BUILDING RESILIENCE: WHY NOW IS THE TIME TO INVEST IN NATURAL HAZARD RISK MANAGEMENT

From raging wildfires in Australia at the start of 2020 to the devastating flash flooding across much of Europe in July 2021, recent years have been scattered with natural hazard events. They have destroyed property and infrastructure, devastated businesses and taken lives. 

In the U.S., Hurricane Ida brought back painful memories to the people of New Orleans, a city that is still rebuilding after Hurricane Katrina caused 1,800 deaths and $125 billion of damage back in 2005. Unfortunately, natural disaster events, such as hurricanes, cyclones, storms, floods and wildfires, are occurring more often and with greater severity. This can be viewed in terms of economic cost increasing over time. 

Fig. 00. Oil and gas assets located on or near the U.S. Gulf Coast, Atlantic Coast and Mississippi River are especially susceptible to hurricane and flood risks.

The Asia Pacific region tells a similar story. Here, average annual disaster event-induced economic losses between 2000 and 2009 stood at $56.7 billion. And, for 2010-2019, that figure more than doubled to $117.9 billion. The Tohoku Earthquake, which struck Japan in 2011, is largely responsible for this. However, even when removing 2011 from the period, the nine remaining years average out at $89.1 billion in annual natural disaster damage. 

In the U.S., meanwhile, the ten-year average annual cost of natural disaster events exceeding $1 billion increased more than four-fold between the 1980s ($18.4 billion) and the 2010s ($84.5 billion).1 

Such has been the impact of growing and more severe weather events, that the magnitude of the 100-year and 500-year flood has undergone revision in Houston—a significant development that experts are keeping a close eye on. 

COUNTING THE COST 

These concerning figures translate into a multitude of damages encountered by organizations that operate across a variety of industries, including oil and gas and the energy industrial sectors with large and highly valuable energy infrastructure bases. 

Unplanned outages and economic losses from production downtime are major consequences of the disruption caused by extreme weather events. Beyond this, there are many secondary and tertiary social and environmental impacts that stem from the primary damage done to these businesses. But why are oil and gas companies prone to natural disaster events? 

Geography plays a critical role here. For instance, onshore operations that are strategically located close to coastal and inland waterways, to enable easy transportation of goods in and out of their sites, can make them especially susceptible to hurricane and flood risks. In the U.S., there are oil and gas fields, refineries and chemical, along with related industrial sites, that are located near the Gulf Coast, Atlantic Coast and Mississippi River. Earthquakes are another risk factor, primarily in the Western states and other regions near fault lines. Key risk areas in Europe include sites along rivers and coasts, including those in regions that are at or only slightly above sea level. 

Following the declaration of “Code Red” for humanity by the UN Intergovernmental Panel on Climate Change, there is a greater sense of urgency among key political decision-makers, enterprises and wider society. Hosted in Glasgow, UK, the COP26 summit represented a defining moment. But oil and gas operators should not wait for more comprehensive legislation and regulation to prompt them into action. 

In many regions globally, there are little or no regulatory drivers aimed at industrial facilities that require them to withstand extreme weather. The onus is on organizations to determine any natural hazard risk management strategy. Given the growing frequency of these incidents, the time to act is now. 

HOW TO APPROACH NATURAL HAZARD RISK MANAGEMENT 

The extent and nature of such action is largely dependent on each individual business’s appetite for risk—in other words, the extent to which your business is prepared to deal with disruptions caused by storms, hurricanes, wildfires, floods and other extreme events. Direct concerns may include the reliability and resilience of your organization’s equipment and facilities to provide worker safety, as well as reduce unplanned outages across its oil and gas and/or pipeline networks. 

However, it is also important to bear in mind that physical damage to buildings and infrastructure represents only the initial source of financial loss. Resulting business disruption and market displacement also can hit revenue figures hard, depending on the severity of the natural hazard in question. Concerns here can center around storing materials and disruption to supply, transportation availability and access, and cost and availability of energy. 

To help quantify some of these risks, organizations should consider a range of factors. What amount of revenue will be lost if I have to shut down my facility for an extended period of time? Can additional understanding of the risks help my company to manage our operations? Will improvements to preparedness and response reduce direct damage and limit revenue loss following an extreme weather event? 

Getting to grips with these questions is a good place to start, the answers to which may prompt a series of mitigation measures. Facility hardening, enhanced preparedness and response planning, and organizational measures, to limit the impact of any single event, are among the risk-mitigating steps companies can take, along with acquiring insurance policies. 

Another option is to leverage the engineering and risk management expertise of third parties. Independent risk assessments and audits can serve as vital tools in quantifying actual risks, with engineering-based studies revolved around rigorous site-specific technical assessments, enabling facilities to measure their exposure to numerous natural hazards. This can carry advantages over advice and subsequent cover offered by insurance firms, which may not offer this level of rigorous evaluation and technical understanding. 

Regardless of which approach is taken, companies must build risk into their cost of business and plan for a certain degree of extreme weather disruption every year. 

DON’T LET INERTIA COST YOU YOUR REPUTATION 

While damage from natural hazard events is increasing year-on-year, and there are clear trends in the loss data to support this, organizations that do not adapt, to better manage their exposure and risks to these extreme environments, will experience greater levels of damage that will impact their supply chain. An organization’s assets, such as its people, systems and its market reputation, will be impacted significantly while dealing with the aftermath of an event. 

Insurance, alone, is not the answer, as this only covers the physical loss. There is the insurance claim, itself, which will increase the knock-on effect of increased premiums and also additional criteria for being deemed to be “insurable.” Experience proves time and time again that to remain insurable, companies must demonstrate that they are pro-actively addressing their exposures. But there are opportunities to protect your business by avoiding some of these common mistakes: 

1. Not focusing on the projections of climate change (e.g. UKCP18 projections)

 ● Choosing to ignore changes in returning weather patterns will become more costly over time, as extreme weather cycles begin to shorten. What was a 100-year event yesterday, becomes a 50-year event today, and so on. 

● Delaying decisions today for tomorrow’s board room agenda. Delaying action to protect your business increases the risks to you, your business, its people and your community in which you operate, particularly as the effects of climate change kick-in. 

2. Designing facilities and their systems for today’s weather and environment 

● Designing for “today” may suffice for near-term weather patterns, but the levels and severity of extreme environments will change with climate change. ● Infrastructure, transport, systems and property need to be designed with a “horizon view” and the likelihood of events happening not just for tomorrow, but to 2030 and beyond. 

● Roof and below-grade drainage systems may be acceptable for the “here and now” rainfall patterns, but will its design cope with mass water flows to reduce flooding risks? 

● Temperature changes can mean that in hotter climates, AC systems are unable to work effectively, and critical products can then spoil. 

A STEP-BY-STEP APPROACH 

Fig. 1. A risk reduction program begins with a review of hazard exposures that drive these programs from critical vulnerability identification and assessment, to targeted risk treatment strategies—all devised to enhance operational resilience.

Risk reduction programs support and guide how to manage natural hazard risks. As Fig. 1 shows, the approach begins with a review of hazard exposures that drive risk reduction programs from critical vulnerability identification and assessment, to targeted risk treatment strategies—all devised to enhance operational resilience. 

Step 1: Hazard exposure 

●  Do you know if your facilities are exposed to natural hazards? 

●  Do you know the financial exposure of your portfolio? 

● Step 2: Facility vulnerability 

● Do you know the critical vulnerabilities at your high-risk operations and locations? 

● Do you know how to address the identified critical vulnerabilities? 

● Step 3: Risk mitigation 

● From detailed engineering design through to independent reviews of third-party designs, the training of personnel, emergency response planning and business continuity plans, there are various approaches to treat, tolerate and transfer risk. 

● Terminating and removing the risk needs hazard mapping and CAPEX reviews for facility relocations, for example. 

FUTURE PROOFING THROUGH KNOWLEDGE SHARING 

The recent COP26 conference in Glasgow, Scotland, UK, had four priority goals; these were the securing of net-zero by 2050; to keep 1.5°C within reach; adapt and protect communities and natural habitats; and mobilize finance and work together to deliver. The need to accept that the climate has, and will, continue to change, due to our global inertia means we have to now deal with the effects, as lowering emissions alone will not solve the challenges. Never has such a challenge been so prevalent for organizations and governments to collectively work together, to address and meet these challenges. 

Some organizations and authorities may lack the in-house technical and engineering expertise to properly plan and execute an entire natural hazard risk management strategy, Fig. 2. Expertise in the field of process safety (including accidental hazards, such as fires, explosions and toxic spillages) and structural rig and plant engineering is critical for companies to get support from the cradle-to-grave process. 

Fig. 2. Some organizations and authorities may not possess the in-house technical and engineering expertise required for the entirety of a natural hazard risk management strategy.

Services, such as risk assessments and independent audits; equipment elevation audits (flood risk); natural hazard audits (from backup power systems to data protection); flood and storm surge risk analyses; reviews of emergency response plans; and more—such as Natural Hazards Risk Management Toolkits—offer insights and resources to assist industrial facilities in reducing exposure to natural and man-made hazards. 

Knowledge sharing is crucial, if organizations with assets prone to natural hazard risk are to future-proof themselves effectively. With more industrial businesses around the world being impacted by natural hazards, there is a clear message; risk from natural hazards is growing. As climate change continues to produce extreme weather events that may become more frequent and severe, the time to act is now.