Assessing Risk Preferences in E&P Operational Settings

Abstract

Risk preferences influence decision making across the entire oil and gas exploration and production (E&P) enterprise. Previous studies have examined risk preferences within this sector mainly in economic settings, where the decision maker compares dollar payoffs between two or more choices. Understanding risk preferences in the context of operational settings, where the payoffs manifest as injuries, fatalities, or environmental incidents is equally important. This research investigates risk preferences in the operational setting by examining the decision to evacuate offshore drilling rigs under the threat of hurricanes. This research develops econometric models for the evacuation decision, and explicitly incorporates risk preferences through specification of a utility function. The results provide support for the conclusion that location attributes, specifically water depth, increase the propensity to evacuate. There is also support for the conclusion that oil company experience increases the propensity to evacuate, that is, experience leads to caution. Results of a utility-based model suggest a high degree of risk aversion.