CHAPTER ONE
INTRODUCTION
1.1 Background of the Study:
Since the commodity boom in the early 2000s, prices of minerals, oil and gas have increased significantly, providing opportunities for financing growth, industrialization and employment to resource-rich countries. On the demand side, low and middle income countries, particularly China and India, have boosted demand for energy commodities. On the supply side, while production of hydrocarbon and minerals has increased, there are also greater environmental risks associated with the attempt to exploit mineral deposits in remote areas as well as the lighter costs of production. In response to the increased demand for commodities, developing countries can leverage the extractive industry to meet the first group of sustainable development goals, mainly economic growth, industrialization and employment generation. These goals can be met if: first, the revenues from the extractive sector are used for investing in public goods such as infrastructure as well as for financing tax and subsidy incentives to promote industrialization. Second, if the extractive industry is linked well with domestic firms in production terms. Third, if infrastructure, such as roads, rail and electricity, is integrated and shared with other productive sectors such as manufacturing and agriculture. Fourth, if employment and incomes related to the extractive sector add to domestic demand and less lo attracting imports.
This study also examines risk management in the extractive industry using insurance as an option. The extractive industry consists of any operation that removes metals, mineral, and aggregate from the earth. Examples of extractive processes include oil and gas extraction, mining, dredging and quarrying. Any process that involves the extraction of raw materials from the earth to be used by consumers (www.business dictionary.com). In a relatively high risk business environment it should be here noted that studying the extractive industry in its totally cannot be achieved in a single study as this, for this reason this study will be done with a particular reference to the Nigerian O&G industry and using the Nigeria Liquefied Natural Gas (NLNG) as a ease study.
When compared with most other sectors, resource firms (including oil and gas) face such high risk that insurance is an essential tool for their sustainability and prosperity. While risk is an unavoidable fact of life, insurance can help individual and organizations mitigate the many risks associated with achieving their objectives, goals and vision (IRM, 2012). The increased demand for resources, arising mainly as a consequence of rapid growth in emerging economies such as Brazil, Russia, India and China (BRIG) combined with a relatively limited supply of resources, has resulted in high and rising global commodity prices over the last two decades and have encouraged large scale investments to expand output in mining, oil and liquefied natural gas (NLNG) worldwide. Rising commodity prices have, over the last few decades, made many nations dual economies e.g. Australia where mining and resources contribute enormously to the nation’s wealth generation and power supply, but are contrasted with slow growth and volatility in the non-mining sector. While oil and gas (O&G) production is of rising importance for the commercial world, inherent risk in that industry is making the community more aware of that risk and how it should be managed.
While oil and gas (O&G) production is of rising importance for the commercial world, inherent risk in that industry is making the community more aware of that risk and how it should be managed.
Liquefied natural gas (l.NG) is increasingly important to the world, as a relatively clean fossil fuel—the “…combustion of natural gas emits almost 30 percent less carbon dioxide than oil, and just under 45 percent less carbon dioxide than coal” (Naturalgas.org, 2014). Liquefied natural gas (LNG) consists mainly of methane and ethane (purified by removing water, carbon dioxide, mercury and heavier hydrocarbon components) and shrinking it 600- fold by progressively cooling the gas until it reaches -160°C, where it is liquid at atmospheric pressure. Hrnsi & Young (2012a and 2012b) explains risk via “risk radar” that identifies key risks and opportunities for businesses in the extractive industry (O&G sector). The definitions of risks and opportunities vary from sector to sector and from firm to firm. The radar is meant to provide a simple image of four key risk in oil-and-gas-sector with 10 sub risk factors (Ernst Si Young, 2011).
The risk radar is divided into quadrants that correspond to the Ernst & Young Risk (2012a, 2012b) Universe Model where:
Compliance risks: arise in polities, law, regulation, corporate governance and/or social expectations;
Financial risks: arise from volatility in markets, macro-economic factors and/or regulation;
Strategic risks: are related to customers, competitors and investors; and
Operational risks: are due to issues in the processes, systems, people, environment, and value chain of the firm (Ernst & Young, 201!).
1.2 Statement of the Problem:
While Nigeria has been viewed as a relatively very harsh environment for business and other activities, the extractive sector on the other hand is one of the world’s most capital intensive sectors, it therefore suffices to say of the extractive sector in Nigeria, to be managing an inherently risky industry and capital intensive industries in a higher risk environment.
Some of the risks associated with the extractive (oil and gas) industry may include fire out breaks/ explosions, liability risks, damage or injury to third party and or third party property, injury sustained by employees in the course of duty, damage to their plains/ equipments and motor vehicles. All of these risks could contribute to slow down the operations and performance of the extractive sector.
The increasing global demand for oil and gas suppliers are increasingly expanding their operations into even more remote and risky regions such as the Niger Delta region in Nigeria. As a result, the experiences of the Nigeria oil and gas firms may provide valuable insights on managing the risk involved in the extraction of oil and gas, some of which have been mentioned above, this study therefore reviews and evaluates the use of insurance option for managing the risks involved in the extraction and exploration of minerals in the Oil and Gas extractive sector.
It should however be noted that the extractive industry is not restricted solely to the oil and gas extraction, iron ore coal etc, but for the sake of time and the need to be concise and to avoid deviation, due to its largeness of scope. The study was narrowed and centered on the Nigeria Oil and Gas extractive sector.
1.3 Objectives of the Study:
The extractive industry sector is one of the world’s most capital intensive sectors. Although, the sector has been implementing risk management practices and techniques for decades, very little research had taken place in properly measuring how effective these techniques and practices have affected the sector. Despite advances in risk planning and mitigation tools, new capital projects in the sector continue to experience a high rate of failure in the sector (Sehroeder & Jackson, 2007). Given the fundamental and profound impact that insurance tends to have on the extractive industry sector worldwide, this is a timely study. While the current economic contribution of extractive industry sector is substantial, the future contribution is expected to be even greater, especially with the rising demand for relatively clean fuels driving the emergence of new LNG projects throughout the world. This research also provides significant insight as to how to best facilitate and create new opportunities and foster sustainability via insurance and effective risk management.
Other objectives of the study are;
1. To know the various operational aspects insurance can be used to make a significant contribution for the extractive industry.
2. To know the risks involved in oil and gas extraction.
3. To know how insurance can contribute to the operational efficiently of the extractive industry.
4. To know the various insurance policies that can be taken to cover the various risks in the operations of the extraction industries.
5. To know how the extractive industries can enhance the development of the country.
1.4 Research Questions:
1. How can the extraction industry contribute to the economic development of a nation?
2. Of what significance is the extraction industry to the growth of a nation’s economy?
3. What loss prevention and control measures are undertaken in the extractive industry (NLNG)?
4. Mow does participants in the extractive industry particularly Nigeria LNG improve the safety consciousness educate and communicate risk awareness to its employees and community?
1.5 Research Hypothesis
The following hypotheses were stated for the researcher to ascertain the impact of the extractive industry and the Nation’s economic growth and development and the significance of insurance to the extractive industry. Two hypotheses were postulated for the purpose of the study, they are as follows;
Ho: Insurance does not play any significant role on the productivity and economic growth potential of the extractive industry.
H1: Insurance plays a significant role on the productivity and economic growth potential of the extractive industry.
1.6 Scope of the Study:
The theoretical scope of this study is confined to the influence of insurance in the extractive industry. This study further focuses on NLNG Limited as its empirical case study. The Company’s three locations in Lagos, Port-Harcourt and Bonny were considered in the population which consisted of 18,000 employees (Managerial, Technical and Administrative).
1.7 Significance of the Study
The significance of this study cannot be overemphasized, the extractive industry is seldom considered to be a viable tool that can contribute to the nation’s wealth. This study will show the significant importance of the extractive industry and also relate insurance to the success of the extractive industry, by this it will benefit, those in the extractive industry as it will show case the importance of insurance to this very risky industry, scholars will also benefit as it will add to the existing body of literatures on the relevance of insurance to the extractive industry with focus on oil and gas exploration. It will also be of great benefit to students of insurance department as they will be equipped to better defend insurance as an indispensible mechanism for the growth and development of any economy.
1.8 Definition of Related Terms
Extractive: The activity of collecting, gathering, sourcing of raw materials for further production, refinement and conversion into finished and consumable products.
RM: Risk Management
O&G: Oil and gas, the industry of locus for the purpose of this study
LNG: Liquefied natural gas; it makes transportation cheaper and easier
NLNG: Nigeria Liquefied Natural gas, the organization responsible for the extraction of minerals and its conversion into gas products in Nigeria.
Risk Factors: These arc things that are likely to cause a loss.
Mineral Deposits: These are the various natural resources found in the ground in the course of exploration of raw materials such as crude oil.
Hydrocarbon: A compound of hydrogen and carbon.
Energy Commodities: These are goods or raw materials or crude products that are converted into finished petroleum products.
Volatility: This is the frequency at which things are changing within particular period.
Local Content Policy: This is a model developed which defined how best to manage the natural resources for the growth and development of the land.
Linkages: this are the various connections and interdependent of one factor and on the other.
Commodity Sector: This is an economic sector which basically deals on making available required commodities/raw material for further production.
Industrial Sector: This is the economic sector which is concerned with the conversion of raw materials to firms.
Upstream: This is the sector of the petroleum industry which deals with the refinement and sale of petroleum products.
Downstream: This is the petroleum sector which is involved with the exploration and extraction drilling of the crude product.
Resource-Rich Countries: These are countries with natural resources.
Diversification: This is the splitting of the financial resources earned from a particular sector to an unrelated sector