Historical loss trends reveal a potential correlation between significant falloffs in oil prices and increased energy losses. Energy companies in the Middle East and North Africa (MENA) region must exercise caution when implementing cost-cutting measures, designed to counteract or offset the effects of low oil prices, to ensure history doesn’t repeat itself.
Fortunately for the Middle East, the region can produce oil and gas at a significantly lower cost than can be done in other parts of the world; however, there is a concern, from a process safety and loss control point of view, that lower revenues from oil and gas production and falling demand could potentially result in reductions in investment in risk-control measures.
The reduction in maintenance and inspection activity could result in a higher rate of accidents.
Historically, in the upstream market, periods of significant pricing falls have been met by new projects being shelved or cancelled, increase in redundancies and hiring freezes, cuts in infrastructure and maintenance spending and lower investment in health and safety measures and employee training.
Similar reductions occurred between 1980 and 1986 when Brent crude oil price fell from $35 to $15 per barrel, in the late 1990s when the price fell below $10 per barrel, and in 2008 when the price fell from over $100 to $32 per barrel. A period of increased frequency or larger losses has typically followed soon after.
However, further Marsh research reveals that Middle Eastern energy facilities have strengthened their risk-quality position since 2013 thanks to significant investment made on the back of increased revenues from the high oil price in the preceding years.
The paper highlighted a significant increase in the risk quality of Middle Eastern facilities compared to the global population, and demonstrated that in many areas the rate of change for the Middle East region is more than three times faster than for the global population.
All of this, of course, is to be welcomed; however, over the past 20 months, oil prices have fallen by around 70%.
Already, companies in the MENA region have been cancelling projects and making staffing reductions. It is estimated that projects worth up to $380bn have been shelved globally, according to consultancy group Wood Mackenzie.
Meanwhile, a recent survey in the Chemical Engineer revealed that the majority of respondents had seen redundancies within their companies.
Additionally, 36% had seen training budgets cut and 45% reported hiring freezes.
While project cancellations and redundancies are easy to quantify due to publicly available information, cuts in maintenance, health and safety measures, and employee training are far more difficult to assess.
With a prolonged period of low oil prices expected, the question now is when oil and gas companies in the MENA region begin spending less on maintenance and health and safety.
With today’s new oil price paradigm, it is important to look to the past for lessons on how best to manage cost savings in a measured manner that limits any potential downside. This includes taking decisions based on the conclusions of assessments to ensure that any risks of major losses introduced by changes to safety expenditure are reduced and mitigated effectively. For example, any significant organisational changes as a result of staffing reductions should be subject to an organisational management of change assessment —including a risk assessment — to ensure that any risk introduced as a result of loss of knowledge or expertise due to staffing changes is mitigated.
In such instances, it is also important to ensure that critical inspection and maintenance tasks continue to be delivered on schedule.
Senior managers should receive regular reports of key performance indicators (KPI) regarding maintenance and inspection performance. These should be selected and tracked so that they are indicative of the key tasks required to maintain process safety performance.
Every business decision, especially those involving cutting costs, should be made taking into account the potential risks involved.
This way, cost-saving initiatives will have long-term value and impact, rather than simply transferring today’s savings into tomorrow’s major costs.
Many forecasters are predicting that oil prices will remain low for some time to come. It is vital that cost-saving measures implemented by oil companies are considered and measured.
Cuts that extend too deeply into an organisation could have a significant impact on loss records and, ultimately, cost more to rectify than they initially saved. Companies should also be looking to take additional risk off their balance sheets at a time when the cost of insurance capital at historic lows. Clearly, opportunities exist to reduce overall insurance premium costs, purchase insurance in areas that were previously omitted due to cost, and renegotiate coverage terms.
