Page 372 - Pipeline Risk Management Manual Ideas, Techniques, and Resources

costs 151347
pay, looks at how much an individual is willing to pay (in terms
of other goods and services given up) to gain a reduction in the
probability of accidental death (again, a statistical death, not
the individual’s). Each method has its drawbacks and benefits.
Human capital approaches. These estimate the value of life
in terms of the future economic output that is lost when a per-
Minimum son is killed. This may be in terms of gross output (in effect,
Expected Cost - the lifetime salary) or net output (in effect, the lifetime tax
payments). This narrow economic approach is now largely
discredited, because it is recognized that people value life for
its own sake rather than for its capacity to maintain economic
output.
Optimal Risk Risk Willingness-to-pay approaches. These estimate the amount
that people in society would be prepared to pay to avoid a sta-
Figure 15.7 Theoretical cost optimization relationships. (From tistical fatality, using their observed behavior in the past or
Stephens, M., and Nessim, M. “Pipeline Integrity Maintenance their expressed opinions on hypothetical situations in ques-
Optimization-A Quantitative Risk-Based Approach,” presented at tionnaires. This is generally considered to be the most credi-
API Pipeline Conference, Dallas, 1995.)
ble approach, although estimates are very variable.
As of this writing, valuations seem to range from about $1.5
Cost of accidents million up to about $15 million [9 11. For those wishing to use a
single estimate without researching the rationale behind the
The primary benefit of risk mitigation is the avoided cost many valuations used for many different purposes, a value of
of accidents. This avoided cost is the ‘‘benefit’’ side of the about $3 million is commonly seen and might be appropriate.
costibenefit analysis and includes
Rate of spending
The value of human life (see Chapter 14)
The cost of hospital treatment, lost production, and human An often critical risk management decision is the question of
costs to people injured. Based on a willingness-to-pay study how quickly a risk situation should be improved. The rate of
of road accidents, costs of serious and slight injuries are spending is normally influenced by one or more incentives such
approximately 10 and 0.8% of the cost of a life, respectively as
~911.
The cost of damage to property. Complying with regulations andor customer concerns
The business interruption costs, including lost production, 0 Reducing the rate of system deterioration (to avoid future
customer damages, contract penalties, and the damage to losses)
company reputation Halting unacceptable current losses.
These costs may not include indirect costs such as customer If spending is driven for long periods of time by requirements
dissatisfaction, political and legal ramifications, contract viola- other than these, such as artificial budgets set without consider-
tions, loss of customer confidence, and other considerations. ations for risks, long-term costs might rise. This includes
When deemed prudent, adjustments to costs can be made to increasing direct losses from incidents and associated indirect
capture some of these additional costs. One approach is to costs such as fines, incidents, and loss of customer confidence.
quantify indirect costs as a percentage of direct costs, depend- After regulatory and minimum customer obligations are met,
ing on factors such as quantity of product delivered, type of the amount of spending on any pipeline section can be gov-
consumer, and location ofpipeline. Indirect costs arising from a erned by a target risk score for an index or by a preset maximum
system failure are not quantified here, but are discussed in spending level. One spending strategy could immediately move
Chapter IO. the “worst case” sections to “midpack’ cases, at which point, a
new set of worst case sections appears on the list. Another
Value of human life spending strategy could gradually improve ail sections, with
the worst case sections improving at a faster rate than the bal-
Historically, there have been two primary methods used for ance of sections. Either spending strategy might be appropriate
determining the economic value of a human life. We should depending on the nature of the risks seen in the worst case sec-
point out that this is a “statistical life,” not an identified individ- tions. For example, several “risk situations” for any portion of
ual. Society has always been willing to spend much more to the system can be identified. For each situation, a spending
save an individual in a specific situation-a trapped coal miner, strategy may be readily apparent. This approach to rate of
for instance. The statistical life reflects the amount that society spending can be driven by data-based risk criteria as described
is willing to spend to reduce the statistical risk of death by one. previously.
One method is the human capital approach in which the A primary deterioration mechanism in some systems
value is based on the economic loss of future contributions appears to be the corrosion of metallic pipe. Given accurate
to society by an individual. The other approach, willingness to corrosion rate information, a pipe rehabilitation rate (miles per