The risks of stockpiling fuels
With rising inflation, the ongoing war in Ukraine, and multiple geopolitical security of energy supply challenges, particularly in natural gas, the looming winter energy crisis in Europe has many companies concerned about guaranteeing business continuity. As a result, some companies have begun stockpiling alternative fuels on their manufacturing sites.
In this article, we look at the potential risks of stockpiling fuels for companies and their insurers and suggest actions that can help mitigate adverse events from occurring.
The dramatic increase in energy prices and significantly reduced flow of gas from Russia to Europe throughout the second half of 2022 has created an energy crisis that may possibly get worse as the region enters the darker and colder winter months. The suspected sabotage of the Nord Stream gas pipeline in the Baltic Sea on 27 September, only served to highlight the increased risk of potential fuel shortages due to lack of supply or even deliberate attacks on physical energy infrastructure.
As a result, many European governments and industry figures have warned of the possibility of energy rationing and have indicated that both their citizens and businesses could experience energy shortfalls and even blackouts during the winter. The impact of the evolving war, the front-page news stories detailing the worsening energy crisis and many other logistical challenges has caused some companies to begin stockpiling fuels on site, due to worries they will have insufficient energy over the winter to support their traditionally gas-intensive processes and operations.
According to recent articles in Bloomberg and the Financial Times, some companies are already actively making contingency plans. Mercedes Benz Trucks recently revealed it was switching to diesel oil for a significant part of its production in Germany, and Traton SE, owner of the Scania truck brand, has secured large gas tanks as well as indicated it is returning to the use of coal. In addition, the world’s two biggest data centre operators, Equinix and Digital Realty Trust, have intensified their stockpiling of diesel fuel for their generators to help secure the generation of electricity at their European sites.
Strict legislation in place
On the legal requirements of stockpiling fuels, begins Fredrik Holmqvist, Head of Property Risk Management Services at If, “In each and every country, there is legislation surrounding inflammable and combustible liquids and gases. And there are different government agencies in each country that direct companies how to store and handle flammable liquids and gases, and this includes what the amount should be and how it should be secured.
When installing tanks and handling flammable liquids and gases, local and national rules and legislation should be adhered to. This is from a fire safety point of view, but it is also, critically, from an environmental point of view.”
It is vital that companies are open about their activities when it comes to the stockpiling of alternative fuels on site. In some policies, companies are obliged to inform the insurance companies if there are major changes in the risk, or if there is an increase in risk. This refers to new fuel storage installations.
Mobile tanks, or large plastic tanks (IPC) with oil waiting to be used on machines, motors and emergency generators can represent a major risk if something goes wrong. When considering installing new tanks, it is beneficial to inform the insurance company and their risk engineers so they can support the client in the planning phase of the project. In addition, the new circumstances also need to be accounted for in insurance values.
‘Bending’ the rules
As the European region scrabbles to deal with the worsening impact of the energy crisis, fears are rising that the crisis is likely to also prove a long-term issue, an increased risk management issue, and that some companies are resorting to ‘bending’ the rules.
“There is some concern at If that some companies, in their current need to secure alternative fuel supplies, may not be abiding by all the guidelines and legislation. We can see that some facilities are really cramped and there is very little space to put in a new fuel tank. If you have a building, for example, with the boiler traditionally running on gas, and then a company decides to make this into a multi-fuel boiler, a tank with fuel oil is then installed.
An increasing risk is the fact that the new solution is implemented as a short-term or intermediate solution but can then quickly turn into being a permanent solution. This is not ideal, if the rules are being bent. If they were to do it properly, a company may decide to have a fixed tank outside of the building with piping going inside, but that, of course, takes time and significant cost to implement,” says Holmqvist.
In addition to a short term ‘quick fix’ turning into a long-term solution, it can be the case that the new tank is installed in perhaps not the most suitable location, and it could also be that the handling of the fuel oil itself is not optimally implemented.
When change is made to infrastructure at a facility, that’s where we see extra risk, because when something is new the risk can be heightened.
Dialogue with risk engineers
Notes Holmqvist, “This is also an increasingly important part of the inspection now, when our risk engineers are going round sites. Fuel stockpiling is a discussion we have had at most of our inspections in 2022. We have a detailed dialogue with companies who are concerned. The stockpiling of combustible and flammable liquids and gases is always a focus in our inspections. This new geopolitical situation, alongside the energy crisis, has placed added focus on the stockpiling of fuels. With the storage of fuels in or near a facility, the risks can be heightened.”
It is also the case in late 2022 that some companies are now having to actively stockpile fuel for the first time, when previously they have always had a guaranteed security of supply, and gas has been piped into their facilities. When fuel oil is considered, it should be noted that unlike gas, which is most often delivered to the site via pipes, the oil is stockpiled on site. And while many facilities might have had other combustible and flammable liquids for other purposes, they were not designed to be a fuel for their boilers or heaters.
To that end, from time to time, If Insurance is seeing that facilities that have traditionally utilised gas as their main fuel are now making this shift and having to consider or even implement the stockpiling of replacement fuels. For companies making their first steps to stockpile replacement fuels or installing on-site gas tanks for back-up, adds Holmqvist, “Any emergency plans should be updated, and the local fire brigade should be informed about any changes to the new fuel storage arrangements.”
Depending on the size of the facility and the fuel requirements to support operations, the sizes of the fuel tanks themselves can vary enormously. This fact also has an impact on the decisions needed to be taken and can have an impact of risk management. “This is also interesting from the size perspective. Some large facilities that use so much gas and fuel oil are now wondering whether they should have a ship laying in a harbour to supply them. And that represents an additional risk because that also becomes a marine cargo risk.”
Securing electricity supplies
With warnings that Europe will have to deal with possible blackouts during the winter, many companies are now considering securing their overall electricity supply. Many companies have a backup generator, but these are primarily to deliver key safety needs at the facility, like for example, to emergency exits, to power safe shutdown procedures for certain equipment, as well as sprinkler systems and to protect data servers.
Says Holmqvist, ‘’Many companies are now considering if they also need to secure an emergency generator for the overall power supply. And these generators are often powered by diesel, and this takes us back to the stockpiling of fuels and the increased risks involved.”
One additional method to secure a source of energy is in the installation of large batteries on site, but due to their chemical composition, they represent a certain fire risk in themselves. In addition, they have different rules, legislation and setup procedures.
As the ability to stockpile natural gas has been limited, combined with increased fuel prices, many governments in Europe indicate that this will be a very challenging winter. Securing replacement fuels is both a short-term and long-term issue for companies trying to secure their energy supply.
“Do it by the book. Think carefully about the legislative requirements. Think about the environment, as well as the fire safety guidelines. Also, think about informing your insurance company about changes in risk,’’ concludes Holmqvist.
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