Oil and gas companies that aspire to be better environmental stewards invest in strong health, safety and environmental management, known as HSE. From an environmental standpoint, it involves creating a systematic approach to complying with environmental regulations, managing waste or reducing harmful, toxic emissions. Successful HSE programs also include measures to address ergonomics, air quality, and other aspects of workplace safety that could affect the health and well-being of employees. Typically, management of a company needs a convincing business case for investment in HSE. In this report, a step by step approach to writing a business case for a small to medium size oil and gas company is mentioned first. This is followed by the impacts of having or not having a strong HSE program. A clear argument is made of the need to view HSE as a critical factor to achieve business success.
Although Health, Safety and Environment is concerned with keeping people and the environment safe in oil and gas activities, one would wonder why one group of people who are usually unwelcome (especially on a rig) are the `HSE people`. Why is this so? Over the years, HSE has been regarded as a stumbling block to working effectively to meet financial and operating targets and seen as a way for a group of people to just make a living. Most oil companies only implement HSE programs because of regulatory purposes without realising its link to achieving company objectives.
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Simply, the business case answers the question, why is this investment worth it? The discussion below starts by presenting Burke et al's (2011) seven step approach to developing a business case for HSE in a small to medium sized oil and gas company and finishes off by giving the impacts and effects of having this business case.
DEVELOPMENT OF A BUSINESS CASE
STEP 1: DESCRIBE THE CURRENT SITUATION
The development of a business case begins with identifying current HSE policies in place and their impact on the productivity of the company. A risk assessment is carried out to determine the possible health, safety and environment hazards which need to be addressed. Examples of these could be the absence of fire extinguishers in the office, lack of emergency plan in case of a well blowout and cleanup procedures for leaks. All potential HSE issues are flagged up at this stage. If an HSE policy already exists, how is it been implemented and what are its effects?
STEP 2: CONSIDER BUSINESS AND HSE GOALS
Every company has a vision to guide it in its operation. One of those goals is to operate safely while maximising profit. This stage of the process considers the business goals of the company while tying in how investment in HSE helps achieve that goal. The HSE proposal should be linked directly with company policy. Say a company states that it wants to protect its workers from soft injuries; the business case should include how this objective can be met.
STEP 3: IDENTIFY HSE OPTIONS
A Long list of options to promote the health and safety of workers and the preservation of the environment is drawn up. From this long list, research is used to shorten the list to the most important options to help achieve company business goals identified in step 2. A list could include investment in worker compensation, change in workload, implementation of safety management policies, investment in redundant safety valves and training of staff in HSE issues.
STEP 4: DEFINE THE ANALYTICAL FRAMEWORK
This is where the audience and perspectives are defined. The time frame for implementing the options or list determined in step 3 is explained. The implementation process and designs are accessed. This will include feasibility studies and some pre conceptual designs. For example, if it is required to increase compensation of workers, how is it actually going to be done? How is the safety management system/policy going to be drafted and implemented? Which people would be needed to make the system efficient?
STEP 5: ASSESS OUTCOMES, COSTS AND BENEFITS
The benefits of implementing the HSE proposals are qualitatively assessed. The cost involved is estimated alongside the benefits. What effects are the chosen plans going to have when implemented? Are they in line with the "money making" business goals of an oil and gas company? These will give credibility to the analysis carried out in step 4.
STEP 6: IDENTIFY PREFERRED OPTIONS
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Sensitivity analysis is carried out to determine the reaction the plans are going to receive when implemented. Financial metrics are used to determine the financial impact to the company by investment in the HSE proposals. Some of the financial metrics used are productivity assessment tool, Net Present Value (NPV), Return on Investment (ROI), Payback time, Cost Benefit Analysis and Internal Rate of Return (IRR). In an instance where equipment redesign is to be undertaken to reduce the risk of injury on a drilling rig at a cost of £200,000, a return on investment could be carried out as: The intervention is anticipated to be in place for 5 years. It is expected to cause a discounted savings of £100,000 in averted medical bills and productivity loss. Over a period of the 5 years, the savings is £ 500,000 which is in effect a "hidden profit" of £300,000. Based on the financial metrics and sensitivity analysis, the options are ranked and prioritised.
STEP 7: FINALISE THE BUSINESS CASE
All factors which can affect the business case are considered and a business case template is drawn up. The factors which will influence its approval like timing or budget constraints and all after thoughts are keyed in at this stage. The final business case should be convincing enough to cause management of the company to adopt and implement it.
IMPACT OR EFFECTS OF A BUSINESS CASE
The main purpose of the business case is to increase protection for workers and justify the cost of HSE investments to management. Management has to be convinced that investments not only create a competitive advantage but adds to the financial value of the company. When the business case is successful in receiving the proposed investment and support in HSE, the oil and gas company benefits in the following ways
1. FINANCIAL IMPACT
While there is a general view that safety is a good thing to practice and have, it does not show a return on investment for capital projects. Managers do not see the need to introduce new HSE policy and spend money training workers to help implement them because it is seen as a pure financial burden.
When the business case achieves its purpose of receiving investment for HSE, hidden costs associated with lost time incidents are avoided. The items that constitute the greatest proportion of "hidden" costs include: overtime, over-employment (extra staffing), training, supervision, employee turnover, waste and rework, lost production time, reduced productivity, warranty costs, maintenance, product and plant damage and equipment downtime (due to injury/accidents). For example in the North Sea, a fatality will lead to platform shutdown. If a small company producing 10,000 barrels of crude oil a day at an oil price of $100 per barrel is shutdown for say five days, this will be a loss of one million dollars. The average cost of an emergency helicopter trip to the rig is $30,000 and this cost will be paid by a company in the event of an injury.
PTTEP Australasia, a Thai based company, was fined $510,000 for pleading guilty to charges of breaching the offshore Petroleum Act in 2009. (Weber, 2010). The price of the destroyed West Atlas rig and the cost of drilling a relief well with four sidetracks in 51 days could have been avoided if proper HSE guidelines were in place.
The U.S. Department of Labour's Occupational Safety and Health Administration fined Pasadena Refinery $115,650 for exposing workers to multiple safety and health hazards. (US Department of Labour, OSHA 2009). On 30 September, 2010, fire broke out at the same refinery leading to a shutdown for a few days. Pasadena was refining 100,000 barrels of crude a day leading to an incurred loss of more than $1 million from lost production alone.
On the other hand, Tesoro Petroleum refinery in Manda was recognised by the US Department of Labour as a star site. (US Department of Labour, OSHA 2011). This was after investment in HSE policies following the April 02, 2010 explosion that led to the fatal injury of seven employees at the company's refinery site in Anacortes, Washington. (US Chemical Safety Board, 2010)
According to the World Oil magazine publication on 15th November, 2012, BP is to pay a $4.5 billion fine to the United States for a law suit in the Macondo Blowout. Such a fine will send a small or medium sized oil company like Dana Petroleum (worth 3 billion) into debt.
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Total insured cost for the Piper Alpha incident in 1988 was £1.7 billion (Offshore group, 2008).
The table below gives some of the penalties paid by small and medium sized companies in the United States for violating HSE regulation:
PENALTY PAID AND DATE PAID
Energy XXI GOM, LLC
Mariner Energy, Inc.
Rooster Petroleum, LLC
Black Elk Energy Offshore Operations, LLC
Hilcorp Energy GOM, LLC
Table 1: HSE violations and penalties paid (Adapted from Bureau of Safety and Environmental Enforcement, 2012)
In hindsight, the financial burden of dealing lackadaisically with HSE without financial investments and management support leads to monetary losses as evidenced above.
2. LEGISLATION PURPOSE (COMPLIANCE)
Regulation is the enforcement of laws. These regulations among other things reduce the rights of a company, add a measure of responsibility and are used for accreditation and basis for issue or cancellation of contracts. In the oil industry, all governments have in place regulations which need to be adhered to by oil and gas companies operating within that country. The operator of an offshore oil and gas facility or installation is required to provide the government with a safety case which sets out identified hazards and issues and how the operator proposes to address those issues. Companies with good HSE policies and a track record of regulation compliance enjoy massive support from government. The inability of an oil and gas company will lead to a cancellation of licenses, breach of contract and possibly a lawsuit.
3. MORAL PURPOSE
According to the World Health Organisation (2003), "Health is a state of complete physical, mental and social well-being and not merely the absence of disease or infirmity". The ability to attract the best people in the industry to a company comes with the worker moral and perceived opinion that people have of the importance that management attaches to the health and safety of their workers. The greatest motivation for workers is to enjoy their work under safe conditions. Involving workers in HSE policy draft and implementation creates the awareness and confidence needed to work assiduously to achieve set targets and goals.
Employers that implement effective safety and health management systems may expect to significantly reduce injuries, illnesses and the costs associated with these injuries and illnesses including workers' compensation payments, medical expenses, and lost productivity.
HSE estimates indicate that in 2001 and 2002, the total cost to employers of workplace accidents and ill health was between £3.9 and £7.8 billion, while the total cost to society was between £20 and £31.8 billion. (Health and Safety Executive, 2004 pp. 14)
The safety of the worker population is of paramount importance in optimising production outputs. In the North Sea, drilling rigs are mandated by law to have rooms which accommodate a maximum of two people to provide a level of comfort and reduce health hazards offshore.
On April 8, 2004, at the Giant Industries Ciniza Refinery near Gallup, New Mexico, six employees were injured, with four of these employees hospitalized with serious burn injuries, when gasoline components were released and ignited. On January 19, 2005, another refinery incident killed one employee and caused multiple injuries to other employees at the Kern Oil Refinery in Bakersfield, California. (American Society of Safety Engineers, 2007).
Three contractors died and one contractor suffered serious injuries in an explosive fire at the Partridge-Raleigh Oilfield on June 5, 2006 due to the lack of safe hot work procedure and hazard awareness training (US Chemical Safety Board, 2007). These hot work procedures could have been implemented with very minimum investment costs. The lives of workers lost in each of these cases are dwarfed by the 167 people who died in the Piper Alpha disaster in 1988. Below is a chart showing offshore injuries from 1998 to 2011.
Figure 1: Fatal and major jnjuries
Figure 1: Fatal and major injuries to offshore workers (Offshore safety statistics bulletin 2010/11)
4. REPUTATION AND COMMUNITY RELATIONSHIP
Some oil companies lead and are able to acquire (with relative ease) entry into frontier regions of exploration due to their reputation built over time. When Tullow Oil Plc. was granted license to drill in Greenland, the press and environmentalists did not oppose the move because of the reputation that Tullow Oil had built over the years in operating with rigorous HSE policies. This company has operated for over 365 days without a lost time incident or environmental discharge in their operations in Ghana.
To maintain a social license to operate and restore public confidence in a company's offshore activities, companies must be responsible custodians of their marine environment. A small or medium sized oil company has to act responsible to win over the locals in the vicinity of their activities. This is because, in most cases, the lives of locals (fishermen, farmers etc) are disrupted as a result of oil and gas exploration and production and hence it is the corporate social responsibility of the company to not only give back but also to work in an environmentally safe manner. If an oil company which owns refineries has an incidence seen as a result of negligence or bad practices, the public will shun buying gasoline and lubricants from these companies. This was evident after the Macondo Blowout of British Petroleum and the Brent Spar disaster of Shell UK.
Management has a myriad of investments to consider and HSE sometimes ranks close to the bottom in terms of priorities because it is perceived as a non profit venture. With the help of a business case, management are made to see HSE as a prerequisite for company success. Investment in HSE as a result of this well written and convincing business case has impacts in the finances, compliance, reputation building and increases the confidence with which workers do their work.
With the help of this business case, management should be aware of the somewhat hidden financial implications of neglecting HSE in a company. For a small or medium sized company, this is even more crucial because they may not have the financial reserves to absorb such fines and losses that may arise from the neglect of an HSE policy and may lead to the crippling of the company.
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