Energy is universally defined as the ability to do work. Today’s world is made possible because humans have learned how to change energy from one form to another. The four types of energy are heat, electrical, chemical, and gravitational.
The primary energy uses – residential, transportation, electric power, commercial, and industrial – are often related or intertwined. For example, electrical power is essential to residential, transportation, commercial, and industrial needs.
Primary energy sources in the United States of America (U.S.)
- Petroleum – The global exploration, extraction, refining, transporting, and marketing of petroleum products.
- Natural gas– Uses similar extraction methods to petroleum, but the product is natural gas.
- Renewable energy – Useful energy collected from renewable resources that are naturally replenished.
- Coal – A combustible black sedimentary rock used to power a large percentage of the world’s infrastructure. Coal is widely used but very carbon-intensive.
- Nuclear power – Uses nuclear reactions to produce electricity. The energy is obtained from nuclear fission and nuclear decay. It has zero carbon emissions.
U.S. petroleum products consumed in 2020
Figure 1: An overview of the consumption of crude products in the U.S.
As shown in figure 1, 60% of all refined petroleum in the U.S. is used for road transportation. Using more renewable energy sources could significantly lower the country’s petroleum consumption and, subsequently, carbon emissions.
The cracked spread is the overall pricing difference between a barrel of crude oil and refined petroleum products. The constituent components of crude oil differ according to their source. Therefore, the source of crude oil will affect its crack spread.
The U.S. total energy consumption timeline (1950-2020)
Figure 2: A 70-year timeline of U.S. energy consumption.
As a society, we have become more efficient over the decades. We’re using our resources more knowledgeably and developing more renewable resources. Unfortunately, this shift means reducing older, less efficient energy assets. This peak energy curve shows the visible impacts as we get better at consumption and more efficient in our energy usage.
The oil and gas industry
Figure 3: Sectors in the oil and gas industry.
The oil and gas industry consists of upstream, midstream, downstream, distribution, and integrated oil companies. The upstream sector involves offshore, near-shore, and onshore production assets. On the other hand, the midstream sector consists of the storage, processing, and transport of produced energy, oil, or gas. These companies are primarily industrial. Their gas pipelines are usually several decades old, making them prone to failures. Most midstream assets around North America are at, or past, their initial design life.
Once oil and gas are extracted, they are transported to a refinery to process valuable fuels and chemicals. It makes transportation a crucial part of the oil and gas industry.
The downstream segment involves the refining of raw materials. As such, it usually consists of chemical producers and energy suppliers.
Figure 4: The separation of crude oil into different components.
While these components can be found in different barrels of crude oil, they often come in very different degrees. In addition, each type of crude oil poses a unique set of transport challenges. It means refineries must balance the different types of crude oil to maximize their output and capacity. Finally, distribution involves getting the final product to the residential, commercial, or industrial market.
Integrated companies own different parts of the oil and gas industry. For example, some companies are trying to pivot their business models into a carbon-neutral energy company. It means they no longer invest in traditional oil and gas fields as much anymore. Instead, they now focus more on renewable energies. Some even go as far as closing or selling some of their refineries.
Types and frequencies of losses within the oil and gas industry
Losses in the oil and gas industry can vary from fires to flooding events, depending on the area. On average, North America experiences ten significant events, 20 major events, and approximately 500 mid-market events per year. Large events are newsworthy on a national scale and usually result in loss of life. Major events often receive coverage in the local news, while mid-market events rarely receive news coverage. It is important to note that the claim size increases with each event size.
Energy losses due to the nature of production and manufacturing are usually complex. The origin and cause are highly technical, and this industry’s damaged property is unique.
Figure 5: Alesco’s energy, power, and renewables market update (June 2021). Source: Alesco Europe
Figure 5 provides a global perspective of the magnitude of energy-related claims. For example, a vapor cloud explosion (VCE) often involves a heavy gas coming out of the pipeline and coating an area until it reaches an ignition source. As indicated above, the top 10 losses make up a little over 60% of the total downstream losses.
Typical causation categories
- Lack of proper maintenance – Refineries have several fixed costs, but some neglect preventative maintenance fees. Regular maintenance is essential in refineries because some of the equipment is old, making it prone to failure if improperly maintained.
- Human error on the operator’s part – A wrong decision by an equipment operator could lead to loss. Many of these failures occur during a transient state where an operator transports an asset for maintenance and removes or adds heat energy from the plant.
- Human error on the part of a contractor – These losses usually occur when the equipment is already malfunctioning, resulting in the retainment of a contractor to fix it.
- Weather events can include hurricanes, tornadoes, and damage caused by fires due to climate change.
- Design defects – Manufacturing defects can result in components and systems malfunctioning. In the petroleum and petrochemical industry, a design defect can significantly impact the asset because there are very highly integrated pieces of equipment and plants involved.
Types of claims
In most claims, investigators determine the origin and cause of loss, conduct damage assessments, and provide a repaired timeframe. Petrochemical systems contain highly specialized assets, which require a high level of knowledge to evaluate failure mechanisms. As such, it’s crucial to retain an expert in all damage claims. In addition, a damage assessment provides an accurate estimation of the cost to repair. Without specialized experience, it’s hard to ascertain how much a loss would cost and how long it would take to repair. In cases where the damage is to an old piece of equipment, there’s usually a discussion about whether to repair or replace an asset.
In addition to the above, an experienced adjuster is better positioned to tell if there is a potential for subrogation on these types of claims. There are often subtle differences between claims, as several types of claims can be found in the petrochemical industry. These are:
- Property damage (PD)
- Construction All Risks (CAR)/ Delay in Startup (DSU)
- Business interruption (BI) – A typical U.S. refinery has a daily profit of US$1 million. For significant and large losses, repairs typically take 6 to 18 months. In such instances, claims could reach up to US$180 million.
When considering the BI for an energy asset, the following aspects could warrant expert examination:
- Duration of the repair period and intermingling of non-loss-related works.
- Commodity pricing and consumption as well as production costs
- Market distortion
- Contingent Business Interruption (CBI) – A typical chemical plant has six “take or pay” raw material supply contracts and a similar number of product sales contracts. This can easily represent twelve potential CBI claims resulting from a single loss. When considering CBI claims for an energy asset, the following aspects could warrant expert examination:
- Duration of repair period and the lack of information relating to the primary PD claim to measure the repair period.
- Commodity pricing and consumption
- Market distortion
The significance of scene documentation
The damage can be significant in energy losses, and the repair process can be lengthy. And so, it is essential to diligently document conditions immediately after the loss. Photos are a vital part of the documentation process.
You can use laser scanning, 360 spherical photos, or even drones to capture the scene accurately. Images can be beneficial in the claim as the rebuild process gets underway. They can help validate the scope of what was done versus what had been in place at the time of the loss.
There are a lot of aging refineries whose documentation and drawings may not be as robust as some of the newer builds. So, having photos to help piece things together after the fact can be huge. Document through photo logs as much as possible when you can access the site.
Figure 6: A site photo captured on a 360 spherical camera.
Common objectives for energy losses
- Validating the extent of damages
This objective refers to the extent to which damage merits a repair or replacement of the equipment and identifying where repairs or replacements are made based on non-loss-related causes.
One would need to validate damages to understand the nature of the loss and then interpret the damages with this understanding. It makes it possible to segregate the damage that occurred due to the event from what might be the result of a pre-existing condition. This step requires in-depth analysis, especially on larger equipment.
It is also crucial to understand the damage to the supporting components of these pieces of equipment, such as the electrical instrumentation, structural steel, and concrete piping.
Figure 7: A major piece of equipment requiring repair (left) and its supporting disciplines (right).
While the reactions and money-making processes come from the big pieces of equipment, the actual replacement cost and time for setting them are generally far less reaching than the replacement of the supporting components. So, more time is often spent on identifying the supporting disciplines and quantities and the extent of the damage. It provides an accurate understanding of what that means in terms of replacement in kind for the insured.
Some of the causes of petrochemical fires can impact the repair process, particularly in supporting disciplines like piping and electrical. And so, they need to be evaluated and highlighted to the adjuster for their application of policy coverage. Getting the material quantity list in a solid state is crucial as early as possible because the rest of the process will become contingent on it.
Figure 8: A simplified guide to determining a material quantities list when validating damages.
At times, the insured might consider losses as an opportunity to fix pre-existing issues, in addition to the damages sustained in the loss. Referred to as opportunity work, this is out of scope for the insurer. If all these quantities are ordered from the same vendor and at the same time and installed by the same labor vendors, then the cost for the additional unrelated work could quickly become included in the claim. Therefore, an initial quantities list where you have identified what was damaged in the loss and merits replacement, makes it easy to identify these exceptions.
- Estimating the cost of repair
This objective relates to using the list of damaged property to determine the cost of putting the insured back in their position before the loss. This requires identifying a baseline cost associated with the specified repairs for materials, labor, and equipment. In addition to this, an adjuster also identifies buckets of expenses that may need to be incurred but could be subject to policy interpretation. This estimate would typically be the basis for setting a reserve for the loss and serves as an anchor to the claim.
Cost estimation takes the detailed line items that make up the material quantity summary and applies industry metrics for cost and installation rates and the cost of the supporting disciplines and crafts.
In any industry, it’s essential to understand how insurance companies plan, approach, and manage their rebuilds, so that you can more adequately align your parallel process. This way, you are determining an independent cost valuation on the one hand, and the insured is planning their cost valuation on the other. In doing so, you can easily understand and bridge the variances between those two when they arise.
Refineries and chemical plants primarily utilize software called Aspentech for their production optimization and cost estimation. It is the industry-leading software for process simulation and estimating. Using Aspentech, your estimated output would be very aligned to the insurance in terms of metrics, unit cost assumptions, and labor unit assumptions. It then becomes easier to see divergences in the estimates.
- Timeline analysis for the duration of repairs
The timeline is always required for DSU, BI, or CBI claims. It applies even to claims without business interruption coverage because the length of time repairs are undertaken can impact claim-related costs. In addition, this schedule provides a way for the adjuster to anchor the BI or DSU claim period and the associated costs based on the number of days, months, or years the repairs could take after physical damage.
Most insureds build their schedules in Primavera. And this would be another area where one should run the same software and methodologies so that schedules and variances could be tested more robustly.
Figure 9: A typical schedule for energy claims.
This kind of analysis goes beyond understanding the quantity and sequencing of work. As such, you must be diligent in documenting assumptions because these are the areas where you might see a lot of resistance from an insured.
Other conflicts can arise over assumptions on the density of workforce on site or how much factors like weather conditions might impact the productivity of the work crews. You can even reference an industry-standard in such cases.
Once this initial basis is set, one must understand the actual sequence of events as they occur during the rebuild period. Then, they must identify those within the scope of the damage repairs and those out of range but still undertaken by the insured. Moreover, they must determine how the time for these is accounted for.
These situations require extensive knowledge of contemporary works and how much time this caused the work to be extended. Time for opportunity works is considered out of scope by the insurer and adjuster. You might also be tasked with determining the different buckets of timeline impact from this type of event.
Figure 10: A diagram showing the timeline analysis of two plants.
Figure 10 is a high-definition view of a timeline analysis report. Such diagrams can help identify where the damage and the associated repairs could disrupt normal operations.
Figure 11: A timeline view of the connected plants and units.
Complex losses and heavy data
Across many industries, companies are moving to more data-heavy record-keeping to control costs and manage operational drivers. With these transitions, the claims documentation and process on significant complex losses have become more aligned with this big data, and less with a standard paper, invoice billing, and documentation. While this means that a claim can be presented with 50,000-line items, it also means that you can leverage that data to gain critical insights into the scope and scale of the repair works with the right tools and skill sets.
Creating relationships between these various data sources can break big claims into manageable, understandable pieces for the adjusters to correctly allocate the cost and scope as per their policy definitions.
- Scrubbing expenses claimed for scope
This objective is related to the detailed analysis of the cost claim to ensure that they are aligned with the defined scope of damage and repairs. The standard for these types of claims is for the insured to present large information data sets.
More companies in the energy space are using a “Track” system as their primary cost system. The track is a gait logging system where vendors’ time is logged to a particular location, work order, or purchase order based on where and when they physically badge in and out. It enables their time to be approved quickly and electronically by the company supervisors and for the wage rates and the number of hours to be accurately applied based on the contracts with that vendor.
Figure 12: An example of a Track process.
This system is prevalent because it is a cost and time saver for the companies that use it, and no paper invoices are produced for this type of labor. Instead, the vendor bills their employee labor, materials, and equipment through Track, based on the insured’s designated purchase and work orders. When the insured receives these costs, they’re designated to the appropriate place in the financial system, and an extract is provided to the claim with these line items.
In the curves above, we conducted data analysis based on different wage classes of workers. It helped us construct a visualization of what type of work was going on and when, and the man-hours associated with each discipline. We could then compare these with industry metrics to get a basis for what types of quantities they would likely be associated with.
In figure 13, red indicates demolition-related work, and green indicates electrical and instrumentation installation. This data view is particularly insightful and meaningful because it allows us to highlight areas where more information may be required from the insured to validate the costs.
Figure 14: A visualization of data analysis leveraging.
Figure 14 is an example of how you could leverage data analysis to bring attention to items unrelated to the damage scope. The chart shows the number of loop checks done to verify the functionality of electrical and instrumentation runs done as a pre-commissioning step before startup. This allows us to see operations conducted before or after the loss so those could be excluded from the claim. When reviewing a claim on an invoice-by-invoice basis, these insights can be challenging to find.
This type of analysis is beneficial on large complex claims where a tremendous amount of data, costs, and significant cost exposure needs to be managed appropriately.
Key messages
- A material quantities list is vital when validating the extent of damages.
- When estimating the repair cost, align processes and systems to the insured.
- Assumptions are critical when determining a timeline for the duration of repairs.
- Leverage significant data insights when scrubbing expenses claimed for scope.
Origin and Cause: Your Choice of Investigative Partner
Petrochemical fires could be tricky and complicated to unravel and understand. Our team at Origin and Cause is well equipped and well-versed in the field of petrochemical fires and how to conduct an investigation to find out the root cause of the fire or explosion. We offer concrete answers based on facts and all conclusions are formed only after verification of facts. Contact Origin and Cause at 1-888-624-3473 today to help us assist you with your claim.