Energy firms must not cut investment in risk management
Despite falling revenues, energy firms must maintain their investment in risk management to reduce the potential for future major incidents and insurance claims, according to broker Marsh.
Marsh analysed the historical sequential correlation between oil price falls leading to energy firms cutting costs, in its new research report, Can Energy Firms Break the Historical Nexus Between Oil Price Falls and Large Losses?.
The firm said that this cost-cutting from energy firm include cuts to safety training and education, which in turn, led to an occurrence of significantly larger insured losses in the following period.
According to the 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 $35 to $15 per barrel. In the late 1990s, this cycle occurred again when the price fell below $10 per barrel and again in the years following the 2008 slump, when the price fell from more than $100 to $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.
He added: “Analysis of past cycles indicates that cost-cutting decisions were followed by an increased frequency of major incidents or large losses.”
Marsh’s analysis follows a period of significant investment in risk engineering by energy firms in the Middle East.
George added: “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.
“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.”
The new report was launched at the firm’s bi-annual National Oil Companies (NOC) conference in Dubai.
