Getting From Here to There
Companies within the energy industry are facing growing risks as their trucks roll through urbanized areas and rural roads not designed for heavy-duty traffic.
With the boom in oil exploration comes the need to move high-value machinery, hazardous materials and hazardous waste, and natural resources at seemingly ever-faster paces into locations previously untouched by the industry.
The expansion of the U.S. energy business is evident.
From February 2010 to February 2013, onshore oil production within the lower 48 states increased by 64 percent, according to the U.S. Energy Information Administration, and the number of natural gas wells found in shale plays in the United States increased to 10,173 in 2011, from 5,531 in 2009. From 2010 to 2011, shale drilling expenditures increased by 88 percent, totaling $65.5 billion, according to the American Petroleum Institute.
As a result of this expansion, organizations face greater reputational and environmental liability risks, and may also experience an increase in third-party liability claims.
Risk reduction is possible for companies that develop a robust and proactive risk management strategy that makes safety a high priority.
Fleet operators understand that their reputation is on the line with every accident, whether in the headlines or not. Organizations’ health and safety performance data can hinder a service company’s ability to win contracts. Their entire safety record is made public through the Department of Transportation’s Safety and Fitness Electronic Records (SAFER) system.
Any future business they get within the oil business is contingent on their risk management performance and regulatory compliance. This concern is shared by every link in the energy supply chain, as every ancillary operator in the business — from drilling, to well-servicing and beyond — has drivers, trucks and exposures.
A 21st century energy company understands the need to evaluate their safety risks and develop effective risk mitigation strategies.
Contributing to the transportation risk scenario are key factors such as high levels of driver demand, a relatively inexperienced driver pool across the U.S., increased state and federal regulatory oversight, and drivers operating in unfamiliar locations.
Recognizing the broad and ever-changing nature of transportation risks is crucial, and companies working to keep these exposures in check do so through the development and implementation of a systemic approach to fleet risk management and loss control that includes the following steps:
1. Gap Analysis/Regulatory Review
The first step in a risk management program is to gain an understanding of the current state of affairs.
Part of this involves ensuring that a Motor Carrier Consensus Form is accurate. One good indicator of safety is the SMS BASIC percentile rank that can be found in the monthly CSA Data Preview.
Inspection and violation histories can also help companies identify patterns and trends, revealing which areas of their transportation program (including their own business processes) require improvement.
2. Safety Training
Training involves making drivers aware of Department of Transportation rules. Even experienced truckers, upon coming to the energy business, might need training on the challenges of driving on smaller roads through towns and the varied other operating environments they experience.
Part of any training program must also involve increasing all drivers’ awareness that their performance on the road directly affects the company.
The Consumer Energy Alliance Trucking Safety Task Force recommends making sure drivers know that no load is worth sacrificing safety standards or violating rules.
3. Driver Vetting
This can be a daunting task. The economy of the oil business dictates that operators are active as much as possible while the prices are high; for gas, despite the lower commodity prices, wells are being drilled more and more.
Drivers are wanted. Screening procedures and drug testing are more than ever a necessity to mitigate fleet risk.
4. Periodic Re-Evaluation
Repeat steps one, two and three on a regular basis. As the Consumer Energy Alliance Trucking Safety Task Force guidelines suggest, meet with community members and leaders, local law enforcement and emergency to understand their safety concerns and address them in upcoming training as needed.
Meet regularly with the drivers themselves and ensure they are aware of changes on the ground.
The domestic energy industry is experiencing an exciting and prosperous moment, yet with growth in exploration and production comes growth in risk and its consequences — particularly those centered around transportation.
Some larger oil and gas service companies have already spent millions of dollars to understand and mitigate their fleet risk. Other companies are not quite as far along. Yet all service providers appreciate that creating a safety culture can only help them in the future.
One of our clients had a delivery driver involved in a car crash. I happened to be in the area so I was dispatched to the scene. I spoke with an officer after the ambulance left with the driver. The officer checked his notes: “One vehicle accident. Good weather conditions. No skid marks indicating a high rate of speed. Driver says he simply lost control of the van and ran off the road.”
I inspected the van, which had crashed into a copse of trees. The windshield was broken, the front bumper was dented, the headlights were broken, and the grill was damaged.
I checked the back. The storage area of the van was open to the front seats. It was scattered with boxes that looked more bashed up than I would have expected. “What do you make of that?” I asked the officer.
He shrugged. “Got jostled in the crash?”
The boxes were all fairly light. Some of them looked punctured, but I didn’t spot any sharp objects in the back of the van. I noticed the interior paint in the van was scratched up, too. Odd.
Then I spotted a small smear of blood near the back door of the van. Something really wasn’t adding up here.
At the ER, I introduced myself to the injured driver, Kyle Warner, as a nurse checked his wound, which was on the back of his head, behind the right ear.
After a few preliminary questions, I said: “So, Kyle, what exactly caused the accident to the best of your recollection?”
Warner looked down at the floor and said, “I guess I just lost control of the van.”
“That’s a bit strange,” I replied. “It was a straight road. No lights, stop signs, or construction crews around.” Warner glanced at me sideways. “It’s even more baffling how you sustained a laceration on the back right side of your head.”
He looked uncomfortable. “Maybe a box hit me. I don’t know.”
Then I spotted a small smear of blood near the back door of the van. Something really wasn’t adding up here.
I looked intensely at him. “I think you do, Kyle. What did you have that was alive in the back of that van?”
Warner stammered, “I … I don’t know what you mean.”
“C’mon, what was it?” I pressed. “It was something large. Not a dog. It was wounded. My best guess is a white-tailed deer. The hooves would explain the punctured boxes and the scratched paint, not to mention your head wound.”
Warner was staring at me with his mouth open. “You may as well tell me,” I said. “I can easily get a blood sample from the van.”
“OK,” he said finally, letting out a sigh. “I came across a doe on the side of the road that must’ve been hit by a car. I thought it was dead, so I put it in the van so a friend of mine could butcher it for venison.
“Only it wasn’t dead — it was just stunned. Five or six miles later, it came to and went berserk in the back of the van. Before I could pull over, it hit me in the head with a hoof and knocked me half senseless. That’s when I ran the van off the road. I was able to get out and get around to the back of the van and let the deer out before the police arrived.”
I indicated that picking up a stunned deer was certainly not something in the course and scope of employment of his job as a driver, and that this non-sanctioned action led directly to his injury.
“What’s going to happen with my job?” Warner asked me.
“That’s up to your employer, Kyle,” I replied. “but I wouldn’t be counting on receiving a commendation.”
Passion for the Prize
In his 1990 book, The Prize: The Epic Quest for Oil, Money and Power, Pulitzer Prize winning author Daniel Yergin documented the passion that drove oil exploration from the first oil well sunk in Titusville, Penn. by Col. Edwin Drake in 1859, to the multinational crusades that enriched Saudi Arabia 100 years later.
Even with the recent decline in crude oil prices, the quest for oil and its sister substance, natural gas, is as fevered now as it was in 1859.
While lower product prices are causing some upstream oil and gas companies to cut back on exploration and production, they create opportunities for others. In fact, for many midstream oil and gas companies, lower prices create an opportunity to buy low, store product, and then sell high when the crude and gas markets rebound.
The current record supply of domestic crude oil and gas largely results from horizontal drilling and hydraulic fracturing methods, which make it practical to extract product in formerly played-out or untapped formations, from the Panhandle to the Bakken.
But these technologies — and the current market they helped create — require underwriters that are as passionate, committed and knowledgeable about energy risk as the oil and gas explorers they insure.
Liability fears and incessant press coverage — from the Denton fracking ban to the Heckmann verdict — may cause some underwriters to regard fracking and horizontal drilling with a suppressed appetite. Other carriers, keen to generate premium revenue despite their limited industry knowledge, may try to buy their way into this high-stakes game with soft pricing.
For Matt Waters, the chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, this is the time to employ a deep underwriting expertise to embrace the current energy market and extraction methods responsibly and profitably.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance,” Waters said.
Matt Waters, chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, reviews some risk management best practices for fracking and horizontal drilling.
Waters’ group underwrites upstream energy risks — those involved in all phases of onshore exploration and production of crude oil and natural gas from wells sunk into the earth — and midstream energy risks, those that involve the distribution or transportation of oil and gas to processing plants, refineries and consumers.
Risk in Motion
Seven to eight years ago, the technologies to horizontally drill and use fluids to fracture shale formations were barely in play. Now they are well established and have changed the domestic energy market, and consequently risk management for energy companies.
One of those changes is in the area of commercial auto and related coverages.
Fracking and horizontal drilling have dramatically altered oil and gas production, significantly increasing the number of vehicle trips to production and exploration sites. The new technologies require vehicles move water for drilling fluids and fracking, remove these fluids once they are used, bring hundreds of tons of chemicals and proppants, and transport all the specialty equipment required for these extraction methods.
The increase in vehicle use comes at a time when professional drivers, especially those with energy skills, are in short supply. The unfortunate result is more accidents.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance.”
— Matt Waters, chief underwriting officer, Liberty Mutual Commercial Insurance Specialty – Energy
For example, in Pennsylvania, home to the gas-rich Marcellus Shale formation, overall traffic fatalities across the state are down 19 percent, according to a recent analysis by the Associated Press. But in those Pennsylvania counties where natural gas and oil is being sought, the frequency of traffic fatalities is up 4 percent.
Increasing traffic volume and accidents is also driving frequency trends in workers compensation and general liability.
In the assessment and transfer of upstream and midstream energy risks, however, there simply isn’t enough claims history in the Marcellus formation in Pennsylvania or the Bakken formation in North Dakota for underwriters to rely on data to price environmental, general and third-party liability risks.
That’s where Liberty Mutual’s commitment, experience and ability to innovate come in. Liberty Mutual was the first carrier to put together a hydraulic fracking risk assessment that gives companies using this extraction method a blueprint to help protect against litigation down the road.
Liberty Mutual insures both lease operators and the contractors essential to extracting hydrocarbons. As in many underwriting areas, the name of the game is clarity around what the risk is, and who owns it.
When considering fracking contractors, Waters and his team work to make sure that any “down hole” risks, be that potential seismic activity, or the migration of methane into water tables, is born by the lease holder.
For the lease holders, Waters and his team of specialty underwriters recommend their clients hold both “sudden and accidental” pollution coverage — to protect against quick and clear accidental spills — and a stand-alone pollution policy, which covers more gradual exposure that unfolds over a much longer period of time, such as methane leaking into drinking water supplies.
Those are two different distinct coverages, both of which a lease holder needs.
Matt Waters discusses the need for stand-alone environmental coverage.
The Energy Cycle
Domestic oil and gas production has expanded so drastically in the past five years that the United States could now become a significant energy exporter. Billions of dollars are being invested to build pipelines, liquid natural gas processing plants and export terminals along our coasts.
While managing risk for energy companies requires deep expertise, developing insurance programs for pipeline and other energy-related construction projects demands even more experience. Such programs must manage and mitigate both construction and operation risks.
Matt Waters discusses future growth for midstream oil and gas companies.
In the short-term, domestic gas and oil production is being curtailed some as fuel prices have recently plummeted due to oversupply. In the long-term, those domestic prices are likely to go back up again, particularly if legislation allows the fuel harvested in the United States to be exported to energy deficient Europe.
Waters and his underwriting team are in this energy game for the long haul — with some customers being with the operation for more than 25 years — and have industry-leading tools to play in it.
Beyond Liberty Mutual’s hydraulic fracturing risk assessment sheet, Waters’ area created a commercial driver scorecard to help its midstream and upstream clients select and manage drivers, which are in such great demand in the industry. The safety and skill of those drivers play a big part in preventing commercial auto claims, Waters said.
Liberty Mutual’s commitment to the energy market is also seen in Waters sending every member of his underwriting team to the petroleum engineering program at the University of Texas and hiring underwriters that are passionate about this industry.
Matt Waters explains how his area can add value to oil and gas companies and their insurance brokers and agents.
For Waters, politics and the trends of the moment have little place in his long-term thinking.
“We’re committed to this business and to deeply understanding how to best manage its risks, and we have been for a long time,” Waters said.
And that holds true for the latest extraction technologies.
“We’ve had success writing fracking contractors and horizontal drillers, helping them better manage the total cost of risk,” Waters said.
To learn more about how Liberty Mutual Insurance can meet your upstream and midstream energy coverage needs, contact your broker, or Matt Waters at firstname.lastname@example.org.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.