Hurricane Katrina

The Gulf of Mexico, being home to massive offshore oil and gas operations over the past year, had an estimated total insured value of about $100 billion – Katrina may have caused the largest hurricane loss to ever occur in the offshore energy market.

Katrina caused severe damage to, and in some instances complete obliteration of, offshore oilrigs after crossing the Gulf of Mexico. Reports state that Katrina forced operators to halt production of 1.43 million barrels of oil per day – more than 90% of the Gulf’s oil output and nearly a quarter of total U.S. production.

Two catastrophic events – the landfall of Katrina in southeast Louisiana and coastal Mississippi on August 29 that caused extensive wind and coastal surge damage, and the flooding in New Orleans that resulted from the failure of the levee systems – are the basis of the ensuing economic loss, which Risk Management Solutions (RMS) now pegs at approximately US$100 billion.

RMS, a provider of products and services for the management of catastrophe risk, initially issued preliminary insured loss estimates of up to US$25 billion based on losses related to the effects of wind and storm surge in Florida and the Gulf Coast, as well as offshore oil and gas impacts. But this figure preceded the levee failure and flooding in New Orleans.

In part due to the levee’s destruction, approximately 150,000 properties have been flooded, surpassing the previous U.S. record from flooding and levee failures on the Lower Mississippi river in 1927, which inundated 137,000 properties. The historical incidence of strong Category 4 or 5 hurricanes and subsequent flooding in this region is therefore well known. The levee system, however, was only designed to protect against a Category 3 storm. RMS says that the insufficient level of flood protection offered by the city’s levees has been exacerbated by shortcomings in preparedness.

Laurie Johnson, vice president of technical marketing at RMS, says most of the property damage is already evident because damage is mainly a result of flood waters entering a building. Cost estimates, however, will change with time as “prolonged immersion of wooden residential buildings in warm polluted water will lead to rapid deterioration requiring an increasing proportion of the building stock to be completely replaced.” Johnson says that additional costs will result due to land and building decontamination efforts.

The story does not end there as losses from business interruption and displacement of residents depend on the duration of the flooding and the clean-up. If RMS is correct and costs of interrupted economic activity exceed US$100 million per day, it may be likely that businesses will leave the affected area and relocate their operations in order to sidestep continued business interruption loss.

Johnson, who is responsible for the RMS’s catastrophe response services and reconnaissance, says the speed of the clean-up phase is completely dependant on how quickly flood waters can be removed, which in turn depends on how quickly the existing pumps can be reactivated and additional pumping capacity added. CNN reported that it could take up to 80 days to completely drain New Orleans of the flood waters.