On November 22, 2013, an explosion at a Sinopec (600028.SH, 00386.HK) oil pipeline killed 62 and injured 136 in Qingdao, Shandong province. Crude oil leakage from the pipeline into the municipal drainage pipes fuelled the explosion. The accident was identified as a “very serious dereliction of duty” by China’s central government. After the accident, both Sinopec’s Shanghai- and Hong Kong-listed stock witnessed a sharp decline. The stock fell 6.5% in Shanghai trading and Sinopec’s market value shrank by CNY 30 billion (USD 4.9 billion). Some of Sinopec’s refineries in Shandong have slashed production.
Social Impact
This accident is the most severe one in China’s petrochemical industry since a PetroChina Sichuan natural gas explosion in 2003 which killed 243. It is also the deadliest one in Sinopec’s history. Sinopec did not issue warnings or evacuate residents nearby after detecting a pipeline leak, seven hours before the blast occurred. During the seven hours, Sinopec only informed the local government of the leak, while “selectively ignoring” thousands of residents nearby. This has been criticized by the public, the media, and by Sinopec’s peers.
Although Sinopec laid the oil pipeline before the municipal pipe network and nearby residential communities were built, the company should still be responsible for pipeline safety. Sinopec actually had already recognized safety risks two years ago. In September 2011, and August 2012, Sinopec’s pipeline storage and transportation branch, and Shandong local environmental protection bureaus issued announcementswarning that urbanization was threatening repair work on a crude oil pipeline in Qingdao. Sinopec stated in the announcements that originally the pipeline was located on the city outskirts, which had since then become a bustling downtown district; the number of buildings and population density had increased; the close proximity of the buildings were impediments to conducting pipeline repairs and maintenance. Sinopec already realized that safety risks existed.
In this situation, Sinopec should do more preventive work in advance, such as promoting security education among residents near the pipeline and conducting evacuation drills in case of a pipeline leak. If Sinopec had paid attention in enhancing residents’ safety awareness, improved their safety skills, and timely informed and organized residents to evacuate after detecting the oil leak, this tragedy might have been avoided.
Environmental Impact
The accident has caused enormous damage to both Sinopec staff and local residents’ lives, while also seriously polluting the environment. The accident resulted in a large oil spill and severe contamination in the sea. The leak spread across 3,000 square meters in the Jiaozhou Bay and Yellow Sea. Local maritime safety administration officials claimed that they did not receive any report on blast-related marine pollution until four hours after the leak was detected, thus missing an opportunity to prevent the damage. According to some experts participating in the clean-up work, most of the oil spill has been removed. The remainder is difficult to clear and will take at least a month to remove. Some components in the oil, such as asphalt, will sink to the sea bottom, making it difficult to find and remove. Such components degrade slowly, and will continue to be toxic and harmful to marine environment and offshore aquaculture.
The new Civil Procedure Law of China came into effect in January 2013, for the first time recognizing public interest litigation in China’s laws. It is worth mentioning that on November 29, 2013, just one week after the Sinopec explosion, the All-China Environment Fed*eration, a Chinese environmental organization, filed a lawsuit against PetroChina for illegally discharging waste drilling water, causing severe pollution in Jilin province. The organization sued PetroChina for CNY 60.8 million (USD 10 million) for environmental restoration. In the case of Sinopec, the All-China Environment Fede*ration stated that it would send a lawyer to participate in the investigation process, and did not exclude the possibility of filing a public interest litigation case against Sinopec, should it find the company had caused serious contamination.
Financial Impact
The explosion had limited impact on Sinopec’s refining capacity. However, since it caused many casualties, the accident has attracted much public attention. Sinopec is potentially required to pay large amounts of compensation and government fines. Sinopec has established an internal safety production fund but whether the fund can hedge against the potential financial losses remains unknown. Sinopec indicated in its 2012 annual report that “The process of petroleum chemical production is exposed to the risks of inflammation, explosion and environmental pollution and is vulnerable to natural disasters. Such contingencies may cause serious impacts to the society, major financial losses to the Company and grievous injuries to people. […T]he main assets and inventories of the Company have been insured. However, such measures may not shield the Company from financial losses or adverse impact resulting from such contingencies.”
Impact on the Petrochemical Industry
(1) Project site selection costs will increase due to potentially stricter policies and social license threshold
The Sinopec accident exposes the risks of improper planning of oil pipelines and the municipal pipe network. These risks exist not only in Qingdao, but also in the entire country. It is very likely that policies and regulations will become stricter with regards to petrochemical project planning and site selection. In addition, the accident further raised the public’s antipathy towards petrochemical projects; such projects will face greater pressure from the public. The explosion triggered a local collective protest in December 2013, against a Sinopec ethylene project planned to be located in Qingdao. When the environmental impact assessment results of the project were publicized for public opinion in April the same year, the project already faced bitter opposition.
(2) Operational costs will increase due to large scale safety checks and enhanced safety standards
After the accident, the Qingdao municipal government as well as China’s State Council announced that they would conduct citywide and nationwide industrial safety checks of all oil-and-gas pipelines. The Qingdao municipal government also stated that it would design a pipeline reconstruction program. Meanwhile, China’s State Council reported that they would pay special attention to safety distances of parallel pipelines and nearby buildings, demolishing buildings, shutting down or removing factories, or changing piping routes should there be any problems.
Impact on Other Industries
The oil spill posed a threat to vessels. Ships were warned not to enter Qingdao port after the accident. Even though one of China’s largest crude oil import terminals, the Qingdao port was temporarily closed for one week, only resuming operation at the end of November 2013.
Besides, the full extent of the impact on the offshore aquaculture industry by the residual and settling oil remains under assessment. However, using a similar incident as a reference, an explosion at a PetroChina crude oil offloading line in Dalian in 2010 disrupted Dalian Xingang port operations for weeks and the resulting oil slick destroyed the fishing industry along the coast.
Insight from SynTao
Based on the findings of the SynTao Local ESG News Monitoring System, in the past three years, occupational health and safety incidents have always generated the largest share of alerts in China, and Sinopec has always been listed in the top 10 companies most exposed to ESG risks in China.
Similar Sinopec safety accidents have occurred several times over the past years. In February 2013, an oil leak at a Sinopec pipeline in Jiangxi province contaminated local water supplies; in October 2010, a Sinopec owned oil storage in Yunan province exploded, injuring four; in July 2010, an abandoned Sinopec chemical factory in Jiangsu province exploded, killing 22; and in 2007, a Sinopec’s subsidiary in Canada was involved in an oil tank collapse. Additionally, Sinopec’s relations with local labor as well as communities are also poor. In 2012, Sinopec faces public protests against its proposed PX project in Ningbo, Zhejiang province for potential environmental and health impacts, and in 2011, Sinopec’s employees in Argentina went on strike due to unfair payment.
As for the explosion in November this year, Sinopec showed active responses. On the second day after the accident, Sinopec apologized to the public and stated that it would fully cooperate with the State Council’s investigation team. On the fourth day, Sinopec announced that it would conduct a group-wide probe of all oil-and-gas pipelines. On the sixth day, the company suspended two managers responsible for the accident and announced that it would make November 22 a Sinopec “day of safety warning”.
According to SynTao’s company ESG database, Sinopec has issued a Guideline for Health, Safety & Environment Performance Appraisal, conducted a series of occupational health and safety programs, and set relevant requirements and standards for its contractors and suppliers inside and outside China. However, considering the company is frequently involved in health and safety accidents and does not have a community engagement policy in place, corresponding risks remain and should be of concern to investors.
Written by Liu Yujun
This article was originally published in China ESG Monitor (November 2013) -- a monthly newsletter highlighting ESG trends and research relevant to sustainable investment in China.
To subscribe, please send an email to esg@syntao.com with the subject “subscribe”.