Musings: Oil Industry On Alert - Active Hurricane Season Forecast

This opinion piece presents the opinions of the author.
It does not necessarily reflect the views of Rigzone.

Earlier this month, the tropical storm forecasting team of Philip J. Klotzbach and William M. Gray, professors in the Department of Atmospheric Science at Colorado State University (CSU), released their first forecast for the upcoming hurricane season. They are calling for the season to experience "enhanced activity compared with the 1981-2010 climatology," meaning it will be an active storm season. Furthermore, the forecasters "anticipate an above-average probability for major hurricanes making landfall along the United States coastline and in the Caribbean." In other words, be prepared.

Based on the work the tropical storm forecasting team has done in conjunction with the GeoGraphics Laboratory at Bridgewater State University in Massachusetts, the model predicts that there is a 72% probability of a major hurricane making landfall along the entire U.S. coastline compared to a 52% average for the past century. For the U.S. East Coast including the Florida Peninsula, the probability of landfall is 48% versus a 31% historic record. For the Gulf Coast from the Florida Peninsula to Brownsville, Texas, the probability is 47% compared to a 30% record. The model also estimates that the Caribbean has a 61% probability versus 42% historically of experiencing a major hurricane landfall. These higher than historic probabilities will have the U.S. petroleum industry on alert during the upcoming season although even with a very low probability it only takes one storm to create serious disruption and economic hardship.

The CSU forecasters are using a relatively new April forecasting model that employs four predictors they have found to have an above-average predictive value. This is the third year the forecasters have used this model, which is built on data from 1982-2010. The model incorporates the most recent and reliable data available, which the forecasters believe helps improve the model's predictive ability. They said these four predictors helped the model to correlate with the Net Tropical Cyclone Activity (NTC) at 0.79 when all years studied are included. A drop-one cross-validation analysis yields a correlation with the NTC of 0.68. This is a more realistic view of the skill the model will have in future years. The forecasters say that this model correctly predicted above- or below-average seasons in 22 out of 31 hindcast years, a 71% average. The model's predictions have had a smaller error than climatology in 19 of 31 years for a 61% average.
The predictors used in the model include the average sea surface temperature (SST) in the Atlantic basin in the January to March period, the sea level pressure (SLP) for March in the central Atlantic Basin and the February to March SLP in the Pacific Ocean region off South America, and the European Centre for Medium-Range Weather Forecast (ECMWF) of the SLP in the Pacific Ocean along the Equator.

The CSU forecast calls for 18 named tropical storms during the season with nine hurricanes and four of them becoming intense (major) hurricanes, meaning they are storms in the intensity range of 3-4-5. They believe that 2013's activity will be similar to the 2011, 2010 and 2009 years with the exception of the number of intense hurricanes last year. This year's activity would also compare with 2008, but not as intense as 2005 when there were 26 named storms and seven intense ones and 2004 with 14 named storms and six intense hurricanes. The comparison of the April forecast with the most recent six years is displayed in Exhibit 14.

The reason for the above-average forecast this season for tropical storms, hurricanes and intense hurricanes is because the meteorological projections call for the combination of an anomalously warm tropical Atlantic basin and a relatively low likelihood of the formation of an El Niño. To modify the forecast from the output of the model, the forecasters look to analog years. In selecting the analog years, the forecasters look for those years with similar meteorological conditions as projected for this season. None of the analog years had a significant El Niño during the peak of the hurricane season, which is the condition anticipated this year. The forecasters are anticipating that 2013 will have more activity than the average of the five analog years selected – 1915, 1952, 1966, 1996 and 2004.

The next forecast update will be produced at the beginning of June and it will be interesting to see what modifications are made. The development of El Niño could alter the forecast meaningfully, but the likelihood is that this year will be more active – consistent with the more active tropical storm phase for the Atlantic basin. If the CSU forecast on landfall potential proves correct, the energy industry will need to be vigilant and is likely to have several episodes when offshore operations will need to be shut down and crews evacuated. That will mean the Gulf will produce less oil and gas this summer than potentially anticipated now by operators and forecasters. All of these possibilities need to be considered when making projections about how the domestic energy business will play out in 2013.

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.

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U.S. Must Remain Active to Ensure Middle East Energy Supplies

The United States must continue its activist role, diplomatically and potentially militarily, in the Middle East, to ensure a free flow of oil and natural gas from the region, former U.S. Ambassador to Iraq James Jeffrey said Sunday on Platts Energy Week, an all-energy news and talk show program.

"The region keeps erupting into one kind or another of violence or instability," Jeffrey said on the program. "So we have to be present."

Currently a visiting fellow at the Washington Institute for Near East Policy, Jeffrey was U.S. ambassador to Iraq from 2010 until June 2012 and was U.S. ambassador to Turkey for two years before that.

Jeffrey acknowledged that the current U.S. presence in the Middle East is "adequate."

"We have a strong presence in the Gulf," Jeffrey said. "We have good relations with most of the countries in the region. But even with the pivot to Asia, this is something we have to be very careful about," he said, referring to the Obama administration's 2012 East Asia strategy.

"Oil is fungible," Jeffrey said. "There is one international oil market. Prices go up because of shortages in one area, they are going to go up in every other area, even in the United States, even if we import from safer areas or produce it ourselves.

"Even more importantly, at the very core of America's security relationship since World War II has been guaranteeing supplies of oil and gas to our friends and allies. Even if we are independent in energy, most of our friends in East Asia and certainly in Europe, and elsewhere in the world are not. If we want a stable world, if we want a world that isn't overrun by terrorists and enemies for freedom, we need to be present and we need in ensure that this gas and oil keeps flowing."

Discussing Iraq, Jeffrey said while that country has boosted its crude production to 3.4 million barrels per day (b/d) in December and is on target for 3.7 million b/d this year, earlier stated Iraqis hopes for reaching about 12 million b/d production over the next 20 years are not realistic.

"In fact, the Iraqis themselves are now negotiating to ratchet that down to the 8-9 million b/d, which would be right behind Saudi Arabia, still the second-most important oil exporter in the world," he said.

"The problem," Jeffrey said, "is that Iraq itself is not completely stable and it is anchored between two greatly unstable countries: Syria, which is under total civil war at this point, and Iran, which is under international sanctions and facing possible military action of the nuclear question. And Iraq itself has problems between the Kurds in the north and the central government. Oil companies from all over the world are flocking into northern Iraq because there are extraordinary reserves of oil and gas up there."

Chevron last week signed its third oil deal with the Iraqi Kurdish Regional Government, while ExxonMobil, Total, Gazprom Neft and other international oil companies have reached similar agreements. Iraq's central government considers all of them illegal.

"The U.S. has been very active trying to work out arrangements where everybody cooperates and oil and eventually gas from the north is exported in cooperation with Baghdad," Jeffrey said. "The latest deal has fallen through. People are back arguing and more needs to be done to ensure that a solution satisfactory to everybody can be achieved. Because this involves military as well as energy politics."

But despite much public rhetoric by both the central government and the Kurds, the two sides have cooperated on the shipment of oil when it benefits them, Jeffery said.

"Everybody is playing a veiled as well as open game here. I can’t give specific advice," he said. "This is a sensitive issue. A great deal is at stake, not only in energy, but in the political stability of Iraq, where we lost so many people, and therefore, I know the U.S. government is very energetically engaged in trying to find a solution. "

An advisor on Iran at State Department and White House during George W. Bush Administration, Jeffrey was adamant that U.S. and European Union sanctions over its nuclear program have been "extremely effective" against Iran.

"They've cut Iran's exports by more than 50%," he said. "But because oil markets are extremely flexible, including Iraq with its surge in exports, we've been able to balance that out globally and thus the sanctions have been able to tighten the screws on Iran without impacting world energy markets.

"Iran will be under much more pressure to go to the table, but this requires several things," Jeffrey said. "First of all, an offer that they would find acceptable in terms of ending their enrichment to at least 20%. Secondly, they would have to be persuaded that if they do not go down this route, military action will follow, and they may not be persuaded of that yet."

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Active Income Portfolio reaps dividend rewards

The purchase of Henderson Far East Income (HFEL), brought into the active income portfolio last month, might on the face of it seem an odd decision given the stellar performance of some other Asia-Pacific income funds.

The investment trust has managed a 47% return over five years and a 19.7% rise in 2012 to date, but that performance still lags the returns of the sector leaders. Aberdeen Asian Income (AAIF), the sector leader, has returned 132% over five years, while Schroders Oriental Income has achieved 89%.

Both outperform Henderson in terms of the value of their underlying assets. Aberdeen's 70% rise in net asset value (NAV) far exceeds Henderson's 10% NAV rise, as does Schroders' 32%. However, buying top performers trading at a premium to NAV carries its own risks: investors will pay a 4.35% premium for Aberdeen and a 2% premium for Schroders. And while these sector leaders yield under 4%, Henderson brings in more than five.

That income deficit may seem irrelevant in the context of the far superior total return, but it isn't. The danger for market leaders in any fund or trust sector is of a reversion to the mean, something that is particularly likely in fast-changing Asian markets.

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