Is the oil price drop the only risk to energy businesses?

After a 17-hour day at their jobs at a natural gas drilling site in Ohio, four workmates packed themselves into a truck and set out for their company’s shop in West Virginia, a four-hour drive away. Just a few miles from their destination, the driver fell asleep and the truck veered off the road. In the resulting collision with a sign, one entire side of the truck was ripped away and one of the passengers died. Incredibly, the man who was killed had barely escaped death just two months prior when a different co-worker fell asleep behind the wheel and the truck they were riding in smashed into a pole.

The events described above took place two years ago, and they represent tragic examples of how difficult it has been to maintain an overall culture of safety during this time of increased energy-related activity in the U.S. As boomtowns and energy projects emerge in remote places, the risks to workers and others in the surrounding communities have increased.

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Innovation Means Rise in Risks, Too

The story of any burst in energy activity logically begins with exploration and production. First, an energy company must locate new sources, and then go about the difficult and often risky business of extracting them.

The recent energy boom has created an entirely new set of associated risks compared to those of the past. Today’s drilling methods require significant amounts of water, sand or gravel, chemicals and equipment to constantly be delivered to work sites, accounting for up to 4,000 truck trips per well—a number that can be nearly 50 percent higher than what would be considered a “traditional” extraction process.

At the same time, extraction operations in some cases ramped up too quickly for communities to build sufficient roads to handle the increased and unwieldy traffic patterns or to install appropriate traffic signals.

An analysis of traffic deaths and U.S. census data in six drilling states showed that the population of North Dakota counties where drilling activity is taking place soared 43 percent over the last decade, while traffic fatalities increased 350 percent. Roads in those counties were nearly twice as deadly per mile driven than roads in the rest of the state. Of course, not all of these accidents involve trucks from drilling projects—drivers transporting heavy equipment and day-to-day motorists are sometimes the cause—but the traffic volume associated with drilling activity can quickly surpass a small community’s ability to seamlessly absorb it.

“It seems counterintuitive that an oil field employee is most in danger when traveling to, from and around the work site,” says Eric Boquist, President of Travelers Oil & Gas. “However, the U.S. Bureau of Labor Statistics has found that not only are vehicle accidents the leading cause of death for oil and gas industry employees, but the industry also leads most other work sectors when it comes to vehicle accident deaths.”

Those who work in the oil and gas industry know their assignments can be dangerous if proper precautions are not taken, but many let their guard down when it comes to driving. “By tapping into the resources that insurers provide, oil and gas companies can create a safety culture that protects their workers and lowers their exposures to costly liability at the same time,” Boquist adds.

Learn how to create a fleet safety program to help protect your employees and your company:

A New Technique, a New Risk

As U.S. oil and gas operators look to increase efficiency and improve profit margins, they have turned more and more to multi-well drilling, i.e. the practice of drilling multiple wellbores from a single surface location. This technique negates the need to disassemble and move a drilling rig to start a new well.  According to the Multi-Well Pad Drilling Congress, more than 58 percent of wells drilled in unconventional formations in the U.S. deploy multi-well pad drilling. While operators using multi-well drilling are seeing significant cost reductions, they also face additional risks related to both property and people. While many of these risks are similar to those on single-well sites, the potential for catastrophic loss can be much greater.

In short, multi-well drilling creates a simultaneous risk scenario: One part of the pad brings risks associated with drilling or completion, while another brings perils related to well stimulation, flow back or even production, forcing an operator to juggle a number of the risks in a well’s lifecycle all at once.

As a result, a new set of best practices for managing related exposures has emerged. “From coordinating simultaneous operations and getting the pad design right, to communicating a clear response plan and hiring the right partners, new and different risks exist at every turn,” says Boquist. “Operators can be better prepared to manage risks and, in turn, protect the people and property located on a site by understanding the complex risk equation—and how to effectively manage it at the start.”

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Construction Activity Expected to Spike

One of the biggest challenges of increased energy production is creating infrastructure to match the scale of it. For example, there is tremendous demand around the world for liquefied natural gas (LNG), but currently not enough LNG facilities to match that demand.

In this scenario, construction activity has been ongoing and is expected to continue. FMI Capital Advisors’ Construction Outlook estimates that the amount spent on oil and gas construction projects in the U.S. exceeded $55 billion in 2013—a rise of 11 percent in one year—and that similar growth will continue at an average of 17 percent through 2017.

As energy production grows in the U.S., FMI projects the construction of petrochemical facilities, pipelines, LNG facilities and related infrastructure will rise in turn. Recently, it was estimated that more than $330 billion could be spent on oil- and gas-related construction during the next four years, nearly double the amount that has been spent in the past four years.

“While this clearly presents an opportunity for growth in the construction industry, it is also shining a light on what contractors say is their biggest concern—finding skilled labor,” says Rick Keegan, President of Travelers Construction. “Many craftsmen have retired or left the industry, so as volume picks up there is a huge need to replace these workers. The increased energy demands are creating a new paradigm shift where the oil and gas and the construction industries are competing for a similar pool of available talent to fill the huge demand for skilled positions,” Keegan adds. Such limits in a talent pool can lead to the hiring of less-qualified workers, and the resultant potential gaps in training and in the understanding of safety measures, can increase risk and liability.

From increased liability caused by traffic accidents to a rise in the number of workers’ compensation claims, the multifaceted risks that have accompanied the U.S. energy boom have created new risk management challenges. The solutions, like the boom itself, are ever-evolving.

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“In an industry as large as energy, the term itself encompasses extraction and power generation, and a myriad of supporting industries such as construction, manufacturing and transportation,” says Michael Klein, Executive Vice President and Leader of Travelers Energy Practice, which offers insurance, risk management and surety resources to the energy sector. “The industry is complex and the risks it encounters are in many cases specific to it. It helps to work with an insurance company that can address the evolving operational and safety needs of this vast industry so businesses can continue to grow while managing their risks.”   Source: Bloomberg