Or Pipes, Power and Plants
The recent deep-freeze across the US Gulf Coast, spawned by Winter Storm Uri, wreaked havoc on individuals, infrastructure and the energy and chemical industry.
While individuals and businesses prepared for the winter storm, wrapping pipes, preparing their plants, and, in the case of some chemical companies, proactively shutting down and putting response-plans in place, when the deep-freeze arrived and the power outages started rolling in, those preparations, in many cases, were insufficient. Houses and businesses froze, pipes burst, the energy grid was gridlocked, and there was significant personal and economic loss.
WoodMackenzie reports that ~80% of US olefins capacity was offline due to the winter storm. And IHS Markit reported that ~90% US polyethylene and polypropylene were impacted, along with PVC, aromatics, and much more. In a market where supply-chains were already stressed, price increases and force majeure notices quickly followed.
Just 1 week after the deep-freeze struck the south, it’s a balmy 72 degrees in Houston. It could be easy to forget the past, yet many individuals are still repairing pipes and just beginning to plot rebuilds on damage, and the many chemical plants that shut down, are assessing, repairing and restarting. There are reports that it could take weeks before some chemical plants are fully operational.
In the coming weeks, as companies recover from the outages and seek to restore balance, it’s a good time to assess and address some key elements of your business and operational strategy.
1. Risk Management: In so many ways, the impact to people’s homes, the power systems, and the chemical plants in the south is related to Risk and Risk Management. It’s an easy statement to say: “We’re just not designed for this weather.” That’s true. And, at some point, this was a conscious choice based on the assessment of freeze-related Risk and whether or how to mitigate it. After all, chemical plants and refineries in northern climates operate safely and effectively during long, freezing winters.
At some point, this was a conscious choice based on the assessment of freeze-related risk and whether or how to mitigate it.
The reality is that it’s easy to assess risk once, set the response, and then put it away. As recent events have shown, Risk Assessment and Risk Management needs to be a periodic, if not continuous, process.
Dust off your Risk Assessment and Risk Management Plan and review and update it, considering these key questions:
What winter-weather risks have already been identified? Is the likelihood of occurrence or order of magnitude of impact still the same? Is the response and mitigation plan still sufficient? If not, what’s a better solution?
What risks were missed? Identify those risks, assess them, and develop a response.
2. Supply chain and safety stocks: Across the chemical industry, we’re seeing Force Majeure notices tied to the recent freeze and manufacturing shutdowns. Traders are reporting non-standard requests for products typically made by the requestor. Prices are increasing and supply chains are tight.
The impacts from the COVID-impacted 2020, with tight supply across many products and supply chains, and a investor-motivated decision by many to draw down inventory levels at year-end, have certainly exacerbated the situation. Safety stock is always a tricky thing, as companies try to optimize (minimize!) it in order to reduce working capital, the potential exposure from having too much of the “wrong” product in stock, etc. And really, it ties to item 1 above, Risk Management, as well as system design philosophies.
Take the opportunity to review your supply chain strategy and inventory/safety stock principles:
Take a robust look at Safety Stock levels and the principles and assumptions behind it. What’s changed since those safety stock levels were last assessed? Factors including customer demand profiles (volumes, frequency and locations) and logistics and transportation providers and reliability can dramatically change your safety stock requirements.
Consider your feedstock and raw material supply strategy: What’s the plan when your primary or secondary supply sources are unavailable? Do you have a sufficient number of qualified suppliers? When one source is shutdown on a short- or long-term basis, can you adjust quickly?
3. Contingency planning and business continuity: What’s your Plan B? As hindsight is 20-20, foresight is…. good planning. Here’s the good news… most chemical and petrochemical companies across the US Gulf Coast have well-articulated business continuity plans. After all, in an area where hurricanes are a regular event, plans to safely shutdown operations and conduct business from remote locations during a hurricane event are reviewed and executed on an annual basis. However, the winter storms in the US Gulf Coast are typically short-lived and less widespread.
Taking stock of how effectively your business continuity plans worked, and then updating with those learnings, will be an important post-winter recovery activity.
4. Collaboration, Resourcefulness and Good Neighbors: As we’ve seen in the past, crises can bring out the best in people and in companies. In the past week, my Facebook feed has been filled with people requesting and swapping resources…. everything from plumbers’ phone numbers to piping and parts. Lending a hand comes naturally.
So too, for companies across the chemical industry. While chemical plants may have been shutdown during the severe weather, the community support and engagement was active. Many companies reported keeping their cogen units operating and feeding into the electrical grid. (Yes, that’s good economics, but also good community support.) I’ve seen reports of potable water being shared with local communities and an uptick in community outreach, all while dealing with their own in-plant issues. Chemical plants have historically had good support networks with each other, particularly when it comes to HSE and Emergency Response.
What additional support networks do your company and community need? While competition is a fundamental component of the chemical executive psyche, identifying opportunities for cooperation and collaboration create benefits, particularly during non-standard operations.
Don't waste a good crisis, learn from it.
I have confidence that recovery will be strong and a month from now, we'll be considering blue skies and sunny days, rather than dwelling on the cold and grey days of winter. But, don't sweep the experiences of this cold-weather crisis under the rug. Consider the 4 strategic actions noted above and learn, grow, and improve your business and plans.
Progressio Global helps chemical companies accelerate results by closing the strategy-to-execution gap. If you're wondering whether your strategic response plans are robust enough to stand up to a crisis, we can help. Setup a free strategy call to review your plans and identify actions you can take today.