Managing hurricane risk in the Gulf of Mexico

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Courtesy of ABS Consulting

The 2004 and 2005 Gulf of Mexico hurricane seasons expanded the traditional definition of risk and asset management for the oil and gas industry. At the most important level, the industry did an excellent job of protecting the lives of people directly involved in operations. In addition, in the aftermath of Hurricanes Katrina and Rita, the industry expended an extraordinary effort in getting assets back on line. In spite of these efforts, both hurricanes had a significant
financial impact on the performance of the industry due to the extensive asset damage, production loss and market
disruption. The impact of these losses also reduced the ability of companies to obtain adequate insurance at a  reasonable cost. The insurance industry in general is raising prices, reducing limits and increasing deductibles/waiting periods for all Gulf of Mexico (GOM) risks and in particular for offshore risks. Also, several insurance companies
have completely stopped providing any GOM coverage, and this action further restricts the market. As a result, many companies are directly absorbing a larger portion, and in some cases all, of their GOM hurricane risk. Looking ahead, it is very likely that more “bad” hurricane seasons will occur and this is a problem that will not go away. As a result, the financial risk from hurricanes in the GOM has become a major issue for the oil and gas industry that needs to be aggressively managed. Therefore, the challenge is how to efficiently manage in a rational way the economic losses and related consequences from GOM hurricanes over a multiyear time frame, in terms of asset damage, business interruption, contingent business interruption and extra expense.

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