Energy Risks

7 Critical Risks Impacting the Energy Industry

The energy sector needs to be proactive in assessing its risks, from environmental impact and regulation changes to talent retention and recruitment.
By: | July 26, 2018 • 7 min read
energy industry

From oil refineries to coal mines and nuclear power plants to wind farms, the energy industry plays a big role in how households, businesses and companies, governments, transportation and more function.

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Because this is an industry spanning global markets, across international economies and different geopolitical environments, the energy sector isn’t immune to emerging risks. But that doesn’t mean it shouldn’t be ready to face these critical issues as they continue to emerge. The following threats to the energy industry are some of the more important risks to watch in the coming years.

1) Global Warming and Climate Change

Our atmosphere is ever-changing. But in recent years, human activity has had an accelerating impact on how rapidly the climate changes. One of the biggest contributors to the “greenhouse effect” causing global warming is fossil fuel emission — of which, 80 percent of the world’s energy comes from.

The energy sector has worked diligently to curb carbon emissions, and one report from the U.S. Energy Information Administration found that electric power consumption of fossil fuels is at its lowest level since 1994. The report says this is likely due to a shift toward natural gas versus fossil fuels.

“The declining trend in fossil fuel consumption by the power sector has been driven by a decrease in the use of coal and petroleum with a slightly offsetting increase in the use of natural gas,” the researchers wrote.

“Changes in the fuel mix and improvements in electricity generating technology have also led the power sector to produce electricity while consuming fewer fossil fuels.”

One of the biggest contributors to the “greenhouse effect” causing global warming is fossil fuel emission — of which, 80 percent of the world’s energy comes from.

However, despite a desire to burn more effectively, environmentalists are cracking down on the energy sector in the hopes to influence how energy is produced moving forward.

The San Francisco Board of Supervisors, for example, unanimously agreed to a resolution urging the insurance industry to stop insuring and investing in fossil fuels altogether.

The board is pushing the city to screen its potential insurers for investments in coal and tar sands. The board also is encouraging the city to cut ties with insurance companies that insure “dirty” energy projects.

And San Francisco isn’t alone. It’s joining a trend stemming from Europe, where 17 of its large insurers have already divested about $30 billion from coal companies. Other insurance companies have stopped or limited insuring coal altogether, and two insurers stopped insuring for new tar sands projects entirely. The energy sector needs to keep up with how customers wish to consume energy or face a decline in demand.

2) A Rapidly Changing Industry

Another risk the energy industry faces: rapid change.

“This industry has more change going on than most,” said Scott Smith, vice chairman, U.S. power & utilities leader, Deloitte LLP. “It’s a changing workforce,

Scott Smith, vice chairman, U.S. power & utilities leader, Deloitte LLP

changing capital investment, changing how energy is produced all the way through to how it is consumed.”

There’s changing regulatory models as well as some states undergoing deregulation as well as different rates changing, he added, and a push for decarbonization of generation.

Decarbonization, according to Green Tech Media, is “the reduction of greenhouse gas emissions from the electricity sector as a response to climate change. This includes the rapid expansion of variable renewable energy, coal-to-gas fuel switching, solutions for intermittency, and the evolution of power market design.”

“You have a risk of a lot of stranded investments the industry has to deal with,” said Smith. But, he added, “[this industry] is better at change than given credit for. It won’t look the same in 10 years.”

3) Cyber Threats

“What’s going on in the industry is massive capital expenditures. It’s spending a lot for instance on modernization of the grid,” Smith said. He added that there’s roughly $52 billion a year going toward grid modernization as the grid transforms from mechanical to digital.

And while this will bring positives to the energy industry as it enters the digital age, new risks abound. Particularly in cyber.

Energy’s a highly targeted industry, said Smith. He added that it may very well be one of the most targeted industry for cyber attacks, because it impacts a lot of individuals as well as large companies.

In fact, a U.S. Department of Homeland Security recently disclosed information that Russian hackers were behind a series of power outages last year, leaving facilities in a blackout while they accessed utility control rooms.

“In a digital world there exists more opportunity for more bad actors to get into systems. Customers use different ways to connect their home, using smart devices — smart TVs, thermostats, connected refrigerators — they all have a cyber element. People with bad intent have more devices, more entry-points, to get in,” said Smith. “The ability to do harm is increased.”

Dave Venable, VP of cyber security, Masergy, told Forbes he has seen numerous cases of both state and non-state actors targeting energy and other critical infrastructure.

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“Many of these systems were designed so long ago that equipping them with modern security countermeasures can be difficult,” Venable said.

He added more needs to be done in regards to the electric grid and that “rapid detection and isolation of intrusions results in higher levels of resilience,” eliminating or minimizing any impacts.

4) Regulation and Public Policy

One risk that has been ongoing in the energy industry is regulation and public policy.

As Smith said, there is a changing nature surrounding power and how it’s generated. With change comes new laws to match. The U.S. Department of Energy has some of the broadest responsibilities in regulating power generation and electric transmission, distribution and retailing across the country. With numerous legal bodies overseeing nuclear, electric, gas, coal, oil, petroleum and more, the energy sector needs to be in-the-know of how its local, state and federal jurisdictions are changing to comply with the law.

5) Tariffs and Trade Tension

“My company,” wrote Dan Eberhart, CEO of Canary LLC, for Forbes, “saw an almost immediate 20 percent increase in the cost of steel when [President Trump’s] tariffs were announced” in April of this year.

Canary, he explained, is one of the nation’s largest, privately-owned oilfield services contractors, and it “spends roughly $10 million a year on imported steel to make wellhead and pressure control equipment, valves and other apparatus used by oil companies in the exploration and production process.”

The U.S. energy industry relies on global steel imports for a majority of its operations. Steel is needed for drilling, for production facilities both on- and offshore, for petrochemical plants, refineries and pipelines. With tariffs in place, the supply chain is impacted, costing energy facilities millions.

By hiking up the costs on supplies, companies will need to cut back somewhere else. And it’s employment that will suffer most.

“The economic consequences of a trade war are a real threat to our employees just as they were starting to see the benefits of the president’s other policies,” continued Eberhart. “Higher supply costs could force us to lay off as much as 17 percent of Canary’s staff of 300 employees.” With less employees, another big risk arises for the industry: a talent shortage.

6) Talent Retention and New Hires

According to a talent crisis survey, “Addressing the energy industry talent gap, where should you put your energy,” KPMG LLP, with contributions from Rigzone, found that nearly 50 percent of the energy workforce will reach retirement age in the next five to seven years.

The report went on to identify several key factors contributing to the talent gap in the energy sector, including inadequately skilled/trained workers, a lack in technical skills required for this continuously-innovating industry, competition over a limited talent pool and a shortage of petroleum engineers.

7) Catastrophic Events

“As an industry utilities are very good at dealing with these events, but we see that there’s, a) more events, and b) there’s more to them,” said Smith.

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And he’s right. Looking back at the past year alone, the U.S. had three major hurricanes, unprecedented wildfires, huge mudslides, tornadoes, hail storms and flooding. 2017’s weather-related natural disasters cost the U.S. $306 billion. Hurricane Harvey, which flooded Houston with over 50 inches of rain, totaled $125 billion alone.

And CAT events aren’t just caused by malicious weather; any attack to a facility’s infrastructure — from terrorist-related activity to a mass physical-cyber event — can impact the facility and shut it down.

These events are “going to be seen with greater frequency and severity,” said Smith. “The dollars involved are so much greater.”

When a CAT event rolls through, the energy sector is tasked with getting back up and running. Smith said this has become easier as technology expands and more events occur; the energy industry is able to learn from past events and recover quickly.

“But it’s more than just getting services back after these events. It’s dealing with other aspects such as regulators, insurance companies, different constituents,” he said. &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]