The Value of Hurricane Forecasts to Oil and Gas Producers in the Gulf of Mexico

Abstract

The threat of hurricanes often forces producers of crude oil and natural gas in the Gulf of Mexico to evacuate offshore drilling rigs and temporarily to cease production. More accurate hurricane forecasts would result in fewer false alarms, thereby preventing these unnecessary evacuations and disruptions in production. This study estimates the value of both existing and more accurate hurricane forecast information. A probabilistic cost?loss model is used to estimate the incremental value of hurricane forecast information for oil and gas leases in the Gulf of Mexico over the past two decades. Detailed computations of hurricane forecasting accuracy are performed using records from the National Hurricane Center and Marine Forecast/Advisory from 1980 to 2000. Evacuation costs and potential losses are estimated using data from the Minerals Management Service and oil company drilling records. Estimates indicate that the value of existing 48-h hurricane forecast information to oil and gas producers averaged roughly $8 million per year during the 1990s, which substantially exceeds the operating budget of the National Hurricane Center. From an industry perspective, however, these values are a small fraction of drilling and production costs. Moreover, although recent hurricane forecast accuracy is improving, it has not been sufficient to create significant value to this industry. On the other hand, forecast value dramatically increases with improvements in accuracy, rising by more than $15 million per year with a simulated 50% improvement in 48-h forecast accuracy.