A Category 5 hurricane that passes through the heart of Gulf of Mexico energy platforms could cause producer damage and output losses of more than $65 billion, according to an expert on extreme-risk modeling.

"Property damage alone could exceed $35 billion and losses due to business interruption and reduction in production capacity could add another $30 billion to the loss," said Richard Clinton, president of Oakland, CA-based EQECAT Inc., a subsidiary of ABSG Consulting.

"Industry-insured losses are more difficult to estimate due to the changes in allocated insurance capacity, policy terms and limits following the large losses from [the] 2004-2005 hurricanes, but could certainly be in the $15 billion range," he said.

The oil and natural gas industry had insured losses of about $6.8 billion in the wake of Hurricane Katrina, said Robert Healy, senior vice president. But he noted that total industry losses from damaged Gulf platforms and interrupted production were $26 billion. As for Hurricane Rita, he estimated the industry's insured loss at $4.2 billion, while total loss was $12 billion.

Healy said he doubts that a storm of the ferocity of Hurricane Katrina will hit the Gulf any time soon. His company has estimated that a hurricane of that magnitude is a once-in-every-20-year occurrence.

The $65 billion damage/lost production estimate was generated by EQECAT's new Offshore Energy model, which was designed specifically for quantifying offshore energy risk. "EQECAT has developed new modeling capabilities that enable more comprehensive loss estimates for the offshore assets than those previously available. The model takes into account waves and current, wind, tidal surge and mudslides to estimate platform and pipeline damage," said Mahmoud Khater, EQECAT's chief technical officer.

The model also has the ability to quantify the risk of disruption of product delivery to onshore facilities due to pipeline damage, the company said. "This assessment is possible through use of a network analysis that considers pipeline connectivity, redundancy and the impact of wave scouring and mudslides to determine residual pipeline capacity after a storage," Khater noted.

"The program estimates the initial loss of oil and gas product delivery capacity, and also takes into account the time necessary to restore full delivery capability. This is the first model that will enable users to plan for all major aspects of offshore damage and loss."

Users of EQECAT's Offshore Energy model would be insurance companies, banks and producers as well, Healy said. Producers need to know the risks they face if a hurricane would hit -- what their annual losses would be and what would be a worst-case scenario, he noted. "It's a risk that they have to understand...It could bankrupt a company," he noted.

For further information on EQECAT's risk models, call (510) 817-3100 or go to www.eqecat.com.

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