Energy sector loss severity is growing

Eight of the largest-ever property damage losses experienced by the global hydrocarbon extraction, transport, and processing industry occurred during 2018-2019, according to a new report from Marsh JLT Specialty.

It estimates that property damage losses incurred in 2018-2019 totalled $4.5 billion, one-tenth of the overall total of $43.2 billion for the one hundred largest losses incurred in the last five decades (based on property values at 31 December 2019).

The report only covers property damage and does not include the additional costs of well control or third-party liability. But it does note that total third-party liability claims for the Macondo loss in the Gulf of Mexico, in 2010, were more than 20 times the value of the associated property damage loss. 

Several of the largest losses in last two years stem from refineries and petrochemical assets, particularly those built in the 1960s or earlier: refineries account for 50%, while petrochemicals account for 25% of the new losses.

The past two years have contributed more incidents (four) to the top-20 largest losses than any other two-year window for 30 years, since 1988-89.

According to the report, contributing factors to this spike include a reduction in global engineering standards, less stringent regulation, the higher utilisation of certain facilities such as refineries, and ageing infrastructure.

Andrew George, Global Head, Energy & Power Practice, Marsh JLT Specialty, commented: “The past two years have seen a high number of large property damage losses across the energy sector. These losses can take a long time to recover from, especially with additional delays likely to result from the global coronavirus pandemic, and could even mark the end for a site.

“Despite the lessons that can be learned from these events, many energy companies’ business resilience strategies continue to lag. With plants older than 30 years more likely to experience losses, the global energy industry needs to address the changing risks of older refineries and petrochemical plants.

”Regardless of age, paying attention to areas such as systems of work, inspections, and fireproofing can have a significant impact on mitigating the risks, reducing the costs and, ultimately, the financial and operational impact of any incident.”