THE CONTRIBUTION OF INSURANCE TO THENIGERIAN PETROCHEMICAL INDUSTRY: Challenges and Prospects

CHAPTER ONE

INTRODUCTION

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, 2005).

              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 from petrochemicals.

          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 industry itself.

          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 production process.

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 petrochemical industry.

1.3             OBJECTIVE OF THE STUDY

The main objective of this study is appraising Specific objectives include:

1. To assess the prevalent risks in the petrochemical industry.
2. To assess the insurance cover available for risks in the petrochemical industry
3. To find out if the existing cover provided by the insurance company fully meets the needs of the petrochemical industry.

1.4     RESEARCH QUESTIONS

1. What are the risks prevalent in the petrochemical industry?
2. What are the insurance covers available for risks in the petrochemical industry?
3. Does the cover provided by insurance activities fully meet the needs of petrochemical industry?

1.4                         RESEARCH HYPOTHESIS

Hypothesis 1

Ho:     There are no insurance covers available for risks in petrochemical industry.

H₁:     There are insurance covers available for risks in petrochemical industry.

Hypothesis 2

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

1. 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.
2. CONTAINMENT: A system designed to prevent the accidental release of radioactive material from a reactor.
3. DRILLING: This is a process of making a hole the earth in the hope of extracting petroleum.
4. EXPLORATION: This is the act of searching or travelling around a terrain for discovery of resources.
5. OFFSHORE: This is the operations of oil drilling companies on sea.
6. PETROCHEMICAL: These are substances obtained by the refining and processing of petroleum or natural gas
7. 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.
8. 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.