Commitment to Risk Management - Especially During Lean Times

AN ONGOING COMMITMENT TO RISK MANAGEMENT CAN REAP BENEFITS – ESPECIALLY DURING LEAN TIMES

ENERGY PRICES

Similarly, decline in oil prices during 2008 – 09, led to increase in LTIF numbers by 14% during 2012 over 2010.

However, when oil prices declined during 2000-02 period the improvement in safety performance was arrested. Additionally, the change in trend of safety performance resulted in rise in injury rate by 6% between 2003 and 2002.

As a result of rise in oil prices during 1998 – 2000 period, there was a steep improvement in safety performance of 8% CAGR, during the same time.

1998

120

Lost Time Injury Frequency ContractorSource: BMI database and OGP Data series Safety Performance Indicators - 2013 data: Refer Links

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2.5

2.0

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1.0

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2008 2009 2010 2011 2012 2013 2014 2015 2016

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Companies in the oil and natural gas sector have recently had to adapt to rapid change in their industry in ways that few other companies have. New technologies in unconventional development have spurred signifi cant growth in the industry, particularly in the United States. Oil production has risen 80 percent in the U.S. since 2008, from an average of 5 million barrels per day to 9.2 million barrels per day as of December 20141. Th e global oil sector is now struggling with a marked decline in oil prices that is reverberating throughout the industry. In the past year, prices have fallen from a high of $114 per barrel to a low of $46 per barrel since April 20142 as a result of surging U.S. production, declining world economic growth, higher energy effi ciency, increased use of renewable energy and industry consolidation.

During this period of declining oil prices there is potential for important risk management eff orts to be neglected. As companies seek to monetize every drop of oil taken out of the ground in response to falling prices, it is inevitable that certain initiatives will be re-prioritized as capital is transferred from one part of the business to another.

Looking back to 1998, DuPont Sustainable Solutions conducted a study that revealed an alarming correlation between declining crude oil prices and rising safety violations and injury rates in the oil industry. As a result of rising oil prices between 1998 and 2000, there was an 8 percent annual improvement in the industry’s Lost Time Injury Frequency (LTIF) rate3. However, there is an expected time lag between the point at which oil prices begin to fall and when those price declines are refl ected in safety performance indicators. When oil prices dropped between 2000 and 2002, there was a 6 percent rise in LTIF rates from 2002 to 2003. Aft er crude oil prices rebounded but fell sharply during 2008-2009, the industry experienced a 14 percent increase in LTIF rates in 2012, as compared to 2010.

By Davide Vassallo Global Managing Director, Consulting, DuPont Sustainable Solutions & Mieke Jacobs Global Practice Leader, Operational Risk Management, DuPont Sustainable Solutions

1 U.S. Energy Information Administration Monthly Energy Review, March 20152 Investment Mine, www.infomine.com, April 20153 BMI database and OGP Data series Safety Performance Indicators based on 2013 data

It is during these times of price instability that operational risk management – the identification, evaluation and control of hazards based on potential levels of severity and likelihood of occurrence – should remain a top priority for companies in the oil and natural gas industry. Taking such steps will enable companies to avoid costly incidents and high insurance premiums, and thus continue to drive profitability, ensure the safety of their workers, and maintain their future right to operate. This in turn will put them in a position to capitalize on inevitable rebounds in energy prices. It is estimated that companies spend $170 billion each year on costs associated with occupational injuries, which come right out of company profits. But companies that put safety and health management systems in place can reduce injury and illness costs between 20 and 40 percent4. Also, a European Union report found that for every euro invested in safety and incident prevention, companies saw a return of up to 2.89 euros5.

NOT ALL RISKS ARE CREATED EQUAL

But how can oil and gas companies best manage and mitigate their operational risk even during the current low oil price cycle? What risk mitigation model is most ideal to help companies strengthen the capabilities of their workers and increase the efficiency and productivity of operations in these challenging times?

Organizations face a wide spectrum of risks they have to deal with, ranging from high-frequency/low-severity risks to low-frequency/high-severity risks, and everything in between. There is no one-size-fits-all approach to dealing with risks, and it is simply not practical to address all risks with the same level of intensity considering an organization’s limited resources. It is more important that companies recognize risk and the conditions in which they could occur. DuPont Sustainable Solutions (DSS) advocates a differentiated risk approach that identifies potential risks by level of severity and likelihood of occurrence. If the risk is higher, then there is an obvious need to have more layers of protection and detailed plans in place. This ensures the appropriate effort and resources are expended based on the specific risk profile of the industry and business a company is in, resulting not just in the desired end state, but ensuring value for investment.

Companies must define their individual risk threshold, which can and should vary for each company and facility based on factors including regulatory requirements and insurance and stakeholder considerations. Once this risk threshold is defined, a framework for managing risks needs to be developed that clearly identifies proportionate control mechanisms (both engineered and administrative), organizational structure, corporate standards and a monitoring system that can measure both leading and lagging metrics. Also important is the integration of people and process requirements into operations risk management.

IMPORTANCE OF A SYSTEMIC APPROACH

But there is more to effectively managing operational risk. Neither behavioral solutions nor technical, process-driven solutions alone are enough. DuPont’s experience is that focusing on managing and reducing risk is more effective than simply driving compliance to systems or procedures. To achieve this, companies should adopt a truly systemic approach to risk management that is reinforced by workplace culture, leadership, technical improvements and standards, capability development and strong, measurable management processes.

... companies should adopt a truly systemic approach to risk management that is reinforced by workplace culture, leadership, technical improvements and standards, capability development and strong, measurable management processes.

4 U.S. Occupational Safety and Health Administration, 20155 “Creating Safe and Healthy Workplaces for All,” International Labor Organization, 2014

In this systemic approach, four key elements work in tandem to achieve sustainable improvement in risk management:

ACHIEVING IMPROVEMENTS IN SAFETY AND PRODUCTIVITY

DSS has put this unique and proven model to work in helping companies operating some of the world’s most hazardous facilities manage their operational risk. For example, Saudi Aramco Base Oil Company-Luberef is one company that has benefi tted from this systemic approach to risk mitigation. Luberef is the only base oil producer in Saudi Arabia. Its two refi neries at Jeddah and Yanbu supply base oil to more than 15 nations and companies such as Shell, Mobil, Caltex, Fuchs and Petromin Corporation. Anticipating a signifi cant expansion in production capacity to come online at its Yanbu site in 2016, Luberef sought to dramatically improve its safety performance and develop a systemic approach to safety management throughout the company.

Aft er conducting a thorough assessment of the Luberef sites, DuPont concluded that the organization needed to change its focus from reactive indicators to being more concerned with predictive indicators of risk. At the time, Luberef had a high incident potential that could not be reduced if the company only addressed the effi ciency of its safety management system. Also, Luberef had to act on identifi ed risks by improving incident reporting, carrying out system audits and establishing a strong behavioral observation program.

To accomplish this, DuPont supported Luberef in implementing 22 elements fundamental to successful operational risk management. Each element was assigned to a task team within

• Mindsets & Behaviors ensures a company’s commitment to safety is driven and reinforced by active participation of corporate leadership through coaching, motivation and ownership of results to build a company-wide culture of safety and performance. One must also fully understand how individual employees behave, think, and feel, and as a result, how they are making decisions.

• Capability Building seeks to educate and provide employees the ideal values, attitudes and beliefs that will engage and motivate employees, clearly communicate expectations and accountability, and encourage teamwork and collaboration.

• A sound Technical Model defi nes hazards, assesses the associated risks and provides standards and procedures for managing risk.

• Management Processes defi ne the vision, set the strategy and tactics, monitor performance and set up the organizational structure to support the processes.

Integrated Approach to Managing Operational Risks

When pursued in concert, these elements will result in a self-reinforcing, metric-driven system that positively infl uences individual behavior, enabling companies to best protect their employees, assets and ultimately, their earnings.

Luberef, and DSS trained them in best practices so they could in turn pass what they learned onto the wider Luberef workforce. All process safety elements were introduced during the design and construction phases of new projects. Senior leadership at Luberef championed all safety programs, participating in regular safety observation visits and audits. To help change the culture at Luberef, safety became part of employee KPIs, formal appraisals and job plans. Even bonuses were linked to safety targets.

As a result, safety and productivity improvements at Luberef have been remarkable. By November 2014, both the Jeddah and Yanbu facilities operated more than seven million man-hours without incident. By December 2014, the total process safety incident rate (CAT C) had dropped by 75% and the total recordable injury rate, for both employees and contractors, was reduced by 100%. In addition, the environmental incident rate and the total occupational health incident rate both stood at zero while the mechanical availability of Luberef ’s sites were operating at 98 percent.

Companies in the oil and gas sector that want to successfully manage their operational risk can realize improvements in safety and performance that translate to increased profitability and growth. But investing in risk management should not be considered a luxury that is best suited for periods when the industry is flourishing. Those companies with the foresight to make such investments when crude oil prices are on the decline will be particularly well-positioned when the industry rebounds.

To discuss how DuPont can assist you with operational risk management, please contact us today at 1-800-532-SAFE (7233).

For more information visit us at: www.sustainablesolutions.dupont.com

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Operational Risk Management Framework

Risk Governance

Risk Recognition

Risk Governance• The Corporate Risk Management Framework• The Corporate Visibility (Dashboard)

Risk Recognition• Process Safety Information (PSI)• Process Hazard Analysis (PHA)• Differentiated, needs-based risk identification

Managing Risk• Focused on treating needs-based, major risks• Integrated with governance & business goals “SOP/SWP, MIQA, CSM, MOC/PSSR, II, ERP”

Continuous Improvement• Compliance monitoring & feedback• PSM auditing• Manage Operating Discipline (OD) & CI focux

ManageOperations

ManageMaintenance

ManagePeople

ManageCompliance

ManageImprovement

ManageEmergencies

ManageChange

ManageIncidents