Study links oil price falls to increased major incident risk

Oil Refinery

Cheaper oil has eroded their revenues, but energy firms should maintain their investment in risk management to reduce the potential for future major incidents and insurance claims, says global insurance broker and risk adviser Marsh.

The firm, a subsidiary of Marsh & McLennan, launched its research report entitled ‘Can Energy Firms Break the Historical Nexus Between Oil Price Falls and Large Losses?’ at its bi-annual National Oil Companies (NOC) conference in Dubai.

The report analyses the historical sequential correlation between oil price falls, which led to energy firms cutting costs, including safety training and education, which in turn, led to an occurrence of significantly larger insured losses in the following period.

According to Marsh’s report, insured losses in the global upstream energy sector reached a peak in the 1980s shortly after the price of Brent crude oil fell from US$35 to US$15 per barrel. In the late 1990s, this cycle reoccurred when the price went below US$10 per barrel and again in the years following the 2008 financial crisis, when it slumped from more than US$100 to US$32 per barrel.

“Historically, falling oil prices have prompted cuts in infrastructure and maintenance spending, and less investment in health and safety measures and employee training,” said Andrew George, chairman of Marsh’s global energy practice. “Analysis of past cycles indicates that cost-cutting decisions were followed by an increased frequency of major incidents or large losses.”

The cutbacks contrast a period of significant investment in risk engineering by energy firms in the Middle East, which saw a marked increase in the adoption rate and quality of risk management methodologies at between 2013 and 2015, compared to their global peers.

“Thanks to continued investment and boardroom support, energy firms in the Middle East have made major improvements in their risk management protocols over the past two years and many are now ranked among the world’s elite in their approach to risk and emergency response,” said George.

“Firms that have invested in risk management have seen real benefits. Energy companies should exercise caution when implementing cost-cutting measures in response to this latest downturn to avoid a repetition of the major losses that occurred in the past.”

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