Four years ago, the oil and gas industry was shaken by one of the worst industrial disasters when the Deepwater Horizon drilling rig exploded in the Gulf of Mexico, causing the largest accidental oil spill in history. The disaster put the spotlight on companies’ exposure to environmental, social and governance risks, in particular on the safety of oil operations, spill prevention and response plans.
Four years on, many oil majors appear to have worked hard to improve their risk management in this area. However, a drive towards cost efficiencies may have left stakeholders exposed to another safety and environmental risk – that of an ageing pipeline infrastructure. Pipelines can be kept running through the deployment of temporary measures instead of companies replacing them or repairing them for the long term.
Pipeline corrosion accounts for an estimated 70% of all oil spills, according to a Bank of America Merrill Lynch broker report. If this risk is mismanaged by companies, it could increase the downtime of a plant, cause loss of production and increase maintenance costs, also by requiring more personnel on site. Furthermore, unscheduled plant shutdowns could lead to a rise in insurance premiums. This comes at a time when oil and gas companies across the world already face stricter regulations and higher production costs. Managing the integrity of ageing pipelines should therefore become a priority, in particular in the UK, the US, Nigeria, Brazil, Columbia, China, the Middle East, Russia and Australia, which all have ageing pipelines. In the US, for example, 60% of onshore pipelines are reportedly over 40 years old.
In emerging markets, meanwhile, increasingly stricter regulation in the extractives sector is leading to more fines and punitive measures in line with what is happening in developed countries. This is likely to extend to poor pipeline maintenance. Often the economic development of a country is tied to the supply of oil products and oil exploration is a major tax revenue for governments. Transparency in emerging markets is often limited, which means investors are likely to struggle to obtain the full picture on pipeline management and accidents.
Some reports suggest that companies do not invest enough in modernising and updating their plants. Corrosion can wear out pipe walls until they burst and a failure by operators to inspect them frequently and monitor them on an ongoing basis could have severe consequences. Fortunately, corrosion can be controlled by anti-corrosion technologies. However, infrastructure maintenance must be carried out in accordance with all joint venture partners to ensure uniformity in the maintenance procedures and to overcome any reluctance to temporarily shutting down a profitable plant.
For sure, it costs companies time and money to carry out routine pipeline checks. However, companies and investors face an even greater loss of revenue if maintenance is neglected and/or substituted with substandard repairs and a fragmented approach. Therefore, investors could seek third party independent verification on the pipeline monitoring and repair audits undertaken by the company.
The oil and gas industry’s track record indicates that a major accident is likely to occur if there is a history of numerous low impact events. By placing adequate attention on safety – including that of their pipelines – companies are better placed to manage their reputational, operational and financial risks. However, this can only be achieved with a strong tone from the top of the organisation promoting safety through shifts in behaviour as well as meeting compliance needs.