Several Gulf of Mexico operators may be visiting their insurance brokers in London in the coming months in meetings that will decide whether these producers have to give up in the region. Word on the street is that post-KatRita insurance costs may force several Gulf independents to call it quits. One producer reports that insurance costs alone now represent a third of his lease operating expenses. New premiums are projected to cost four times more for production assets and 400% more for pipelines. Also, underwriters may begin to require separate, large windstorm deductibles, and cap this liability. "All in all, we expect our premium to increase by 110% and we might be one of the lucky ones," another Gulf operator says. At press time, some 50% of oil production and 40% of gas production from the Gulf of Mexico remained offline, and a portion of it may never flow again. An abandonment-services firm reports that 2006 orders to decommission destroyed or damaged platforms alone may exceed all the expected 2006 orders, pre-storms. Insurers estimate market losses for KatRita at more than $11 billion, and business-interruption claims remain open. "It is likely that no one will be fully covered anymore; rather, the producers will live with 50% to 60% of the assets under coverage and simply hope that no group of storms in a 12-month period will ever destroy more than that percentage," the operator says. The smallest of operators are most exposed, while larger producers have premium caps and they have other assets-onshore and abroad-that insurers want to underwrite, "so my best guess is that the end of the market (in the Gulf) that will suffer is middle and down." For more on this, see the December issue of Oil and Gas Investor. For a subscription, call 713-993-9320, ext. 126.
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