1.1 BACKGROUND TO THE STUDY
A study of human history
reveals a universal desire for security. The quest for security has been
one of the most potent and motivating forces in material and Cultural
Revolution. Early societies relied on family and tribe cohesiveness for
their security. Insurance, in some form, has been a universal response
to societies’ quests for security as it covers risks in many aspects of
human endeavor including the petrochemical industry (Kenneth and Harold,
Nigeria’s economy before
independence and shortly afterward largely depended on agriculture; this
is because a good number of its citizens were farmers. Agriculture then
was her only source of foreign exchange through the sale of cash crops.
Shortly after the independence and the civil war, Nigerian economy
changed because of oil boom in the early 70s. This caused a significant
neglect of its agricultural sector and other mineral resources which
they are blessed with. The boom attracted foreign investors which
include banks, insurance companies, oil producing companies etc. Among
the early oil producing companies to exploit its share of Nigeria
include British Petroleum Company (now SHELL), Uni Petrol etc.
Petrochemicals are chemicals
derived from petroleum or natural gas. They are obtained either directly
from cracking (pyrolysis), or indirectly from chemical processing of
petroleum oil or natural gas. Major petrochemicals are acetylene,
benzene, ethane, ethylene, methane, propane and hydrogen from which
hundreds of other chemicals are derived.
The petrochemical industry and
the products it makes play an enormous role in our daily lives. Imagine
life without gasoline, cosmetics, fertilizers, detergents, synthetic
fabrics, asphalt, and plastics. These products and many more are made
Petroleum products are used
virtually in all major facets of human endeavours, these include:
household product manufacturing, transportation, communication etc.
Spitz and Peter.H in their book “Petrochemicals: The rise of an
industry” argues that the petrochemical industry has become an important
sub-sector in the modernization process and industrial growth of many
nations. More so, it is a source of revenue generation, foreign exchange
earner and high contributor to national output. Thus, our age has aptly
been described as the age of petroleum.
Crude oil has become a global
commodity because of its extensive applications which are capital
intensive (Anthony, 2007). This explains why multinational organizations
want to invest in the oil and gas industries to apply their skills in
high technology. Also, volatile nature of petrochemical operations makes
it risky to handle with utmost diligence; therefore, the importance of
insurance is accorded equal degree on importance with the petrochemical
As our country’s economy
depends largely on oil and its by-products, based on chemicals derived
from oil sector and natural gas, it is pertinent that one should
consider the risk involved and the types of risks that the petroleum
industry is exposed to. It is of paramount necessity to think of
appropriate ways of minimizing the risk involved in its operations.
Insurance is an appropriate way of handling and reducing these risk
exposures. Insurance covers losses or destruction to properties,
equipment and machineries, etc., and since petrochemical industries use
some of these equipment’s in their operation, insurance is of essence in
the industry. Insurance’s most important function is indemnification,
and it prevents the petrochemical industry from being handicapped
financially or to stop production after a loss.
1.2 STATEMENT OF THE PROBLEM
With the discovery of crude oil in
Nigeria, other sectors of the nation’s economy were neglected and given
the back seat of the economy while the euphoria associated with the
lucrative opportunities that came with the oil sector promoted the
sector in the economy. The said promotion and diversion of majority of
attention to the oil sector and its lucrative opportunities gave rise to
the neglect of some perceived risks faced by the industry, and as well,
the neglect of the need for insurance companies.
Nigerian economy has grown rapidly in
recent years with strong expansion in the chemical and petrochemical
industries, transforming the country into one of the world’s largest
producers of chemical products. As the Nigerian economy grows, so does
the number of industrial accidents. This gives rise to safety issues, as
industrial accidents become a constant occurrence. In the past few
years, there have been numerous large-scale industrial fires and
explosions, causing widespread public concern and significantly impeding
prospects for further development of the petrochemical industry. Also,
there have been many lesser-known accidents that caused severe property
damage and casualties.
With many plants involving the
handling of flammable components, the loss of containment can result in
a leak of sufficient volume and rate, to result in the formation of
vapour cloud. The mixture of the cloud with air to form flammable
mixture can lead to a composition in the explosive range which will find
a source of ignition and provide a serious loss. The Vapour Cloud
Explosion (or VCE as it is commonly called) often provide the most
severe damage level within a chemical plant and therefore the largest
monetary loss. According to The UK Chemical Industries Association
(2010), approximately a third major losses to date have been caused
through VCEs. The subject of rate of release is often overlooked and a
very large leak may promulgate turbulence and enhance mixing with air.
Some distinct activities can
be identified in the operation of the oil sector in Nigeria and these
can broadly be classified under upstream and downstream sectors. The
exploration for crude oil and its production fall under the upstream
sector while the refining into petroleum products, distribution for
consumption, and storage are the major operational activities in
downstream sector. Fire hazards are present in every step of the
With all these safety issues and because
the above problems could lead to downward trend in the performance of
the petrochemical industry, the question to be asked is, are there
matching covers for all these perceived petrochemical hazards?
Based on the foregoing, this research
sets out to investigate the contribution of insurance to the Nigerian
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is appraising Specific objectives include:
- To assess the prevalent risks in the petrochemical industry.
- To assess the insurance cover available for risks in the petrochemical industry
- To find out if the existing cover provided by the insurance company fully meets the needs of the petrochemical industry.
1.4 RESEARCH QUESTIONS
- What are the risks prevalent in the petrochemical industry?
- What are the insurance covers available for risks in the petrochemical industry?
- Does the cover provided by insurance activities fully meet the needs of petrochemical industry?
1.4 RESEARCH HYPOTHESIS
Ho: There are no insurance covers available for risks in petrochemical industry.
H1: There are insurance covers available for risks in petrochemical industry.
Ho: There is no
significant relationship between the existing cover provided by
insurance and the needs of the petrochemical industry.
Hi: There is
significant relationship between the existing cover
provided by insurance and the needs of the petrochemical industry.
1.6 SIGNIFICANCE OF THE STUDY
The research work will be relevant to the following:
Petrochemical industry: The
study will be of immense significance to the petrochemical industry
because it x-rays the various covers needed and the importance of
insurance in the industry.
Insurance industry: The
study will be also being useful to insurance industry in the sense that
it would help them to improve in the services they render to the
petrochemical industry, and the economy at large.
It will also be useful for academic
purpose and it will serve as a database for students carrying out
further research on the related topic in future.
1.7 SCOPE AND LIMITATION OF THE STUDY
This study is restricted to the
activities of the oil producing company and their various insurance
covers. It focuses mainly on Nigeria National Petroleum Corporation
(NNPC) located in Port-Harcourt, Rivers State. Information would be
gathered with questionnaire and will be used as inference to other oil
companies and insurance companies.
1.8 DEFINITION OF TERMS
- COVERAGE: The scope of protection provided under an
insurance policy. In property insurance, coverage lists perils insured
against, properties covered, locations covered, individuals insured, and
the limits of indemnification.
- CONTAINMENT: A system designed to prevent the accidental release of radioactive material from a reactor.
- DRILLING: This is a process of making a hole the earth in the hope of extracting petroleum.
- EXPLORATION: This is the act of searching or travelling around a terrain for discovery of resources.
- OFFSHORE: This is the operations of oil drilling companies on sea.
- PETROCHEMICAL: These are substances obtained by the refining and processing of petroleum or natural gas
- PETROLEUM: Crude oil that occurs naturally in
sedimentary rocks and consists mainly of hydrocarbons. A wide variety of
commercially important petrochemicals, including gasoline and kerosene,
are derived from it.
- PREMIUM: This is the consideration paid by the
insurer to the insurance company to enable him secure insurance cover
and be indemnified on the happening of the event insured against.