Jubilee oil field FPSO insured loss to rise on continued shutdown

The loss that will fall to the insurance and reinsurance market due to the damaged turret on the Kwame Nkrumah FPSO (floating production storage and offloading) operating on the Jubilee oil field, Ghana, is set to rise, as the FPSO will remain shutdown to production well into 2017.

According to the operator of the FPSO Tullow Oil the remediation work to get the FPSO back up and running to full production is set to drag on and there is an expectation that the facility will be shutdown for up to 12 weeks into 2017.

Tullow Oil announced on the 23rd September 2016 that its Hull & Machinery cover for Jubilee had been confirmed by insurance and reinsurance firms. It then said at the end of September that its business interruption cover had also been affirmed by insurers.

This loss event began in March 2016, when the floating production, storage and offloading vessel (FPSO) operating on the Jubilee oil field off Ghana, Africa suffered a fault to a bearing on the turret, resulting in a loss of production of approximately 15% of output per day.

The insurance and reinsurance industry has been expecting losses from hull & machinery, energy and also business interruption lines, with impacts likely to be felt in the retrocessional reinsurance market as well as some ILS funds investing in private ILS contracts, as confirmed recently by Markel CATCo.

These losses have been confirmed and now it comes down to the length of time that it takes to get the FPSO operational again, which it now appears is set to take longer than expected and result in full shut down of output.

Tullow Oil explained; “The Jubilee Turret Remediation Project is progressing as planned. The interim spread-mooring of the vessel on its current heading is on track to be completed by the end of 2016.

“The next phase of the project involves spread mooring the FPSO in its permanent and optimum heading position. Details of this phase are currently being finalised with the Government and the Joint Venture Partners and it remains on schedule to be completed in 2017. This work is likely to result in up to 12 weeks of production shut down in 2017.”

The company expects that this will be covered under the business interruption policy, and that this will “Offset the loss of revenue associated with this loss of production.”

Tullow Oil said that it is working with loss adjusters to “establish efficient payment schedules for reimbursement of operating and capital costs associated with the remediation project and lost revenue from reduced production.”

The addition of up to 12 weeks of total production shut down in 2017 could exacerbate the business interruption loss considerably, increasing the overall industry loss that insurance and reinsurance firms will face.

Total insurance and reinsurance industry loss estimates for the Jubilee oil field loss ranged from $1.2 billion to $1.5 billion recently, but with the business interruption component set to rise and continue rising into 2017 with a total shut down of the FPSO, that number could increase by a meaningful amount.

The insurance-linked securities (ILS) funds that had exposure to this loss event may escape increasing their estimates, as they are more likely exposed through property related energy lines, so the hull and machinery, rather than the business interruption policy. However retro contracts can pick up BI exposures, so there is still a possibility of some loss creep seeping into exposed ILS contracts.

We understand that the estimates of industry losses from this event largely include an allowance for this 2017 shut down of production and the resulting business interruption had been factored in.

Also read:

– Jubilee oil field business interruption loss is covered: Tullow Oil.

– Tullow Oil: Jubilee oil field FPSO hull & machinery loss covered.

– CATCo adds 3.5% of NAV loss reserve for Jubilee FPSO claims.

– Jubilee oil field FPSO loss & Euro floods hit private ILS funds in June.