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MELBOURNE, Australia -- A fire at the state of Victoria's main natural gas supply plant that shut down many nearby industries has exposed a need for better disaster planning.
Businesses are facing production losses totaling tens of millions of dollars a day, according to estimates by the Victorian Employers' Chamber of Commerce & Industry and the Australian Industry Group.
The fire broke out Sept. 25 at a natural gas processing plant in Longford, Australia, operated by Esso Australia Pty. Ltd. Two men were killed, and at least eight were injured. Gas supplies were cut off immediately to contain the fire and remained out last week.
Major industries in Victoria, which include Ford and Toyota automobile plants, are facing production losses that grow daily. As a result, VECCI is warning businesses to check whether their insurance is adequate. Coverage for utility disruption must be bought as an extension to standard business interruption policies, and VECCI said smaller companies, especially, typically do not have the coverage extension.
Insurers and brokers said last week no claims information was available, but they expect to receive claims after gas supplies are restored.
While the Victorian government said last week it will investigate the fire's cause, Esso and BHP Ltd., which jointly own the gas wells near the Longford plant, have declared force majeure on their supply contracts. Such a declaration of "external unforeseen circumstances" may shield the gas suppliers from liability for failure to supply, an Esso spokesman said.
In addition, two separate class actions have been filed in federal court in Melbourne, Australia, against Esso Australia, a wholly owned subsidiary of Houston-based Exxon Corp.; the government-owned Victorian Energy Network Corp.; and gas supply companies.
The lawsuits were filed by Melbourne-based law firms Slater & Gordon and Maurice Blackburn & Co. The suits claim Esso breached its contract with gas buyers by failing to maintain supply, said Nick Styant-Browne, a Slater & Gordon attorney.
Natural gas from wells in the Bass Strait between Victoria and Tasmania is pumped to Esso's processing plant in Longford, 120 miles southeast of Melbourne. Gas distribution from Longford is the responsibility of the Victorian state government-owned VENCorp., which supplies gas retailers.
An Esso spokesman would not comment on the company's insurance arrangements but said Esso is covered under a global program placed for Exxon.
Esso has not yet identified the cause of the fire, but the Victorian premier, Jeff Kennett, said Esso contends maintenance was not to blame. "They (Esso) have assured me that the maintenance of this plant has always been at the highest levels possible," he told a press conference.
He said the government inquiry would "apportion blame wherever blame should be apportioned, if in fact blame should be apportioned at all."
Mr. Kennett acknowledged that business interruption costs will be high. "I have no doubt it will be hundreds of millions of dollars. Beyond that, I can't quantify. But it will be hundreds. I mean, if you have a look at Toyota, they're losing $10 million (Australian) a day at a time when they've just got a huge order for export," he said.
Victoria is a major auto manufacturing center; the Toyota and Ford plants are closed until gas supplies resume. It has other major manufacturing plants, particularly for the plastics and petrochemical industries.
Mr. Kennett said gas supplies could be limited for as long as six months because, while the fire occurred in only one of three processing plants, all pipes were routed through the No. 1 plant, where the fire occurred. The plants were interdependent, he said, but work was in progress to re-route the gas from the area where the fire occurred.
Brian Crews, national president of the Assn. of Risk & Insurance Managers of Australasia, said the gas industry, and other utilities that have suffered supply problems in Australia in recent months, appeared to lack a business continuity plan for a disaster.
"Sound risk management involves the identification of risks, analysis of them, then assessment and prioritizing, and implementing treatment programs," Mr. Crews said.
"While no one might at first imagine that a fire in a gas plant or a maintenance problem at a power station could cause such major supply shortages, these are things risk managers ought to consider and they need to implement plans to counter the potentially devastating effects," he said.
Mr. Crews said the problems illustrated the need for business continuity planning in every organization, regardless of size. Business continuity plans should be compulsory for organizations supplying essential services such as gas, power or water, he said.
Part of the plan would include having adequate insurance in place. Mr. Crews said most organizations with good risk management programs buy business interruption insurance, with an endorsement to cover loss of supply.
"These incidents with loss of supply from major utilities demonstrate clearly that every business which relies on power, gas or water supplies needs to consider a supplier extension on a business interruption policy. Even if there is no physical loss or damage at your own premises, the extension will cover some of your business interruption losses if there is loss/damage at a supplier's premises," he said.
But Mr. Crews warned that the Australian industrial business interruption and property insurance rates were beginning to rise, and businesses would have to demonstrate they had sound risk management programs in place to attract competitive rates from their insurers.
VECCI criticized Esso for failing to implement a business continuity plan. David Edwards, chief executive officer of VECCI, said Esso, as the monopoly natural gas supplier to Victoria, had a responsibility to have an effective disaster plan.
Mr. Edwards estimated a week without gas would cost the state $200 million Australian ($119.5 million) in lost production.