ESG and the pricing of a Near Miss

Today, let’s talk about pricing in risks for things covered by regulation.

Let’s say you’re at a refinery during turnaround (what we’d call a maintenance shutdown). One of the big tasks for the multi-week marathon is an exchanger bundle swap.

Presumably, No one was actually crushed by this heat exchanger bundle. c/o https://www.barnhartcrane.com/projects/heat-exchanger-removal-and-replacement/

The horizontal cylinder you see on the crane above is packed with thousands of feet of densely packed steel tubing for heating up crude before it enters primary distillation. The exchanger unit is probably 30 thousand pounds.

Let’s say the area under the crane isn’t roped off. Workers are swapping valves just under the tube, now 15 feet in the air. Suddenly, the crane’s rigging snaps. The exchanger falls to the ground and lands with a sickening THUD.

Five feet away from the fallen bundle stands one of the workers. He’s in shock. He wasn’t struck by the equipment as it crashed to the ground.

But…

Nothing was stopping that worker from being just under that equipment. OSHA regulations prohibit workers from being under overhead loads and specify crane rigging and inspection. Those laws dictate requirements, but that doesn’t mean they’re followed as they should be

Pure luck saved the worker from being crushed to death that day.

The fallout from this event might involve some yelling. Maybe someone gets fired. Maybe a new crane plane for the site will be developed. But there will be no OSHA fine. No funeral. No multi-million dollar lawsuit.

This is the paradox of the Near Miss. All the ingredients for a deadly, costly, and unacceptable incident were there. It’s just that the tangible outcome wasn’t bad.

We have two options to deal with the Near miss: we can treat it like someone did die. Or, we can say, “that’s too much paperwork,” and move on from it.

But here’s the thing. We’ve got a turnaround to complete. And every extra hour of downtime is $100,000 lost. I bet you know which path usually wins.

Frank Bird, one of the pioneers of process safety, developed the above graphic in the 1960s after analyzing hundreds of thousands of safety reports. The most severe sorts of accidents, death and dismemberment, will occur at rates several orders of magnitude less often than near misses.

The example I described above is a pretty extreme example of a Near Miss. But it’s a great way to think about safety. If we treat the near miss as seriously as we do the death that could’ve occurred, we would fully investigate the problem and correct it in a full and comprehensive manner.

I can assure you that today, nearly 60 years after the above graphic was produced, companies do not have records of near-miss investigations approaching an appropriate level.

Why is that? It’s because companies are bad at identifying risks that aren’t distinctly priced by markets.