What we can learn from the last two years

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The period 2020-21 will be long remembered for the significant impact of the COVID-19 pandemic, and the widespread disruption to almost every part of our daily lives. Fortunately, during this period there were a relatively small number of energy property damage losses that were large enough to qualify for this edition of the 100LL publication.

There are only two new additions to the largest 100 ranking since our last report in 2020, with property damage costs of US$200 million and US$300 million respectively. This equates to the lowest average amount for any two-year period in the 100LL ranking since 1995/96 (see Figure 1). This is also a remarkable change compared to the last few editions of the 100LL publication with 2018/19 contributing seven entries (totalling US$4.1 billion); 2016/17 contributing four entries (totalling over US$2.6 billion); and, 2014/15 contributing three entries (totalling US$1.4 billion).

Figure 1

The cost of the new additions to the 100LL shown on a two-year rolling basis.

The relatively low amount of US$250 million per year for 2020/21 is highlighted for ease of reference (orange line).

The COVID-19 pandemic had a seismic impact on both crude oil price and refinery utilisation. At approximately US$42 bbl^[1], the 2020 year average crude oil (Brent) price dropped to its lowest level since 2004, and at 79% the US refinery utilisation dropped to its lowest level since 1985 (see Figure 2). There was also significant disruption to the petrochemical industry, particularly with respect to supply chains. However, the impact on production throughputs varied widely, depending on the exact type of petrochemical product manufactured.

Figure 2

US refinery utilization from 1985 – 2021^[2]

The remarkably low utilization in 2020 has been highlighted for ease of reference (orange line).

The collapse in global oil demand in mid-2020 resulted in a low of US$9 bbl for Brent crude and an astonishing low of US$37 bbl for West Texas intermediate crude, as a result of critical storage issues.

After the immediate shock from COVID-19 in 2020, the energy industry largely recovered through the course of the following year, with the 2021 average crude oil (Brent) price standing at US$71 bbl, and US refinery utilisation at 86%.

COVID-19 had a huge impact – both direct and indirect – on the global energy industry. This invites the question of whether the sharp reduction in new large losses is a consequence of the pandemic. To help answer that, we have considered the possible short and longer term impacts separately.

Short-term reasons for a reduction in large loss events

The swift flurry of major losses that some feared at the start of the pandemic did not materialise. This is partly due to sites successfully managing the disruption to established work practices through well-executed business continuity plans. This included changes to staffing levels and management of associated fatigue risk for shift workers. There are also a number of factors that may have helped to mitigate potential process safety risks:

A “back to basics” approach by sites. New initiatives and changes were put on hold and steady operation was largely prioritised over optimisation initiatives.
Planned turnarounds and major project commissioning works were postponed as sites struggled to source key materials and contractors — or where complex operations could not be completed in a COVID-19 safe manner due to restrictions to physical site access or maintaining safe distancing measures. The associated reduction in both maintenance work and transient operations will have, in the short term at least, helped avoid a potential root cause for process safety incidents.
Many assets, particularly in upstream and refining, operated well below their maximum safe operating limits.

Medium to longer-term considerations and impacts

Moving forward, there are a number of potential risks that will need to be carefully managed in order to prevent potential “delayed losses”. Operators should consider the following:

Postponing turnarounds has meant that much planned inspection and maintenance work has been delayed. If the risks associated with deferring this critical work have not been properly managed, or if the backlog is not cleared in a timely fashion, then this could be a common cause of losses in the coming years.
Assets being operated at minimum safe throughputs can have a negative impact on asset reliability, if not properly managed. Equipment may foul more easily, furnace tubes may coke more quickly, and rotating equipment, such as compressors and pumps, may be more prone to breakdown after periods of operating at minimum throughputs.
Many sites suspended emergency response drills during the pandemic due to challenges of working to COVID-19 safety guidelines. This may mean that emergency response teams are not as familiar with site-specific response plans, which in turn could hamper any mitigation efforts, in the event of a fire or explosion.
A number of sites utilised remote work practices to complete scheduled hazard and operability studies (HAZOPs), project safety studies, or risk assessments as part of the management of change (MoC) process. If not properly managed, the quality of such safety analysis may be compromised.
Some organisations may have experienced a significant turnover of staff, including redundancies, since the start of the pandemic. The loss of experienced staff, particularly in any safety critical positions, will pose a clear risk if not adequately managed.
The financial impact of the pandemic on balance sheets may increase merger, acquisition, and divestment activity in the coming years. The disruption from a poorly managed ownership transition can precipitate process safety events in various ways.

From a process safety perspective, the pandemic may have indirectly helped in the short-term. However, the medium to long-term impact remains to be seen.

At the time of writing, the most recent upstream sector loss based on Marsh Specialty’s 100LL analysis occurred in February 2016 (Jubilee Field, Ghana). The five subsequent years now mark the longest period without an upstream addition to the 100LL ranking since the period of 1993 to 2001. This is particularly notable given the drop in crude oil price in 2020. The last two major drops in crude oil price, in late 2008 and 2014, were both swiftly followed by several large property damage losses in the upstream sector. This did not materialise in 2021 (see Figure 3) and credit must be given to operators globally for successfully managing this most challenging of periods so far.

Figure 3

Graph showing average crude oil price^[3] and upstream additions to the 100LL.

It is notable that the crude oil price drop in 2020 was not accompanied by any new upstream entries to the 100LL.

There have, of course, been some notable upstream losses and near misses over the last two years, notably in Malaysia, the North Sea, and the US. At the time of publication, none of those losses were valued at over the US$189 million property damage threshold to qualify for the 100LL. However, it should be noted that the eight-year absence of entries from 1993 to 2001, was followed by 14 entries into the 100LL over the subsequent 15-year period. This reinforces the importance of maintaining strong risk management protocols and effective mitigation of complacency creeping into the collective industry psyche. Similarly, the rate of tier one process safety events over the past decade has remained somewhat constant^[4]which underlines that there remains further room for improvement for safe working practices in the upstream sector.

A question of if, or when, cyberattacks will feature in the 100LL

Currently, none of the entries in the 100LL directly result from a cyberattack, and it will be interesting to see if this changes in the coming years. In May 2021, we saw the effect of the ransomware attack on the Colonial Pipeline, which was one of the largest publicly disclosed cyberattacks against critical infrastructure in US history. Although there was no direct property damage from this incident, it did impact the company’s operations, and sounded alarm bells for governments, regulators, and communities. For the time-being, it appears that the objective of cyber perpetrators is to cause disruption, rather than destruction. That said, the Triton malware, which specifically aims to breach safety control systems, and the Stuxnet malware, which targets supervisory control and data acquisition (SCADA) systems, both serve as reminders that cyberattacks do have the potential to result in large-scale property damage and loss of life.

Conclusion

There has been a significant reduction in new entries to the 100LL over the last two years, compared to recent history, and the energy industry should certainly be commended. However, it is perhaps premature to conclude that there has been a fundamental improvement in operational, inspection or maintenance practices, or overall risk management maturity, as this improved performance may be attributed, at least partly, to a decrease in site-based activity, or short-term operational measures in response to the COVID-19 pandemic. The longer-term risks associated with the pandemic remain to be seen, and cyber-related risks remain a growing area of concern.

^[1] Dollars per barrel

^[2] Refinery utilization and capacity, US Energy Information Administration

^[3] Macrotrends

^[4]IOGP Safety performance indicators, Process safety events, 2020 data

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What we can learn from the last two years

Figure 1

The cost of the new additions to the 100LL shown on a two-year rolling basis.

Figure 2

US refinery utilization from 1985 – 2021[2]

Short-term reasons for a reduction in large loss events

Medium to longer-term considerations and impacts

Figure 3

Graph showing average crude oil price[3] and upstream additions to the 100LL.

A question of if, or when, cyberattacks will feature in the 100LL

Conclusion

100 largest losses in the hydrocarbon industry

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US refinery utilization from 1985 – 2021^[2]

Graph showing average crude oil price^[3] and upstream additions to the 100LL.