Burning issues for the energy sector

• New business interruption challenges could arise from an increasingly competitive environment for producers
• Small fires, machinery breakdown and unit shutdown/start-up incidents are contributing to larger losses than previously, due to increasing complexity and rising values
• Concerns have been raised that budget pressures may lead to reduced expenditures on maintenance and mechanical-integrity inspection programs, at the same time as a degradation of some protection features
• For companies to truly mitigate increasing business interruption risks, onsite surveys by risk engineers are essential

BI, including supply chain disruption, was again voted the most important risk for companies in the Allianz Risk Barometer 2021 annual survey, which surveyed a record 2,769 respondents from 92 countries and territories in order to identify the most important corporate risks they faced. It was also ranked, by some distance, as the top risk by those who worked in the oil and gas sector, where it accounted for more than half of all responses (see graphic below). The trend for larger, more complex, BI losses – from major fires and natural catastrophes – continues unabated, with the cost of these claims rising, driven by the trend towards higher values and more concentrated supply chains. Exposures are growing in tandem as more volatile and severe weather brings the increased risk of damage and disruptions from storms, floods and wildfires.

In addition, smaller fires, machinery breakdown and unit shutdown/start-up incidents, and longer lead times for critical parts are also contributing to larger losses than seen in the past due to increasing complexity and rising BI values. Indeed, partial shutdowns of plants/units for relatively short periods of time now have the potential to cause the kind of financial losses previously expected from larger events/longer shut-downs. 

Increased volatility is coming from a range of issues facing the industry. Certainly larger plants are introducing more technology and more complexity, so recovery after a loss can take more time. More integration of world-scale refineries with petrochemical operations creates greater interdependencies. Another problem area is increased incidences of starting, stopping and slowing down production operations due to fluctuations in demand. Simultaneous operations (SIMOPS), such as doing construction work at a plant that is running at full speed, introduces additional complexity – and risks. Although difficult to clearly quantify, budget pressures are leading to reduced expenditures on maintenance and mechanical integrity inspection programs, as well.

“One might also argue that small incidents can more easily morph into large incidents because there has been some degradation of protection features over the years as companies squeeze on design and insurers have less say about how plants are constructed,” says David Robertson, Global Expert Group Leader Oil & Gas at AGCS. For example, equipment spacing has been reduced in new plant designs, meaning a pump or tank fire could more easily spread to adjacent equipment because of reduced footprints.

“We have seen that new, more risk-based, mechanical integrity inspection programs tend to be less comprehensive,” says Robertson. “Process control technology has increased in complexity and is being used more often than more ‘tried and true’, inherently safer designs or safeguards, due to the drive for cost savings and operational efficiency.

“Fixed fire protection has decreased, in part from greater reliance on technology and partly because of budget pressures. Fire brigade/first responder expectations and funding have also gone down. All of these factors can potentially enable small losses to become large claims, especially with the high BI vertical exposure and limited opportunities to mitigate production losses.”

Another area of concern is the consolidation and retrenchment of refinery operations. For example, in Asia-Pacific, reduced operations or shutdowns from reductions in demand and competition from more modern, lower cost and more efficient refineries in India, China and South Korea are driving increased concentrations of exposure. And expansion projects not only increase scale and complexity, but SIMOPS have been identified as contributing factors in a number of large energy losses. While this is going on, plants and equipment are getting older every day.

“How companies manage the aging process of both equipment and workforce is what counts. It is very dependent upon ownership, culture, management and, ultimately, budgets,” says Robertson. “Does management have the right people and processes in place, and are they allocating sufficient money for inspection, testing, maintenance, and equipment replacement? Are retiring employees being replaced by younger, less experienced people or even by machines?”

For companies to truly mitigate increasing BI risks, onsite surveys by qualified risk engineers remain essential. Insurers need to understand both the physical and BI exposures throughout the plant’s value chain in order to support risk management processes and mitigation.

“We are starting to see specialist BI pre-risk reports generated for the market,” says Tom Taberner, Global Product Leader for Energy at AGCS. “Also, we will continue to witness the delicate balance between capacity and volatility. Insurers are increasingly managing capacity deployment against volatility. BI waiting periods, volatility caps, and premium allocations are all in focus.”