February 2022, Vol. 249, No. 2
Features
Why It’s Time to Invest in Natural Hazard Risk Management
By Chris LeBoeuf, Senior Director of Engineering, and Steven Fitzgibbon, Manager of Natural Hazards Risk Services, ABS Group
From raging wildfires in Australia at the start of 2020 to the devastating flash flooding across much of Europe in July 2021, recent years have been scattered with natural hazard events that have destroyed property and infrastructure, devastated businesses and taken lives.
In the United States, Hurricane Ida brought back painful memories to the people of New Orleans, a city that is still rebuilding after Hurricane Katrina caused 1,800 deaths and $125 billion of damage back in 2005.
Unfortunately, natural disaster events such as hurricanes, cyclones, storms, floods and wildfires are occurring more often and with greater severity. This can be viewed in terms of economic costs increasing over time.
The Asia-Pacific region tells a similar story. Here, average annual disaster event-induced economic losses between 2000 and 2009 stood at $56.7 billion; for 2010–2019, that figure more than doubled to $117.9 billion. The Tohoku Earthquake, which struck Japan in 2011, is largely responsible for this, but even when removing 2011 from the period, the nine remaining years average out at $89.1 billion in annual natural disaster damage.
In the U.S., meanwhile, the 10-year average annual cost of natural disaster events exceeding $1 billion increased more than fourfold between the 1980s ($18.4 billion) and the 2010s ($84.5 billion).1
Because of the impact of increasing and more severe weather events, the magnitude of the 100-year and 500-year flood has undergone revisions, a significant development that experts are keeping a close eye on.
Counting Costs
These concerning figures translate into a multitude of damages encountered by organizations that operate across a variety of industries, which notably include pipeline, oil and gas and industrial sectors with large and highly valuable infrastructure bases.
Unplanned outages and economic losses from production downtime are major consequences of the disruption caused by extreme weather events. Beyond this, there are many secondary and tertiary social and environmental impacts that stem from the primary damage done to these businesses.
But why are pipeline companies prone to natural disaster events?
Geography plays a critical role. For instance, operations that are strategically located close to coastal and inland waterways to enable easy transportation of goods in and out of their sites can make them especially susceptible to hurricane and flood risks. In the U.S., there are pipeline plants and industrial sites that are located near the Gulf Coast, Atlantic Coast and Mississippi River.
Earthquakes are another risk factor, primarily in the western states and other regions near fault lines. Key risk areas in Europe include sites along rivers and coasts, including those in regions that are at or only slightly above sea level.
Following the declaration of “code red for humanity” by the U.N. United Nations Climate Change Conference (COP26) Intergovernmental Panel on Climate Change, there is a greater sense of urgency among key political decision-makers, enterprises and wider society.
Hosted in Glasgow, U.K., the COP26 summit represented a defining moment. But enterprises should not wait for more comprehensive legislation and regulation to prompt them into action.
In many regions around the world, there are little or no regulatory drivers aimed at industrial facilities that require them to withstand extreme weather events. The onus currently is on organizations to determine any natural hazard risk management strategy. Given the growing frequency of these incidents, the time to act is now.
Risk Management
The extent and nature of such action is largely dependent on each individual business’s appetite for risk – in other words, the extent to which your business is prepared to deal with disruptions caused by storms, hurricanes, wildfires, floods and other extreme events.
Direct concerns may include the reliability and resilience of your organization’s equipment, facilities to provide worker safety, and its pipeline network to reduce unplanned outages.
However, it is also important to bear in mind that physical damage to buildings and infrastructure represents only the initial source of financial loss.
Resulting business disruption and market displacement can also hit revenue figures hard, depending on the severity of the natural hazard in question. Concerns here can center around storing materials and disruption to supply, transportation availability and access, and cost and availability of energy.
To help quantify some of these risks, organizations should consider a range of factors.
What amount of revenue will be lost if I have to shut down my facility for an extended period of time? Can additional understanding of the risks help my company to manage our operations? Will improvements to preparedness and response reduce direct damage and limit revenue loss following an extreme weather event?
The answers to these questions may prompt a series of potential mitigation measures.
Facility hardening, enhanced preparedness and response planning, and organizational measures to limit the impact of any single extreme event are among the risk mitigating steps companies can take, along with acquiring insurance policies.
Another option is to leverage the engineering and risk management expertise of third parties.
Independent risk assessments and audits can serve as vital tools in quantifying actual risks, with engineering-based studies revolved around rigorous site-specific technical assessments enabling facilities to measure their exposure to numerous natural hazards. This can carry advantages over advice and subsequent cover offered by insurance firms, which may not offer this level of rigorous evaluation and technical understanding.
Regardless of what approach is taken, companies must build risk into their cost of business and plan for a certain degree of extreme weather disruption every year.
While damage from natural hazard events is increasing year-on-year – and there are clear trends in the loss data to support this – organizations that do not adapt to better manage their exposure and risks to these extreme environments will experience greater levels of damage that will impact their supply chain. An organization’s assets, such as its people, systems and its market reputation, will be significantly impacted while dealing with the aftermath of an event.
Insurance alone is not the answer because it only covers physical loss. The insurance claim itself will increase the knock-on effect of increased premiums and additional criteria for being deemed to be “insurable.”
Experience proves time and again that to remain insurable companies must demonstrate that they are proactively addressing their exposures. But there are opportunities to protect your business by avoiding some of these common mistakes:
- Do not focus on the projections of climate change (U.K. Climate Projections 2018 [UKCP18]).
- Choosing to ignore changes in returning weather patterns will become more costly over time as extreme weather cycles begin to shorten. What was a 100-year event yesterday will likely become a 50-year event today, and so on.
- Delaying action today to protect your business increases the risks to you, your business, its people and your community in which you operate – particularly as the effects of climate change kick in.
- Design facilities and their systems for today’s weather and environment.
- Designing for “today” may suffice for near-term weather patterns, but the levels and severity of extreme environments will change with climate change.
- Designing infrastructure, transport, systems and property with a “horizon view” and the likelihood of events happening not just for tomorrow, but for 2030 and beyond will contribute to readiness.
- Roof and below-grade drainage systems may be acceptable for the “here and now” rainfall patterns but will its design cope with mass water flows to reduce flooding risks?
- Temperature changes can mean that in hotter climates air-conditioning (AC) systems are unable to work effectively, and critical products can spoil.
Step-by-Step
Risk reduction programs support and guide the management of natural hazard risks. As the illustration shows, the approach begins with a review of hazard exposures that drive risk reduction programs from critical vulnerability identification and assessment to targeted risk treatment strategies – all devised to enhance operational resilience. The following steps are things to consider:
Step 1: Hazard exposure: Do you know if your facilities are exposed to natural hazards? Do you know the financial exposure of your portfolio?
Step 2: Facility vulnerability: Do you know the critical vulnerabilities at your high-risk operations and locations? Do you know how to address the identified critical vulnerabilities?
Step 3: Risk mitigation: From detailed engineering design through independent reviews of third-party designs, the training of personnel, emergency response planning and business continuity plans, there are various approaches to treat, tolerate and transfer risk. Terminating and removing the risk needs hazard mapping and capex reviews for facility relocations, for example.
The recent COP26 conference presented four priority goals. These were to secure net zero by 2050, to keep 1.5°C within reach, to adapt and protect communities and natural habitats and to mobilize finance and work together to deliver the goals.
The need to accept that the climate has and will continue to change due to our global inertia means we have to deal with the effects, because lowering emissions alone will not solve the challenges. Never has such a challenge been so prevalent for organizations and governments to work together collectively to address and meet these challenges.
Some organizations and authorities may lack the in-house technical and engineering expertise to properly plan and execute an entire natural hazard risk management strategy.
Expertise in the field of process safety (including accidental hazards such as fires, explosions and toxic spillages) and structural pipeline engineering is critical for companies to get the support from the “cradle-to-grave” process.
Specific services include risk assessments and independent audits, equipment elevation audits (flood risk), natural hazard audits (from backup power systems to data protection), flood and storm surge risk analyses, reviews of emergency response plans and much more.
Knowledge sharing is crucial if organizations with assets prone to natural hazard risk are to futureproof themselves effectively.
With more industrial businesses around the world being impacted from natural hazards, there is a clear message – risk from natural hazards is growing. As climate change continues to produce extreme weather events that may become more frequent and severe, the time to act is now.
Reference
1 National Oceanic and Atmospheric Administration (NOAA) National Centers for Environmental Information (NCEI), “Billion-Dollar Weather and Climate Disasters,” 2021.
Best practice for managing the risks of potential natural catastrophes is linked directly to your strategy. Here are the four golden rules:
Perform regular risk audits.
Examine new build projects at capex stage for exposure to environmental elements.
Develop design guides and mitigation processes to manage risk.
Perform due-diligence reviews.
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