Economic Costs of Safety Policy in The Oil and Gas Industry

Economic Costs of Safety Policy in The Oil and Gas Industry

BY SARAH SAMIR AND NADER RAMADAN

For years, there’s been a long debate over what constitutes sound safety policy in an industry which is known for its high risks and its volatility. It’s no mystery that the oil and gas industry is not for the weakhearted. Potentially hazardous onsite work, especially in the oil and gas industry, poses a significant risk to drain companies of the vital financial resources that they need to remain competitive in the market. Though many may perceive that safety expenses and revenues have an inverse relationship, economists reveal that the reality is quite the contrary. Case after case has made it evident that safety is a prerequisite to the prosperity of the economy as a whole, and this is especially true for the oil and gas sector.

Safety Economics at a Glance

So how much has to come out of a company’s wallet in order to keep their workers and the environment safe? There are two main factors that oil and gas businesses have to take into consideration when spending on safety as a part of their general health, safety, and health (HSE) strategy, which are precaution/prevention measures costs and incidence costs.  Precaution/prevention measures costs seek to reduce risk and involve spending on the minimum HSE standards that should be in place whether there will be an accident or not. Incidence costs are the expenses incurred in case of any accident. The incidence costs could include spending on extra safety measures, costs of medical treatment, compensations to injured employees, and compensations to affected residents near the operation area.

In some countries, billions of dollars are spent because of accidents, showing that safety is not just a luxury, but could also be a key survival factor that determines the fate of any company. “Businesses in the United States spend $170 billion a year on direct and indirect costs related to occupational injuries and illnesses which are taken directly from company profits. This expenditure is quite crucial as it could lead to bankruptcy of the firm,” according to Adaobi Gloria Bolu’s thesis ‘Economics of Safety: An empirical Study’, published by the University of Aberdeen.

In analyzing safety policies on an employee level, the economic repercussions for laborers working in the sector can be financially disastrous, something that will affect the wider market as a whole. Accidents in the oil and gas work place can cost a lot of money, affecting the economics of every employee as an individual. Costs may include medical treatment and rehabilitation. Moreover, in some cases, after being exposed to hazardous effects and suffering from unsafe hydrocarbon site, the employee may need to change his/her lifestyle, and travel to places with less pollution to recover.

Furthermore, accident victims may be at risk of losing a vital source income in case of disability. “In the United Kingdom, the average £62,500 salary earned by an offshore worker could be lost due to an incident in the absence of any compensation payments or benefits,” according to Professor Alexander G. Kemp and Dr Theophilus Acheampong’s paper ‘Economic and Policy Perspectives in Health, Safety and Environment in the Offshore Oil and Gas Industry: Evidence from the United Kingdom Continental Shelf’.

Accidents do not only affect the individual, but they also have a wider impact on the surrounding people who care about this individual. Depending on each family’s financial situation, individuals close to an accident victim may need to take an extra job to afford the costs of treatment, and sometimes it affects their life choices and career path.

Safety Policies in Egypt: Protecting Valuable Human Assets

With a legal framework that requires the maintenance of minimal HSE standards, safety is never looked at as a cost in Egypt’s oil and gas sector, but as a foundational part of the company’s strategy to ensure that productivity is maintained, while the employees are kept safe.

“HSE is the responsibility of everyone in the organization. In our calculations, spending financially [on HSE] cannot be compared with any risk that could happen to anybody in the company because we have direct and indirect results from the incident itself. [First] of all, we create the barriers of our activities in our plan, prior to the implementation of the plan itself,” said ERC Refinery QHSE Manager Mohamed Fikry. “In our opinion the cost of implementation is a continuous effort, rather than a financial cost because when we create understanding people, implementing people, flexible people, to deal with safety, health, and environment in a professional and responsible way, in our philosophy, it’s much more beneficial,” He added.

In a market where it is essential to expect the unexpected, safety is the best economic self-defense move companies can make to protect skilled labor. A competitive market requires that companies have an arsenal of well-trained employees, equipped with the experience that any competitor would bid generously for. Protecting the market’s valuable human resources is not only essential for any individual company, but the economy as a whole.  This is essential to preventing a loss of production as a result of an accident. “Whatever companies spend on whether it includes providing the health support, occupational safety, or maintaining a good work environment, this is an investment for human resources,” said Mohamed Ramadan AlBahwashy, an economics professor and researcher at Suez University. “This is in the interest of the organization. Equipment can be damaged, but to get a skilled, experienced laborer that you can actually depend on is like having a pilot for a plane. The pilot is more valuable than the plane itself.  This is especially the case for the petroleum sector.”

Apart from financial considerations, safety is a collective effort that involves the organization working towards one goal. “Maintaining the safety of employees and minimizing the environmental impact requires a lot of combined and hard efforts from different departments within the organization, starting from HSE department, HR, Procurement, Finance, and above all the Leadership of the organization; it requires commitment and belief,” said Hassan Rashed, QHSE Management Specialist / QHSE Manager Lafarge Egypt, member of Holcim Group. “Maintaining the HSE system through continuous auditing and reviewing, monitoring implementation, training workforce and providing them with the correct tools and PPE definitely consumes financial resources, but this should not be looked at as expenses or waste cost, but should be considered as an investment,” Rashed added.

Most importantly, safety policies harmonize the relationship between business managers and skilled onsite workers, since both have a mutual interest in the welfare of the other. Though many may perceive economics to be strictly a financial science, the fact of the matter is economics is also about the integrity of human relationships and safety is a pillar to maintaining the essential management-employee symbiosis that every organization needs. As a whole, safety does not just guard the well-being of just any single employee working in the sector, but the economy as a whole.

Sarah Samir 2536 Posts

Sarah has been writing in the oil and gas field for 8 years. She has a Bachelor Degree in English Literature. She has three years of experience in the banking sector.

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