The economic perspective in HSE (EHS)
'We always perceive HSE compliance as the time and effort costs needed to identify risks and implement mitigating strategies. Instead of changing our approach by assessing the probability of an incident occurring and make the right HSE investments which will benefit the operator and society.’
Alex G Kemp and Theophilus Acheampong, eCompendium
The economic impact which oil and gas industry renders on the UK's GDP is generated by the demand for energy. According to the statistics, oil and gas output delivers 73% of the overall energy resource, and the forecast predicts this contribution to continue until 2040. Due to the economic interests, the exploration and production of oil and gas in the UK will still play a significant role in the coming years. Many companies have set an objective to maintain the economic recovery of oil and gas reserves in mature basins like the UKCS. This recovery requires an enhanced application of HSE practices and principles.
Fig.1 - ‘HSE compliance is an important part of every industry, especially in the offshore oil and gas industry.’ Alex G Kemp and Theophilus Acheampong, eCompendium, Picture source: Encompass ICOE Ltd
Despite the innovative methods introduced in the industry and the undoubtedly improved performance, there is still concern about the adequacy of safety measures. The industry specifics related to the high risks and unpredictable external conditions need effective HSE policies. The regulators and the industry society have been working for many years on these, and have instigated positive standards such as reduced injuries, incidents, clearer water and lower carbon emissions.
However, there is an emerging question of how these requirements are translated into costs?
Taking the cost approach, the health, safety and environmental compliance accrue economic costs to operators, employees and society. To meet the optimal safety perspective, we should make optimal investment and to consider the minimisation of loss. We may use Brody's framework (1990) which refers to total HSE expenditure formed by the prevention and the accident/incident costs.
Fig.2 - ‘Brody’s framework - adaptation’, Picture source: Encompass ICOE Ltd
The prevention costs exist regardless of the accident or incident rate and aim to meet the minimum regulatory standards before oil and gas production commences. These prevention costs diversify in two - fixed and variable expenses.
The fixed costs comply with the minimum standards that need to be maintained on the offshore facilities determined by HSE regulators or company HSE policies. The variable prevention costs include the inspection time taken by HSE specialists and training.
On the other side, the accident and incident costs incur after an accident, injury or environmental spill has occurred. They consist of the direct insurance costs and the indirect costs, which include the loss of value of production, wage cost and material damage. The component of the indirect costs also contains the reputational damage on the brand.
The cost analysis is presented in “Economic and Policy Perspectives in Health, Safety and Environment in the UK Offshore Oil and Gas Industry”, a chapter in our eCompendium® “Encompassing the Future: Offshore Oil and Gas Operations – Environment Health and Safety Performance Management”. This shows that investment in prevention can radically reduce accident/incident costs. With our commitment to the provision of EHS understanding, this combination of economic and ethical rewards is something we are pleased to acknowledge and facilitate by providing unique cross-discipline EHS awareness and accelerated knowledge.
Fig.3 – The eCompendium®, www.encompassicoe.com/ecompendium
In addition to presenting the economic cost-benefit approach to HSE (EHS) performance management, the eCompendium® presents other relevant modern understanding and guidelines – appropriately in as cost-effective a manner as possible.
Encompass ICOE Ltd, March 2019
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