damage to oil and gas infrastructure in the Gulf of Mexico in the event of hurricanes this season. Key goals of the preparations are to enhance the nation’s energy security, provide environmental protection, and continue the emphasis on personnel safety.
Walter Cruickshank, deputy director of MMS, said the oil and gas industry is better prepared for hurricane season than in years past. New rules have been passed regarding enhanced information on hurricanes and the design of offshore structures.
“Hurricanes Katrina and Rita were unprecedented in the damage they caused to offshore infrastructure,” said Cruickshank. “By working with all involved parties, MMS remains steadfast in our goal to improve the protection of oil and gas production in the Gulf from disruptions during this hurricane season.”
Since those storms cut a swath through the heart of the offshore oil and gas industry in 2005, the industry has shored up its drilling rigs, near-shore, and deepwater production platforms and other infrastructure to better withstand high winds and waves.
Offshore installations in the Gulf of Mexico produce roughly one-fourth of the nation’s crude oil and account for about 15% of the country’s natural gas production. Katrina and Rita shut in 92% of oil and 83% of natural gas production.
Building on improvements made prior to the 2007 hurricane season, such as new guidance documents focusing on enhanced design standards and a web site dedicated to hurricane information, MMS incorporated three API bulletins that contain the enhanced design standards as well as assessment criteria for both new and existing structures in the Gulf of Mexico into a final rule that was effective May 15. Cruickshank says the new criteria will increase platform survivability during hurricane conditions and result in fewer damaged platforms.
Katrina and Rita destroyed more than 100 platforms, and 792 oil and gas wells have been plugged permanently.
The new rule also provides for additional mooring lines for floating drilling rigs, many of which came loose in 2005 and floated freely, sometimes dragging anchors across the sea floor and damaging pipelines.
In addition, the decks of fixed platforms closer to shore have been raised to withstand higher waves and a storm surge. Standards also have been tightened for securing equipment to decks.
FPSO approved for deepwater Gulf
In April, the MMS approved development plans for the Cascade-Chinook oil and natural gas project located in the Walker Ridge area of the Gulf of Mexico, approximately 165 miles offshore Louisiana in 8,200 feet of water. Operated by Petrobras, these projects will involve the first use in the Gulf of a Floating Production Storage and Offloading (FPSO) facility. MMS approved the project after a thorough environmental and technical review.
An FPSO is a floating facility that has the capability to process oil and natural gas, store the crude oil in tanks located in the facility’s hull, and offload the crude to shuttle tankers for transportation to shore. Any natural gas processed will be transported to shore by pipeline.
Inset photo shows staff at the National Hurricane Center tracking a storm. Photo and cover image courtesy US Weather Service.
Petrobras’ FPSO will be equipped with a disconnectable turret. In the event of a hurricane or tropical storm, the facility is designed to disconnect from the turret and move off location until the storm has passed.
“This is an important step for Petrobras and all oil and gas operators exploring in deepwater Gulf of Mexico,” said Lars Herbst, regional director for the MMS Gulf of Mexico region. “The FPSO and many associated first-use technologies lead the way in providing the infrastructure necessary to produce safely in the Gulf’s ultra-deepwater.”
Insurance and impact of storms
When a hurricane strikes, the energy sector in particular is especially vulnerable to heavy losses of assets and the revenue streams generated by those assets. The insurance industry took a huge hit after Katrina and Rita and as a result there has been greater risk transfer. Insurance companies have had to offset their losses, and offshore drilling companies and operators are now paying larger premiums for their coverage, depending on the degree of their exposure to weather-related risk.
“When it comes to insurance coverage, there is no longer any one-size-fits-all model for offshore producers,” said one insurance executive.
In 2005, Katrina and Rita inflicted heavy damage on onshore facilities, including plants and refineries along the Gulf Coast. In addition, the homes and offices of oil and gas employees were damaged or destroyed. Offshore support personnel were unable to move about flooded streets and get to their jobs, and supply boats needed to get offshore production going again took a severe pounding.
Adam Hall is executive vice president of EnRisk, an insurance broker that specializes in energy risk. He says that insurance companies carefully tailor insurance coverage for offshore companies depending on the extent of their risk exposure.
“We are continually looking at ways to mitigate risk,” said Hall. “The Lloyd’s Group runs models taking into account every conceivable scenario so that the underwriter understands what can happen if a storm strikes a particular location and what to expect.”
“We have had two good years – 2006 and 2007 – with relatively little storm activity in the Gulf. However, if we see catastrophic losses in 2008, the market will definitely tighten and rates will undoubtedly increase again.”– Adam Hall, EnRisk
Hall says that Katrina and Rita were not necessarily bad for the industry. “Premiums increased, but insurance buyers are also a lot better educated than before.”
Tropical storm forecasting has relatively little impact on insurance rates, says Hall. They are based on risk exposure.
“We have had two good years – 2006 and 2007 – with relatively little storm activity in the Gulf,” says Hall. “However, if we see catastrophic losses in 2008, the market will definitely tighten and rates will undoubtedly increase again.”
As an insurance broker that specializes in the oil and gas industry, EnRisk creates client profiles, identifying the types of risk and the degree of exposure, and then matches them up to insurance underwriters. The company has offices in Houston and Denver and is headquartered in Fort Worth. Their client base includes small start-ups to large public companies, according to Hall.
