Risk Management & Terrorism Events An Insurance Approach

1. 26 January, 2010 Risk Management & Terrorism Events An Insurance Approach Ian Roy

2. Terrorism and the Energy Market • Events in the Energy market are relatively rare • Saudi Aramco Truck Bomb 1996 • Target was military • USD 2 bbl price hike • 2007 PEMEX pipe-line bombings, Mexico • Small PD damage, large seepage and pollution claim. • 2008 to 2010, 6 bombs by environmentalist in British Columbia, Canada • Bombs defused Mozdok-Tiblisi pipe-line • Underwriters generally operating with 0 % loss ratios • Historically little technical engineering involvement. • Energy Risks perceived as low? • Good protection due to strategic nature of assets

3. Insurer’s perspective: provides a quantitative measure of the risks they are underwriting sets the level of capacity that can be committed to the risk provides quantitative understanding of accumulation (e.g. location) issues internal governance Client’s perspective: supports informed decision making regarding the design of the insurance programme loss limits vs. EML effective use of market capacity provides supportable basis for purchase of limits of insurance (internal governance) a potential means of saving premium (loss limits) Estimated Maximum Loss (EML)Why is it important to estimate the size of potential losses in advance ?

4. Terrorism Estimated Maximum Loss (EML) • Methods available for generation of Estimated Maximum Loss (EML) values related to Terrorism risks • method developed to meet the requirements of project owners and project lenders • also applied to oil, gas, petrochemical and other types of “non energy” related manufacturing facilities • Supports informed decision making about purchased limits of Terrorism insurance • Draws upon specialist resources • engineering/consequence modelling • client HSE, operations personnel • security specialists

5. Risk Measurement Likelihood of Losses Occurring Consequences of Losses Assessment of Quality of Risk Control Features Assessment of Quality of Risk Control Features Assessment of Quality of Risk Control Features Assessment of Quality of Risk Control Features Assessment of Quality of Risk Control Features Assessment of Quality of Risk Control Features • Analytical risk-management approach using Consequence Tools Risk Measurement: Estimated Maximum Loss (EML)How big are potential losses?

6. Marsh EML Methodology – what it is and what it is not • What it is • Property loss estimate • Business Interruption loss estimate • 3 bomb type scenarios placed at specific site locations. • Could consider deliberate/targeted release of inventory • What it is not • It is not a prediction of the terrorism attack (reasons, target or likelihood) • It does not identify the most likely scenarios • Does not consider rocket/airplane type attack • Does not specifically consider explosions at offices/buildings • Does not consider knock-on effects

7. Truck containing some 4 t of a TNT type explosive igniting at one of the entrance gates. Car containing some 1 t of a TNT type explosive driven on site and igniting near the highest value assets. Human/Backpack bomb containing some 25 kg of a TNT type explosive taken on site by a human being and igniting near the highest value assets. Marsh EML Methodology – Three generic scenarios

8. Marsh EML Methodology – EML and the report • EML: what we need • Property replacement values • Site Lay out, congestion and confinement levels • Gate location (HW) and security checks (SW) • External lay out (public / private roads, access to the areas) • EML: Tools we use • SLAM • TNT vs. Ethylene Oxide equivalency file • Report: what we also need • Security hardware (gate, fences, etc.) • Security practices on site (controls, explosive detectors, etc.) • Security measures off site • Terrorism simulation / drills practices

9. Risk Measurement What is SLAM? • Risk assessment tool for clients to facilitate .. • Property Damage loss limits • Business Interruption exposures • Liability studies • Easy to use design tool to support ... • plant layout • buildings location and design • Tool to facilitate insurance placement by providing the Underwriter with a realistic Estimated Maximum Loss based on credible events applied consistently across the energy risk spectrum • Developed with Shell and Imperial College London

10. EML evaluation aspect Modelling approach Plant type Plant layout Source terms Explosion epicentres Pressure-distance profile Damage assessment Loss History SLAM versus TNT models Fundamental, deflagration-based, tuned to Loss History Sensitive to inherent risk type Penalises poorly laid out or highly congested plant Volume-based structures … requires less mass for an equivalent explosion Centred on process structures Matches observed "far-field" effects Differentiates between buildings, tankage and process plant Models small/large release events … models major losses Risk Measurement: ConsequencesWhy was SLAM developed?

11. Fire & Blast Damage Allocation

12. Example – Truck Bomb parked on public roadAdjacent to Strategic high value asset – EML USD 380 million

13. Example – Car Bomb driven into assetsAssumed that in heart of the strategic asset – EML USD 290 million

14. Example – Bag Bomb Carried on-siteAssumed that in heart of the strategic asset – EML USD 130 million

15. Re-build times and Business Interruption The following outlines likely interruption periods following damage on a typical process plant

16. Terrorism Estimated Maximum Loss (EML): Property Damage A three step approach: 1 Threat & Vulnerability analysis • potential threats identified with assistance of security consultants (location specific) • modes of likely attack identified with security consultants 2 Project risk profile generated • probability and direct consequences of attack evaluated • e.g. high explosive blast effects, vapour cloud explosion • EML calculated 3 Risk mitigation • review security procedures and security infrastructure • elemental system re-design (apply control systems) to mitigate risks and reduce calculated EML

17. Terrorism Estimated Maximum Loss (EML)Without effective vehicular access controls Threat Scenario: • Large Truck Bomb (4 tes TNT) detonated at EPF access gate • Car Bomb (1 tes TNT) detonated inside main process area • Bag Bomb (25 Kg TNT) hand-carried in to process area and detonated • Explosion following deliberate release of LPG from storage bullets located on main site Without Effective Controls (Limited Threat Mitigation) USD 142 mm

18. x x Terrorism Estimated Maximum Loss (EML)With effective vehicular access controls in place Threat Scenario: • Large Truck Bomb (4 tes TNT) detonated at access gate • Car Bomb (1 tes TNT) detonated inside main process area • Bag Bomb (25 Kg TNT) hand-carried in to process area and detonated • Explosion following deliberate release of LPG from storage bullets located on main site USD 22 mm • CurrentControls: • Earth berm around site • 24/7 armed access control/search points • Hardened search & hold areas • Blast walls at access points • Restricted/dedicated “onsite only” vehicles kept • inside perimeter • Current Controls: • Sniffer dogs • Personnel ID and vehicle access control systems • Vetting & background checks of local staff • Permit system for zoned work areas on site

19. Risk Management and Terrorism Events • Marsh have developed procedures and methodologies for EML evaluation • Combined with a view of: • Likely modes of attack • Adequacy of safeguards • A Risk Profile can be generated • Mitigation plans can be applied or reviewed • Elemental system re-design can be conducted

20. www.marsh.com