The refining, gas processing, and petrochemical sectors have incurred fewer major property damage losses globally over the past five years.
The refining, gas processing, and petrochemical sectors have incurred fewer major property damage losses globally over the past five years. Aside from mitigating worker safety and environmental risks, the trend may yield considerable insurance cost savings for facility owners.
"It is fair to say that the industry has increased its focus on Process Safety Management (PSM), especially since the Texas City incident as many companies and regulating agencies made a step change following this incident," said Robert Robinson, head of Risk Engineering in the Energy Practice of the insurance broker and risk advisor Marsh, referring to the fatal 2005 explosion at BP's Texas City Refinery. Marsh recently issued a report, The 100 Largest Losses, detailing the most significant property damage losses in the hydrocarbon industries since 1972. The company does not track business interruption losses.
'It is fair to say that the industry has increased its focus on Process Safety Management, especially since the Texas City incident.'
The table below ranks the top 10 largest downstream property damage losses, which together exceed $6.5 billion in 2009 values. It suggests that the industry has made marked progress in preventing and mitigating losses within the past decade. Indeed, only one such loss from the past five years – caused by Hurricane Ike in 2008 – made it onto the list.
The PSM Cornerstone
Robinson said that PSM is the foundation of improved risk management and covers numerous risk aspects, including: new construction design, predictive and preventive maintenance, and operator training and management of change. The refining, gas processing, and petrochemicals communities are employing a variety of PSM tools with greater frequency to achieve these improvements. These tools, contributing to what Marsh calls the "applied science" of energy sector risk management, include:
"Each of these components plays a critical role in loss prevention and loss mitigation," Robinson explained, acknowledging that numerous facilities have yet to implement PSM. "We believe significant opportunities remain for both the expansion and the implementation of PSM across industry globally recognizing that the measure of commitment to PSM varies, both in terms of geographic location and, in some cases, company size."More Systematic, More Sophisticated, More Widespread
Robinson observed that the global downstream industry's overall level of receptiveness to PSM is encouraging. He pointed out that that the sector is not only embracing PSM to a greater degree, but also taking the initiative to make it more robust. "Certainly, application of risk management processes in the refining industry has been taking place for many years -- for example, the use of HazOp (Hazard and Operability) studies goes back some 25 or 30 years," he said. "What we are seeing today is a more systematic uptake across the industry of some of these basics with more sophisticated reporting procedures/processes and analytics now being built into the system."
Although the trend worldwide appears to be increasingly in PSM's favor, Marsh cautions that it is too soon to conclude with certainty which regions are doing the best job of mitigating risk at refineries and gas processing and petrochemical plants. "The evolutionary changes we have been discussing have not, as yet, been in place long enough for us to reach any firm conclusions that could be statistically validated, although, certainly the absence of major losses over the past five-plus years in an area such as the Middle East is, hopefully, an indication of continued progress," explained Kevin Sparks, US Downstream Leader and Managing Director of Marsh's Energy Practice.
"What we can say with a fair degree of certainty is that some geographic regions are doing more than others to promote learning from losses -- the U.S., Australia and the U.K. certainly come to mind," Sparks continued. "Our view is that the entire industry, along with the various governmental regulatory agencies around the world, can and should continue to learn from the 'best practice' approach that developed in the aftermath of the Texas City loss."
U.S. Gulf Coast oil and gas facilities sustained widespread damage from hurricanes Katrina and Rita in 2005 and Gustave and Ike in 2008. Given the frequency and severity of these events, one might assume that hurricanes have become a more prominent cause of property loss. In Marsh's estimation, they have not. "We believe that they (hurricanes) still fit into established models for root-cause analysis," Robinson said, adding that a number of design factors on the facilities themselves – not the storms -- actually appear to have driven the extent of hurricane damage. "In terms of the magnitude of loss, although the overall loss from these natural peril events is high, the impact on any single energy asset -- which is how we generally rank the top 100 -- is relatively small," he said. "Consequently, we do not typically list them as part of the 100 largest individual losses."Looking Ahead
According to Robinson, the disparity in ages between facilities in Western countries and those in developing downstream hubs constitutes but one of the emerging challenges for risk management in refining, petrochemicals, and gas processing. "Cost pressures, managing process safety, aging assets in Europe and the USA competing with newer assets in the Middle and Far East are all challenges for the industry," he said. "Larger, consolidated, and more expensive assets mean that when losses occur they will be much larger." Additionally, he pointed out that increased complexity in supply chains and ongoing uncertainty in strategic risks will continue to pose significant challenges.
'Cost pressures, managing process safety, aging assets in Europe and the USA competing with newer assets in the Middle and Far East are all challenges for the industry.'
Sparks added that the challenges Robinson articulated likely will gradually influence how refining, petrochemical, and gas processing employees do their jobs. "Our view is that you probably won't see drastic changes, but rather an increased focus on doing things well and more consistently, possibly with fewer resources," he predicted. "Ongoing development and commitment to safety and process safety cultures throughout the global industry will be critical, so one would hope that to the extent that additional resources are available, a significant portion would be devoted to safety and process safety."
Marsh contends that implementing PSM on a wider basis throughout the oil and gas industry could lead to significant decreases in what a facility owner pays for insurance coverage – perhaps on the order of 20%. "Ultimately, the degree of reduction will be driven by a number of factors, including global insurance and reinsurance capacity, insurer investment results, industry loss results and the global economy, especially with regard to demand for energy products," said Sparks, adding that a buyer's market now exists in the insurance market. "As a result of reduced demand coupled with stable insurance capacity, insurers are actively competing for business," he said. "Additionally, buyers who can positively differentiate the quality of their risk from their competitors put themselves in a position to optimize available savings."
In the end, Marsh asserts that the dissemination of loss-related information among the refining, gas processing, petrochemical, insurance, and regulatory communities should determine to what extent PSM is put into practice. "We believe that a continued and heightened focus on lessons learned from major losses would be of great benefit," concluded Sparks. "Ideally, this focus would include companies in the energy industry along with increased support from government agencies engaged in the investigation of major losses. Ultimately, it is in everyone's interest to thoroughly investigate incidents and publish the findings."
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