Catastrophe modeling improves risk management
Operators use sophisticated financial modeling to optimize return on capital over the life expectancy of their assets. Decisions are made on platform configuration where the trade-off is cost versus performance. Underlying the financial modeling are assumptions regarding hazard intensity probabilities and asset vulnerability. If either the hazard or the structural performance assumptions are wrong, the financial decision will be flawed. Misunderstanding the risk can impact the risk transfer decisions, which can result in inadequate mitigation. These are all areas where catastrophe modeling can improve the process.
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Pipelines are vulnerable to damage from mudslides in areas with heavy silt and steep slopes. Source: EQECAT Inc.
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The EQECAT model enables the most comprehensive loss estimates for offshore assets. The model considers not only physical damage to platforms, but also OEE, well control, debris removal, BI, and CBI losses. The model simulates thousands of hypothetical hurricane events, accounting for waves and current, wind, tidal surge, and mudslides to estimate platform and pipeline damage. The damage functions have been validated with data from hurricanes Ivan, Katrina, and Rita. One innovative aspect of the model is its ability to quantify the risk of disruption of product delivery to onshore facilities due to pipeline damage. This is possible through a network analysis that considers pipeline connectivity, redundancy, and the impact of wave scouring and mudslides to determine residual pipeline capacity after a storm. The program estimates the initial loss of oil and gas product delivery capacity, and also takes into account the time needed to restore full delivery capability.
After the storms in 2004 and 2005, offshore energy facility insurance capacity was greatly reduced and pricing substantially increased, making insurance cost prohibitive for many operators with BI and CBI. “Insurers are trying to make up for their losses by raising premiums,” says Aon Corp. as reported by Bloomberg. “Coverage for wind damage to offshore facilities costs three or four times as much as before Katrina. The amount of coverage offered has dropped about 70%.” This shortage of capacity created in some instances a crisis for operators needing insurance to finance costly production facilities. The largest operators are in position to self-insure, but many others need the protection.
Offshore-tailored model
Better understanding of risk by both insurers and operators will help to rationalize the current market, leading to better risk transfer decisions. Improved risk modeling tools will help insurers to regain confidence in pricing risk for offshore energy exposure. The problem with many of the models is they are deterministic in nature. These models give only crude damage and loss estimates, with little differentiation of risk. The problem with most currently available probabilistic models is that they were designed largely for estimating wind losses for onshore commercial and residential properties. They have been adapted to cover the Gulf area, but lack the specialization needed to properly model the agents of damage or the vulnerability of these highly specialized assets. Some models lack adequate financial representation of the types of losses that can occur and how insurance policies would handle these losses.
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The EQECAT Gulf of Mexico US Offshore Energy Model uses a network analysis method to model platform to onshore connectivity, pipeline damage, residual capacity, and restoration time. Source: EQECAT Inc.
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Volume 68 Issue 1
January 2008
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