Supply Chain Risk

Harvey Hampers Third of U.S. Refining Capacity

Overall economic impact may reach $100 billion.
By: | September 5, 2017 • 4 min read

Coast Guard personnel walks through Aqueous Film Forming Foam (AFFF) as the top layer blows off spilled oil at a Kinder Morgan Liquid Terminal in Houston, Texas, Aug. 30, 2017. AFFF is a safety measure used to prevent exposed petroleum from igniting. Photo: U.S. Coast Guard

From the newest export terminals for liquefied natural gas to refineries first built before World War II, Hurricane Harvey’s track from Corpus Christi, Texas to Louisiana could not have been better designed to imperil the heart of North America’s refining and petrochemical industry.

Andrew Coburn, director, External Advisory Board, Cambridge Centre for Risk Studies

The U.S. Department of Energy (DOE) reported that six refineries around Corpus, seven running from Houston to Galveston, and two more in Beaumont and Port Arthur shut down. Five others across the region were operating at reduced rates. Those closures comprise refining capacity of almost 4 million barrels per day.

That represents about 40 percent of total capacity along the Gulf Coast, and 21 percent of total U.S. refining capacity. The five refineries operating at reduced rates represent a further 1.5 million b/d, or 16 percent of Gulf Coast capacity and 8 percent of total U.S. capacity. That raises the total national capacity impinged to a stunning 29 percent. Beyond the processing capacity, at least 11 oil and gas pipelines were shut or operating at reduced rates either because of actual flooding or for lack of volume.

The Cambridge Centre for Risk Studies tracks the economic activity of 300 cities around the world assessing them for the implications of shocks and disruptions. According to Andrew Coburn, director of the advisory board, the core gross domestic product (GDP) for Houston is $314 billion. In January the center ran a model of a storm similar to Harvey hitting Houston and estimated that the total economic hit to that GDP at $60 billion. The GDP of the greater Houston area is about $500 billion. Proportionally that would put storm disruption at $100 billion.

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“Beyond the immediate impact to industry,” said Coburn, “there is also the disruption to the national and global supply chains.” Houston is a major rail center, container port, crude-oil and fuels port, air hub, and trucking center.

Upstream of the refineries, oil and gas production offshore as well as in the prolific Eagle Ford shale formation in south Texas is heavily reduced. Jeff Quigley, director of energy markets for Stratas Advisors, said during an August 30 webinar that he expected offshore production to come back sooner rather than later. Onshore production, however, was harder to forecast because it is so decentralized.

“Beyond the immediate impact to industry, there is also the disruption to the national and global supply chains.” — Andrew Coburn, director, External Advisory Board, Cambridge Centre for Risk Studies

David Robertson, global head of energy risk consulting for Allianz estimated that about 800,000 b/d of oil production was impacted, which is close to 10 percent of the national total. “That is having a predictable impact on pricing.” He added that the pipelines and are under particular pressure.

Several insurance and process-industries sources noted that refineries and chemical plants along the Gulf Coast are designed to withstand hurricanes, and that operators had sufficient time to wind down operations and secure the facilities. However, pipe racks, pumps, and tanks are all vulnerable to leaking, floating, or being displaced by water or debris.

“The refineries are run by sharp people who have learned important lessons from previous hurricanes,” said Robertson. “They have a good track record for operations, especially at a steady state. Historically the largest losses in the industry have not come from storms but from incidents on start up, shut down, or maintenance.”

The notable exception to facilities being secured is the Arkema peroxide plant northeast of Houston in Crosby, Texas. When the plant was flooded and lost its generators, the peroxides could not be kept cooled and auto-ignited in a series of fires that caused toxic releases. Why that facility was more vulnerable than others to flooding has yet to be determined.

Other than that there have yet been no reports of major damage to industry as a result of the storm. “The waters are only just starting to go down but we have not heard of any significant damage to refineries or chemical plants,” said John A. Rathmell, Jr., president of Lockton marine and energy, and a former Risk & Insurance Power Broker.

“A lot of our clients in the energy and chemical sector have been through multiple storms. They have hardened their faculties by raising critical equipment off the ground. So far we have not heard of any problems with process unit integrity.”

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Two other common concerns are pollution and business interruption (BI). The latter is not likely to apply broadly, Rathmell explained, because most of the major oil and chemical companies retain those risks. Those that do buy BI coverage may have 30- or 45-day waiting periods, more commonly 60- or 90-day.

Pollution liability is much more complicated, he added. Unless it can clearly be demonstrated that a substance leaked from a certain facility, then contamination is likely to be considered ambient in such a massive flood. Hundreds of gas stations, warehouses, junk yards, and dumps were inundated by Harvey.

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

As a professor of business, Jack Hampton knows firsthand the positive impact education has on risk managers as they tackle growing risks.
By: | April 9, 2018 • 4 min read

R&I: Who is your mentor and why?

Ellen Thrower, president (retired), The College of Insurance, introduced me to the importance of insurance as a component of risk management. Further, she encouraged me to explore strategic and operational risk as foundation topics shaping the role of the modern risk manager.

Chris Mandel, former president of RIMS and Risk Manager of the Year, introduced me to the emerging area of enterprise risk management. He helped me recognize the need to align hazard, strategic, operational and financial risk into a single framework. He gave me the perspective of ERM in a high-tech environment, using USAA as a model program that later won an excellence award for innovation.

Bob Morrell, founder and former CEO of Riskonnect, showed me how technology could be applied to solving serious risk management and governance problems. He created a platform that made some of my ideas practical and extended them into a highly-successful enterprise that served risk and governance management needs of major corporations.

R&I: How did you come to work in this industry?

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From a background in corporate finance and commercial banking, I accepted the position of provost of The College of Insurance. Recognizing my limited prior knowledge in the field, I became a student of insurance and risk management leading to authorship of books on hazard and financial risk. This led to industry consulting, as well as to the development of graduate-level courses and concentrations in MBA programs.

R&I: What was your first job?

The provost position was the first job I had in the industry, after serving as dean of the Seton Hall University School of Business and founding The Princeton Consulting Group. Earlier positions were in business development with Marine Transport Lines, consulting in commercial banking and college professorships.

R&I: What have you accomplished that you are proudest of?

Creating a risk management concentration in the MBA program at Saint Peter’s, co-founding the Russian Risk Management Society (RUSRISK), and writing “Fundamentals of Enterprise Risk Management” and the “AMA Handbook of Financial Risk Management.”

A few years ago, I expanded into risk management in higher education. From 2017 into 2018, Rowman and Littlefield published my four books that address risks facing colleges and universities, professors, students and parents.

Jack Hampton, Professor of Business, St. Peter’s University

R&I: What is your favorite book or movie?

The Godfather. I see it as a story of managing risk, even as the behavior of its leading characters create risk for others.

R&I: What is your favorite drink?

Jameson’s Irish whiskey. Mixed with a little ice, it is a serious rival for Johnny Walker Gold scotch and Jack Daniel’s Tennessee whiskey.

R&I: What is the most unusual/interesting place you have ever visited?

Mount Etna, Taormina, and Agrigento, Sicily. I actually supervised an MBA program in Siracusa and learned about risk from a new perspective.

R&I: What is the riskiest activity you ever engaged in?

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Army Airborne training and jumping out of an airplane. Fortunately, I never had to do it in combat even though I served in Vietnam.

R&I: If the world has a modern hero, who is it and why?

George C. Marshall, one of the most decorated military leaders in American history, architect of the economic recovery program for Europe after World War II, and recipient of the 1953 Nobel Peace Prize. For Marshall, it was not just about winning the war. It was also about winning the peace.

R&I: What about this work do you find the most fulfilling or rewarding?

Sharing lessons with colleagues and students by writing, publishing and teaching. A professor with a knowledge of risk management does not only share lessons. The professor is also a student when MBA candidates talk about the risks they manage every day.

R&I: What is the risk management community doing right?

Sensitizing for-profit, nonprofit and governmental agencies to the exposures and complexities facing their organizations. Sometimes we focus too much on strategies that sound good but do not withstand closer examination. Risk managers help organizations make better decisions.

R&I: What could the risk management community be doing a better job of?

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Developing executive training programs to help risk managers assume C-suite positions in organizations. Insurance may be a good place to start but so is an MBA degree. The Risk and Insurance Management Society recognizes the importance of a wide range of risk knowledge. Colleges and universities need to catch up with RIMS.

R&I: What emerging commercial risk most concerns you?

Cyber risk and its impact on hazard, operational and financial strategies. A terrorist can take down a building. A cyber-criminal can take down much more.

R&I: What does your family think you do?

My family members think I’m a professor. They do not seem to be too interested in my views on risk management.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]