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OPERA (Oil, Petrochemical and Energy Risks Association) Seminar 2012

Judith Hackitt CBE FREng, HSE Chair

Insuring Ageing Facilities, for better or for worse?

It is a great pleasure for me to be here and to have the opportunity to address this seminar.

Managing the integrity of process plant and equipment in the oil, petrochemical and energy sectors is an important subject and one which I am really encouraged to see attracting such a lot of interest.

Asset integrity management and how well it is done, is a key barometer on health and safety performance of the sector and provides a key insight into the competence of organisations when it comes to managing risk. In simple terms if you cannot demonstrate that plant and equipment is and remains fit for purpose what confidence can the Regulator have in the way other aspects of major hazard risk are being controlled?

The aim, when dealing with hazardous substances is to keep the product safely contained in the plant. The uncontrolled release of large volumes of flammable, toxic or explosive material creates the potential for disastrous consequences, which are all too often realised. In the major hazard sector the list of failures is long and painful: Bhopal, Flixborough, Seveso, Piper Alpha, Texas City, Buncefield, Deepwater Horizon, etc. Much of the costs of these failures are born by the insurance industry but the costs to society, and the companies involved are greater still. One failure by one organisation to manage major hazard risk frequently results in loss of public confidence, reputational damage, and additional cost for whole business sectors. These costs apply far into the future and are never a one-off payment. Major accidents frequently give rise to whole new regulatory regimes - the EU onshore major hazards regime takes its name from Seveso, and Piper Alpha resulted in major changes to UK offshore regulation.

Good Health and Safety is Good for Business is a message which applies to every business irrespective of size. But this message is especially relevant in major hazards industries, where the products supplied are often crucial to all of us being able to continue our daily lives. Why put at risk the very means of wealth creation and the reputation of your organisation and sector by failing to effectively manage your assets?

As insurers - you know only too well that the cost of replacing the assets is a small part of the total picture and that the total cost when losses occur in these sectors is far in excess of the cost of keeping the assets intact in the first place.

Asset integrity (also referred to by many of us as Process safety) remains too much of a specialist subject and the territory of specialist engineers. The focus is often on the original design. Of course this "phase" of process safety is important, it determines the key features of how the plant will operate for many years to come. Getting the design right can significantly reduce the risks of any plant failures in the future. Inherent safety in design is a concept which many of us associate with Trevor Kletz. In his words "If we can avoid hazards instead of keeping them under control, the resulting designs will be smaller, cheaper to operate and less likely to go wrong".

But the problem with inherent safety in design is that the main opportunity to do it comes at the start of the life cycle of the plant - when it is still a concept on paper. The subject of today's seminar reflects much more the reality of the oil petrochemical and energy sectors in the developed world today. Many of us have spent years working in the chemical and process industries and have never yet had the privilege of working on a new, green field project. When I started work in the petrochemical sector in 1975 the first plant I worked on was already 15 years old and that same plant was finally closed down less than 2 years ago after around 50 years of operation.

But ageing is not simply about how old equipment is, it is about its condition and how that is changing over time. Ageing is a phenomenon that begins the moment equipment enters service and must be monitored and managed throughout the life of the facility.

From the day a process plant is commissioned it will be subject to change and challenge:

At the outset consideration is given to what inspection and maintenance schedules should be. But it is also likely that from day one there will be challenges to those plans.

If the plant is running at capacity there will be pressure to keep going to meet demand – leading to questions like, "Can we defer this repair or that inspection?" If the economic climate is tough, there will be pressure to defer maintenance activity to reduce costs.

It is the norm in major hazards industries for plants to operate for 30 or 40 years. The capital investment is significant and good engineering standards make it possible to run plants well beyond their original assumed life expectancy but only if asset integrity is maintained. The challenges of achieving this are exacerbated by a number of factors. Very few operators have found sound reliable ways of creating an effective corporate memory which enables knowledge to be retained and passed on.

Increased contractorisation and outsourcing of operation mean that the knowledge often exists outside of the company who has responsibility for the assets.

Add to this the  significant potential for change of ownership of the assets which is likely to take place over 30-40 years, sometimes multiple changes of ownership where the all important design information and historic records will not be passed on to new owners.

We find that cost pressures within organisations often leads to a scaling back on the capital investment in plant and equipment, scaling back in maintenance and scaling back of inspections of plant and equipment - especially where there is not a clear legal requirement for periodic inspection. This is the worst kind of false economy which saves money up front but builds-in problems that may become fatal later on when it comes to the safety of the plant and of those who will be affected by a major accident.

In 2005 the major incident which occurred in Texas City can be tracked back to reductions in inspection and maintenance. Despite being one of the most profitable refineries in the US the facility was old and required a higher degree of maintenance. A company wide maintenance benchmarking exercise resulted in a direction to cut the resourcing at all sites to the company and sector average. So essential equipment was not inspected and maintained as it should have been. The level gauge on the raffinate splitter column was not functioning, and had been defective for some time. The column was overfilled with flammable liquid on start up which sprayed out from high level over the surrounding plant. It inevitably found a source of ignition and 15 people lost their lives as a consequence.

Also in that same year the biggest ever peacetime explosion occurred at an oil storage depot in the UK. Fortuitously there were no fatalities but the level of damage and disruption was very considerable. The Buncefield explosion occurred because a faulty gauge had not been fixed so the tank was overfilled. The automatic cut-off was also defective due to poor maintenance. This led to one operator using an alarm clock to time the filling of the gasoline tank because the gauge was not functioning.

The offshore oil and gas industry has always suffered from fluctuating demand cycles, making it particularly difficult to plan outages and maintenance expenditure. This has had an adverse impact on asset integrity which continued even beyond Piper Alpha when the very hard lessons of that tragedy ought to have been learned throughout the sector.

After 40 years of oil and gas production and with 50 percent of fixed platforms having exceeded their design life, asset integrity is now a major priority and will continue to be so. With the use of enhanced oil recovery methods and the potential use of carbon sequestration many platforms are likely to continue to remain in production for the foreseeable future presenting the industry with a significant challenge.

This is not a new problem. HSE's Offshore Division (OSD) enforcement activities have previously found substantial shortcomings in integrity management (largely due to cost cutting, maintenance backlogs). An associated increase in significant incidents (in particular hydrocarbon releases) led to concern in OSD.

As a response to this concern OSD undertook a programme of work Key Programme 3 on Asset Integrity in the period 2004 – 2007, in particular looking at the risk of failure of Safety Critical Elements (SCEs) associated with structure, plant, equipment and systems.

As you will all be aware the KP3 report revealed significant issues on the maintenance of safety critical systems on offshore installations. Despite initial misgivings at the way the report was made public, the findings were accepted by the industry and a considerable number of actions were put in place to address the concerns.

KP3 raised serious issues and on 20th Anniversary of the Piper Alpha (6 July 1988) disaster, the Secretary of State for Work and Pensions commissioned a review of the issues raised by KP3.

The review was undertaken by HSE and involved input from key industry stakeholders, the TUs and trade associations.

Overall, it found that the industry had allocated considerable resource and effort to improve offshore assets and compliance with relevant standards, and that the offshore industry leadership had responded well.

But this is not a short-term fix, The considerable effort which has gone into catching up with the years of neglect and degradation identified by KP3 has to be sustained. With this in mind HSE launched KP4 on Ageing and Life Extension in 2010.

Following the launch of KP4 the focus has been on critical areas of performance where the offshore industry needs to make further improvements. These include;

The industry has given a public commitment that the lessons of the past have been learned and it will not repeat the mistakes which created the offshore installation integrity crisis highlighted by KP3.

Our expectation as regulator is that future planning will endeavour to anticipate these issues and put in place robust systems to ensure that asset integrity is appropriately prioritised, even during periods of depressed oil price.

We also see particular difficulties in asset management when it comes to mergers and acquisitions. A phenomenon which is increasingly common in both on and offshore facilities. Purchasers often do not fully understand the condition of the assets being acquired and the history of how it has been inspected, maintained and modified. Effective due diligence strategies are essential when acquisitions are undertaken.

The COMAH Competent Authority is currently undertaking an onshore Ageing Plant Strategic programme. This comprises targeted inspections of major hazard plant, to assess the condition of plants by sampling and to review the technical and management measures in place to control plant Ageing. The programme also assesses the effectiveness of the duty holders Senior Management leadership in this area.

Recent research conducted for HSE, which you will hear more about from one of your later speakers, has shown that, in the preceding 25 years, there have been about 100 serious loss of containment incidents at major hazards sites in Europe caused by failure to manage the plant ageing process. Avoiding such accidents should be a key objective of those who operate and those who insure this sector. But our onshore Ageing Plant strategic programme is already showing that around 70% of major hazard sites in the UK need to improve the way they manage plant ageing risk.

Senior Management have a vital role to play in focusing effort on integrity management and Ageing Plant.

They must:

A further finding from HSE's onshore ageing plant strategic programme indicate that chemical and petrochemical sites that use third parties to provide ageing plant management services (particularly plant inspection) are delivering significantly poorer performance when it comes to management of plant ageing.

These third party services are frequently contracted through a site's insurance company or broker. It has long been the case for the statutory inspection of air and steam generating pressure vessels and over time this service has been extended to cover other aspects of inspection. But when this is done it is vital that everyone fully understands that there are distinct differences and greater levels of expertise required for detailed process plant integrity inspection over and above that required to inspect generic equipment. Failure to make this distinction is a frequent cause of inadequate provision being made to manage plant ageing in process plant.

Use of third parties may well be the most cost effective option but only if the client acts as an 'intelligent customer' who can:

Overall responsibility for safe plant will always remain with the Duty Holder but third parties have a responsibly to ensure that they are competent and capable of providing the service they are being contracted to carry out .

Given the many incidents which have happened around the world, it becomes increasingly worrying to see the same causes and the same failures keep repeating themselves. This leads to only one possible conclusion. The greatest weakness of all is the widespread inability or unwillingness to learn. Companies fail to learn even from their own internal sources of learning opportunities - whether across the same site or between sites. The failure or inability to learn from other types of industry accidents is even greater. It is far too easy to find reasons why what happened "over there" won’t happen here. Cultural differences between countries, between on and offshore operations get used as reasons why things are different and therefore somehow not relevant.

Being able to create a learning organisation and culture is perhaps the most important lesson everyone involved in those sectors represented here today needs to learn.

Learning organisations are ones which:

On the other hand learning disabled organisations:

Effective maintenance of plant and equipment in the major hazard sector is essential both for ongoing business success and to safeguard those who would be affected by a major accident. Effective ageing plant strategies need a joined up approach which ensures that owners and service providers deliver a truly robust asset management programme.

Complacency in inappropriate – the data quite clearly shows that we need improvement and we need it quickly. It should not require the regulator to be the one who leads on measuring performance on this, but meaningful performance measurement and monitoring which should create that more appropriate sense of unease within the industry is slow to emerge.

Updated 2012-11-08