ii
Impact to non-damaged downstream production ; it may be possible to divert the excess feedstock / intermediate product to other undamaged downstream units , however this may adversely change the margin achieved at the facility , as a result of the modification to the final product slate or mix , and materially increase the BI loss . In this case , the throughput may have remained largely the same but the profitability may differ significantly .
iii Mitigation options ; buying in replacement feedstock may seem like a simple solution to avoid or minimise a disruption to downstream production . However , there may be challenges as to whether this is feasible from a logistics standpoint :
a ) Infrastructure – a vertically integrated plant may not have the infrastructure to receive third party feedstock to mitigate a loss of production as the facility is designed as a fully integrated plant . This is different to many plants in the US or Europe , where pipeline “ grids ” and rail networks exist which provide a greater degree of feedstock flexibility , frequently allowing easier mitigation .
Due to the possible escalation of uneconomic costs , careful consideration would need to be given toward the sub-limit applied to any Additional Increased Costs of Working (“ AICW ”) or Extra Expenses (“ EE ”) Cover .
Summary As the complexity of the regional refinery and petrochemical market increases , the need for in-depth risk analysis and expertise will become more essential to understand the critical interdependencies and the potential mitigation options that come into play following an insured event to an integrated oilfield , refinery and petrochemical complex .
This will help ensure that sufficient BI and AICW / EE cover is in place to allow for the often non-linear relationship between a production shortfall and the total potential BI loss . ■ b ) Economics – Feedstock pricing incentives or discounts are often given to encourage downstream investment ; these can be the key drivers to profitability of the project and the pricing advantages are unlikely to be replicated via alternative feedstock supply .
In addition to this , the cost of any temporary jetty or storage facilities in order to establish a supply chain to import feedstock / intermediate product may result in the actions being uneconomic .
This is before the consideration of the incremental freight costs for replacement product , which may erode a significant portion , if not all , of the loss of margin saved .
ABOUT THE AUTHORS
Justin Crick FCA , ACIArb is a partner in the London office of RGL Forensics and Clive Burrows ACA is a senior manager in the firm ’ s Dubai office .
RGL Forensics is a global forensic accounting and consulting firm specialising in the quantification of Business Interruption losses . RGL supports insurance professionals with independent calculations , analysis and reporting throughout the claims process .
Justin Crick FCA , ACIArb
Clive Burrows ACA
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