More on Rig Damage and Structural Integrity

First below the fold, a couple of pictures of damaged rigs and some words from one of our insiders. Then, a really interesting note from our friends over at KAC/UCF.  Pretty long, but also pretty interesting...goes a long way in explaining why their models are so good.
From one of our insiders, here's a couple of pictures of damaged rigs here (GSF Adriatic VII) and here (GSF High Island III). The insider reminded us that:
You might also point out that in order to beach one of these rigs, ALL THREE of their 150’ legs must be broken off by the storm. So to fix these rigs, they would require 3 new legs, a new derrick, a new block and draworks, repair of everything broken….it is most likely that they will be scrapped or at a minimum, stripped to the hull and rebuilt. Rebuild will take longer than building a new rig because of inspections and removal of damaged stuff, but with material costs high, it may be viable.
From our KAC/UCF friends:
Thought I could shed a little light on design criteria for the offshore facilities.  

As you pointed out you have to balance the design life of the structure, the raw replacement cost of the structure, and the cost of not having the production from the structure.  Lets look at five sites in the GOMEX (map attached here).

All wind speeds are in knots, two minute average at 10meters above the surface, and are based on an analysis of hurricane activity since 1851 (see Watson and Johnson, "Hurricane Loss Models, an opportunity to improve the state of the art", Bulletin of the American Meteorological Society, Nov. 2004). Assuming a 10 year design life, what conditions should we expect?  Here are the 10 year, 95% prediction limit values (in other words, in any given 10 year period there is only a 5% chance this value will be exceeded) for these sites:

10 Year
Site 1
Site 2
Site 3
Site 4
Site 5

Most engineers use a 100 year design criteria for major structures even if the design life is substantially less than that.  Our comparable 100 year values are:

100 Year
Site 1
Site 2
Site 3
Site 4
Site 5

The 100 year values used in the GOMEX are a bit lower than this because most ocean engineering firms base their analyses on data since 1900, and missed the period of intense activity in the late 1800's.

It is important to keep in mind that very few sites actually exceeded a 100 year design event for Katrina or Rita. However, even if a structure is a 100 year design on commissioning day, after a couple years bathing
in warm salt air and the normal wear and tear of use it probably isn't anywhere near that level in reality, even with a PM program.

So how hard is it to build a better structure?  Harder than you might think.  This table shows the relative wind load and relative stress (which includes vibration modes) between the minimum wind speed for each Saffir Simpson Category:

    Min Wind
   Wind Load

In Saffir/Simpson terms, most designs are for a Cat 3.  If you wanted to build something to withstand a Cat 5, you would have to build it roughly three times stronger - a pretty tough thing to do without totally blowing out the economics of the structures. These are wind loads - designing for wave loads for an anchored structure get to be nightmarish for extreme events. A big air gap for waves means a big surface area for wind loads. The uplift forces, differential stress from waves coming from different directions (which happens inside hurricanes), combined
with wind loads, makes designs above Cat 3 problematic.

The ultimate question is, do you pay some large amount up front in your design, or do you roll the dice and hope your less well designed structure is lucky?  Most engineers try to split the difference and protect against most events, and hope the big ones don't show up during their watch.

It's not the engineers making that kind of decision.
You are correct in some respect. Engineers design to specifications. A good chunk of these specifications are written by third party organizations (Det Norske Vertias for much of the North Sea, American Bureau of Shipping for a good chunk of the world, Lloyd's for ship based structures, etc).

We design around those specifications all of the time. And they are not static. They are constantly being updated (which gives manufacturer's like me constant headaches).

Environmental conditions are ALWAYS a part of a rig specification. Temperature extremes for metallurgical consideration, humidity for corrosion consideration, ambient temperatures for cooling consideration, seismic conditions for equipment accelerations during a seismic event, it is all taken in to account.

A production platform will be most specific in their requirements, as they are for the most part a static structure so we can plan around those very specific environmental conditions.

Mobile rigs (MODU's) which include jackups, semis and drillships are built to specifications for the worst environment expected during the lifetime of the vessel.

Building to North Sea requirements is very expensive due to multiple overlapping governmental regulation agencies and the nature of the environment. South East Asia is a paradise compared to the North Sea. Sea conditions are relatively calm and temperatures are moderate.

A jackup built to SE Asia conditions would never be allowed to drill in the North Sea. Ever. But a North Sea rig can drill anywhere in the world. It all comes down to initial investment and expected return on capital which determines what type of rig a contractor orders from the shipyard.

Now let's venture back to the GoM. Some comments as what would it take to build a rig to Cat 5 standards. And there have been some informative responses. What has not been addressed is capital requirements.

Yes, we can build to Cat 5 standards. Ridiculously expensive. And most of that expense unnecessarily spent (it may never be required in the life of a rig or a platform). THose are valuable dollars that can be spent on exploration, drilling, and refining.

So the purchaser of a facility or rig builds to a certain level. A level sufficient to mitigate against a majority of environmental threat. Anything above and beyond that level is mitigated with insurance. That's why Risk Management is a career path.

An operator can build to Cat 5 specs which may never be used (inefficient allocation of capital) or they can build to Cat 3 and purchase insurance for anything above and beyond that state. A much more efficient use of capital.

Although right now, I'm sure the insurance companies are not very happy about their side of the deal.

It will be interesting to see how many Cat 4/5 hurricanes they feel it necessary to price into future premiums.
There are actuaries crunching the numbers right now. Bet on it.
I just linked to this from my blog, with a photoshopped for clarity version of one of the photos. Let me know if you want me to photoshop the ones you posted.

Here's a link to a Rigzone article with pictures of the upside down Typhoon tension leg platform, as well as other interesting details:



From a purely aesthetic point of view, it looks much better when it is upside down :-).
The Mobile, Alabama Register had a great story about rig design standards.  They found that fixed rigs were designed for a Cat 3 event, but that floating rigs were held to a much lower standard:
Last week, the Register reported that permanent -- or "fixed" -- platforms in the Gulf are only required to withstand winds and waves typical of a Category 2 or Category 3 hurricane, in spite of assertions by federal authorities that these facilities are being designed to withstand Category 5 conditions. In the past year, four storms crossed the rig fields with Category 4 or 5 winds.

But in the recent storms, a large percentage of the damage is being attributed to mobile drilling units -- floating platforms of various designs that prospect for oil before the permanent production platforms are erected.

Register research suggests why so many of these mobile drilling units are running free: Federal and industry anchoring requirements for many mobile drilling units -- particularly the semisubmersible drilling rigs that were prone to break free during Rita -- are designed to account for winds and waves associated with a minimal Category 1 hurricane. In many cases, those rules allow mobile drilling units to set anchors and mooring systems that would not even account for hurricane-force winds.

I wrote a longer diary about this at Booman Tribune.
With the current known damage from hurricanes Katrina and Rita, can we state now categorically that any or all of the following are true:

a) it will be at least 12 months before production pre-storm is achieved again
b) or, it will be 24 months or more
c) and, any hopes of reaching production growth targets for 2005 are now gone, or
d) growth targets for 2006, perhaps 2007 now out the window, too?

A.    Incorrect. Once the pipelines are surveyed production will come back on line. 6 months (personal opinion).

B.    See above.

C.    Production growth, most likely. But given inevitable price increases in a tight market, you may be surprised at decreased demand over this same period. China and Indonesia are already suffering immense pain by subsidizing domestic fuels. Iran s doing the same, but with natural gas. These countries are taking huge treasury hits as they are not allowing the market to dictate prices. They are doing everything to not deal with demand, and they are leaving a ton of  money on the table

D.    Increased prices will cut demand. We're already seeing it in the domestic gasoline market. If we have even a moderately cold  winter, you will see it more when heating bills need to be paid. Demand will drop significantly.

unless you charge it to your credit card and don't pay the bill.
I agree that we're going to start seeing some real demand reduction in the coming months as the price of gasoline continues to rise. I'm not so sure if we can get enough of it to keep us out of serious economic difficulty though.

Since you work in the oil industry and know what's going on, I'd love to hear why you're so optimistic about getting full production from the GOM within 6 months and why you see that prospects for production growth are good too. I hope you're right.

According to the most recent EIA figures on their "This Week in Petroleum" web page, the demand for gasoline on 9/23 ROSE over 9/16 and it returning to the year ago value.

So, this seems to indicate, if any government report is reliable these days, that demand has not slowed despite a slight the increase in the week over week price of gasoline.

It is hard for me to imagine that society as a whole in this country is smart enought to rapidly change their lifestyle considering all the happy talk that they see and hear from their leaders.  As long as banks still extend credit, gas will be purchased regardless of price.  The papers were full of stories about the huricanes doing less damage than thought and stories like Bush urging conservation are buried.  Has anyone seen any increase in ads for public transportation or anything to start conditioning the populace to conserve?

I would guess that as gas prices fell post Katrina and per Rita demand rose. Also Right after Katrina there was more panic buying of gas which caused a rapid spike in price and spot shortages. Now (rightly or wrongly) there is not such a panic and the Rita Spike has played out over a week or so rather than a couple days.

One thing I have noticed is this time Gas and Diesel prices have moved up together with Diesel climbing back above Gas(here in Indiana). Last time Gas was 3.29 and diesel was 2.89, this time it's 2.94 and 3.05 respectively. Also saw where the IRS is allowing OTR trucks to use Off Highway diesel (which is not subject to excise tax). I wonder how much of a hit there will be on taxes.

Yes, increased prices will reduce demand growth, but it will take sustained very high prices to actually drop demand, on a year over year basis. The last year over year declines happened between 1980-1984, and political action:

  • Carter cuts oil imports from Iran/hostage crisis...
  • followed by OPEC cuts, US boycotts of Libya,
  • Iraqi output disruptions during Iran-Iraq war which, ironically, the US supported Iraq in)...

... so this period of demand destruction was caused by political events cauing price to rise; now, unlike then, real or perceived scarcity has much more to do with the price of crude than political or "terror" premiums.

Also, then, unlike now, people were buying 98 hp Toyotas and Datsuns instead of 300 hp monsters for their grocery runs ;-)

One potential similarity - the US implemented windfall profits taxes back then, and some on Capitol Hill are making such noises again.

Somehow I doubt the current administration is likely - correctly - to do anything that gets in the way of capital investment and exploration. The big concern is whether they do anything substantive towards moving the country and therefore the world to conservation and alternatives.

Prediction: If gasoline merely remains between 3 and 3.50 a gallone, demand next year will have risen once again.

I don't think we are seeing much reduced demand for gasoline yet. Most of the apparent demand reduction has been in the gulf coast region. Other regions show little change. There is a huge drop in sales of large SUVs however.  Murray
I hate to nitpick, but 150 meters would be closer to the leg length, not 150 feet.

The Adriatic 7 was probably 410 feet, and the High Island 3 was probably 360 feet.

The question on my mind:

How big does the threat from wind and waves have to be before it pays to design e.g. production platforms as submersibles rather than floating?  If something is already below the water, it can't get hit by a wave.

Someone must have investigated this already.

That is one of the main reasons subsea production is now so prevalent. They can be tied together and tied back to existing infrastructure.

In the deepwater, they need to be tied back to a floater for processing and pipeline maintence. Deepwater sea temperatures are damn cold. They cause all kinds of pipeline flow issues. And shut them down. Flow assurance is now a science and there is a ton of active work ongoing to lower the costs for these operations. Currently methanol or ethylene glycol injections into the pipleines are required to ensure flow. This adds to the complexity and expense of the project.

There's also a ton of research being done in subsea separation (get rid of solids and water at the seafloor, eliminating pipeline capacity to carry it all), subsea elecric transmission (to power subsea pumps and equipment) and artificial islands (subsea floating platforms ro reduce sea state risk, but also to lower drilling costs (1st or 2nd gen semi to drill instead of a 4th or 5th).

When I look at pictures of those production platforms, I see lots of things that look like cooling towers.  Looks like there's considerable need for cooling aboard those things.  Would sitting down in the deepwater be good for some of the processing?

I was actually thinking of an arrangement where the equipment would be mounted in something like a submarine hull, which could be taken down to a safe depth when storms threatened.  The hull could be filled with air at near-ambient pressure when at depth (obviously with no one aboard) so it would not have to be built to withstand crushing.  If it was only taken deep for protection, it would not need to be designed to operate while deep and pressurized, just to protect itself (e.g. chambers and pipes holding low-pressure gas would have to resist crushing).  300 feet should be deep enough to handle 100-foot waves.

There's got to be a point where submersibility is cheaper than building to resist storm loads.  The question is where.

There are internal waves in the ocean on the border between the cold and warm layers of the ocean, but once you get below that it's calmer. The ocean is still a difficult place to work underwater.
If you're handling 100-foot waves, then you're handling (at least) 3 atm of pressure differential. Over the surface area of an oil platform, that's pretty huge.


If you're 300 feet below the average of those 100-foot waves, your pressure differences are going to be quite a bit smaller; IIRC the pressure waves average out and the water motions get less as you go deeper.
Well, MW, we are back to the discussion topic you and I have been sharing for awhile. If you are right about your forecast time-to-repair the damge in the Gulf, how much of that is factored into current energy-complex prices? My guess: in gasoline and natural gas, whose prices have spiked lately, the damage is priced in. Natural gas consumers seem to be scrambling for product, especially since the Henry Hub delivery point is down and NYMEX was forced to release sellers of natural gas futures of their delivery obligations for contracts expiring in September and October. I am guesing that the spiky price charts reflect this.

Given those spiky price charts, I suspect that those prices fall back some, then come back up as the full story leaks out into the MSM. I would also think, though, that equities leveraged heavily to natural gas would still be underpriced... I don't think they have moved enough to reflect new present values that would be caused by the revaluation of natural gas. For perspective on this, see how McDep Associates calculates the present values of the companies they follow on its website.

In my guess that natural gas related equities are underpriced, I am assuming... that after the repairs are completed, the new equilibrium natural gas price exceeds pre-Katrina prices. Given all of this there might be one more chance to buy the gas story, if gas falls off the spike prices a bit more.

My gut feel is that crude oil and heating oil have about 20% more to move over the next several weeks-to-months, all else being equal. As you have noted, crude has barely held its uptrend line since Rita hit. That slow movement is a marked contrast to the natural gas price explosion we have seen.