Speaking at the recent World National Oil Companies Congress in London, Phillip Ellis, Chairman of Willis Energy, a division of Willis Group Holdings, presented hazard risk management as a guard against shocks that can destroy companies.
Ellis pointed to “war in the Middle East, storms in the Gulf of Mexico, oil refinery explosions, gunboat terrorism and kidnapping in Africa,” as examples of the types of risks energy companies face. How oil and gas companies should “plan for and mitigate against events that can threaten lives, ruin reputations and shake a company’s foundations,” formed the subject of his address.
“War, security concerns, storms and economic takeoff ushered in the last five years of unprecedented oil price behavior,” Ellis pointed out. “In this time, we have witnessed steady increases in prices in areas not seen before, and we have yet to see these prices slow the economy enough to reduce oil demand and drag prices back down again. No equilibrium has been reached, unlike the 1980s, 90s, or even the early part of this century.”
While war and natural catastrophes make the headlines, Ellis noted that the more “normal” hazards in the industry are caused by mechanical failures, corrosion and poor design and workmanship – which have become more prevalent in a booming industry that is already stretched to maximum capacity. “The business interruption caused by these losses is often more damaging than the physical loss of the plant,” he stated.
“Many national oil companies have plans to expand into new territories and to rapidly increase production. In order to do so will require a massive application of newer technologies. Coupled with the skilled labor shortage in the industry, this raises hazard risks dramatically,” Ellis continued.
He explained that there are three ways a company can manage hazard risk – mitigation through improving skills and processes; transferring risks using insurance and/or financial markets; and retaining risks via a captive or your own financial resources.
Ellis concluded: “Senior oil executives in national and investor-owned companies alike have put hazard risk assessment and management at the top of their agenda because they realize that unexpected events can ruin their companies. They realize that they cannot leave hazard risk management to middle management; and they no longer think of insurance, or business diversification or public relations as sufficient in themselves to yield the best outcome for their companies.”
Source: Willis Group Holdings – www.willis.com
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