Insurance coverage price tag squeezes energy industry purchases

Oil and gas refineries and petrochemical plants in the USA are considering a dial back on their insurance purchases, following years of severe accidents that have driven up the price tag of coverage. Some of the high-profile accidents have included a handful of explosions at petrochemical plants in Texas, as well as a fire that closed the Philadelphia Energy Solutions refinery in 2019.

In fact, energy companies – once the buyers of billions of dollars of insurance – are more broadly buying less coverage than in the past. As a result, energy firms stand to be liable for millions of dollars for repairs and lost business if an explosion or fire were to occur, according to Reuters. In one scenario, refineries could close down completely after a large incident if their coverage is not adequate.

Insurance rates for property and business interruption coverage have risen by 25% to as high as 100% for some refiners, especially if they have had explosions or fires before. Previous articles in this column have highlighted the recent large explosions and fires in refineries and chemical plants. A senior refining executive reportedly told Reuters that refiners are choosing to buy coverage for only 90%, 80% or 70% of their total asset value in response to insurance rate hikes, a significant reduction in coverage. Does that mean that there will be an increase in the amount and intensity of preventative maintenance and NDT for equipment life analysis? The answer may be that there is no evidence of action in that direction.

Industry sources indicate that, in the case of the blaze at the Philadelphia Energy Solutions refinery, insured losses alone could cost US$1.25 billion! The company will probably receive less from its insurers.

The liability to insurers for incidents in the global refining and petrochemical sector over the past three years reportedly totals more than US$12.5 billion, which is more than twice the gross premiums paid to insurance companies, according to a global broker in a recent report. For insured clients in the sector, yearly premiums are costly, with a refiner worth US$1 billion likely to get a bill for US$2.5 million or more.

There is a reduction in the capacity of insurance provided by major insurers as well as a reduction of their exposure. At the same time, risks for refineries are increasing. The number of unexpected outages has shot up recently, with more than 2000 incidents reported in 2019, which is four times the number of outages in 2015, according to Industrial Info Resources.

With energy and chemical production in the USA booming, complex refineries – where an interruption in one unit can impact production across other units – are running at full speed and taking no downtime to boost profits. Reuters noted that refining margins have been strong over the past two years, which is why refiners have been discouraged from shutting down for maintenance.

Maintenance and the opportunity for intensified inspection and NDT occurs during shutdown periods. When refinery margins are high, there can be a tendency for refineries to extend turnarounds in order to take advantage of the more profitable environment. Thus, the potential for equipment failure and the lack of opportunity for detection combine to raise the probability of failure and subsequent accidents and explosions.

These cause and effect equations result in reductions of failure prediction exploration, lack of inspection and the increased potential for failure. Higher costs of insurance may result in lower amounts budgeted for inspection, with a higher cost in the resultant plant failures.

The author believes that intensified inspection coverage of high-risk, high-temperature and high-pressure units and components can predict potential damage and risk of failure. This means increased NDT and collection of failure prediction data.

Some information was obtained from an article by Alicja Grzadkowska 30 January 2020 in SHARE.

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