Brazil Oil Rig Sinks, Losses Could Reach $650 Million

March 21, 2001

Despite five days of round-the-clock efforts to save it, the 40-story oil rig, the world’s largest, owned by the Brazilian state oil company Petrobas, sank Tuesday afternoon in over 3000 feet of water 80 miles off the coast. One of the rig’s four main support columns was heavily damaged in an explosion and fire last Thursday, which took the lives of 10 workers.

The loss is a blow to Brazil’s efforts to decrease its dependence on foreign energy sources. Running at half its capacity, the rig was still producing 80,000 barrels a day, about 5 percent of Brazil’s total output. Replacing the oil will cost $50 million a day, and it may be two to three years before a new rig can start production.

The rig had already sustained damages estimated at around $360 million. Its loss could raise that total to $650 million. According to a report from Reuters News Agency, 16 carriers share the initial coverage of $500 million, but there is also an excess layer of $150 million. Only three companies have more than 10 percent of the loss, and all of them carry reinsurance through the Lloyd’s market.

Reuters singled out ACE Ltd., XL Capital Ltd., American International Group and CNA Financial as being involved in the coverage, but no comment has yet been made by any of these companies. However, a spokesman for the St. Paul companies acknowledged that it had a maximum exposure of $5 million through its Lloyd’s operation and St. Paul Re.

Petrobas expects to receive payment on the loss within the next 3 to 6 months, which will cover its initial $350 million cost and the reimbursement of expenses linked to the five day salvage operation. It does not expect to recover its economic losses, however.

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