Risk Management in the petrochemical industry - a game theoretic approach

The thesis studies risk management and the complex human interactions in the petrochemical industry using game theoretic methods.

In a first step, the risk management problem is described as a simultaneous inspection game, in which the management of a model petrochemical company makes a decision of safety rule enforcement and the worker faces a trade-off between not violating or violating these rules. Violating leads to a gain if rules are not enforced, and to a loss if enforced. In this simple model, comparative statics analyses show how increased punishment and increased management commitment increase safety standards in the company. The cost and benefit parameters of the analysis are adapted from the “real world”.

In a second step, the risk management problem is described as an enhanced, sequential inspection game in which incident risks are considered. The equilibrium results are used to develop a graphical risk management tool, the “Petrochemical Organisation Risk Triangle” (PORT). The PORT demonstrates how an enhancement of safety culture in the industry decreases the risk of incident. Comparative statics analyses including the effects of technological progress, safety culture incentives, increased punishment, management commitment and external contractors are then discussed using the PORT. It is concluded that in improving a company’s safety culture, management commitment is more effective than increased punishment and that contractors are key players in achieving good safety performance.

Finally, the thesis presents an economic cost and benefit analysis of a model company to quantify and evaluate current risk management practices based on industrial data.