AACE Presentation Final 2007

Why Traditional Risk Management Why Traditional Risk Management Fails in The Oil and Gas SectorFails in The Oil and Gas Sector

-Empirical Front-Line Evidence and Effective Solutions-

Brett SchroederJan Jackson

Asset Performance Networks, LLC

OutlineOutline

1.0 Introduction

2.0 Defining Risk Management

3.0 Nature of Risk for Oil and Gas Projects

4.0 Effective Risk Management – Tools and Techniques

Why is Managing Risk Important?Why is Managing Risk Important?

The intent of risk management is to improve business (project) performance by avoiding surprises and reducing the frequency of poor outcomes

High expectations to continually improve project performance ….e.g., low cost, fast schedule, good operability

Limited availability of owner resources and skills ….i.e., "Doing more with Less”

Project disaster is still a very real riskrecent analyses of petrochemical and energy projects showed thatanywhere from 25% to 35% of major capital projects can be classified as a failure

1.0 Introduction1.0 Introduction

2.0 Defining Risk Management2.0 Defining Risk Management

0.80.9

11.11.21.31.41.51.61.71.8

NotAdequate

PartlyAdequate

Adequate FullyAdequate

Com

bine

d Sc

hedu

le/C

ost

Per

form

ance

Adequacy of Assigning Risk OwnersAdequacy of Assigning Risk Owners

There is a Link Between Risk Management andThere is a Link Between Risk Management andProject Outcomes*Project Outcomes*

*Cook-Davies, 2005

OutlineOutline

1.0 Introduction




Defining RiskDefining Risk

Opportunity:Any uncertainty that, if it occurs, would affect one or more objectives positively

Threat:Any uncertainty that, if it occurs, would affect one or more objectives negatively

Risk:Any uncertainty that, if it occurs, would affect

one or more objectives


Risk Management is A Structured Process Risk Management is A Structured Process

Risk management is the methodology of identifying, listing, assessing, prioritizing, registering, and controlling risks, throughout the Project Life Cycle, by eliminating or reducing the probability of occurrence and the potential impact caused by the threat

Risk management will deliver:

Information enabling management of aggregate project risks at the business levelConfidence in the project performance throughout the project life cycleCurrent schedule of risks identifying ownership, actions, statusMethod of prioritising key issues and effective actions


Overview of The Risk Management ProcessOverview of The Risk Management Process


Setup & Define

EliminateTrivial Risks

Risk Identification

Risk Evaluation Latent Risk Periodic Review No Immediate Action

Active Risk

Action Plans

Obtain Acceptance

Active Risk

Accepted Risk

NO

Accepted Risk ImplementAction Plans

Monitor & Control

Contingency Plans

RISKOCCURS Closed Risk

YES

YES

NO

The Risk Management Process Results in a RegisterThe Risk Management Process Results in a Registerto Help Projects Track, Quantify, and Control Risksto Help Projects Track, Quantify, and Control Risks


Sample Register

OutlineOutline

1.0 Introduction


3.0 Nature of Risk for Oil and Gas Projects3.0 Nature of Risk for Oil and Gas Projects


Oil and Gas Industry Must Manage Oil and Gas Industry Must Manage Wide Array of Potential RisksWide Array of Potential Risks

Complex set of internal and external interfaces

Project sizes and scale stress logistics and supply chain

Regional constraints and political issues

Technology stretch

Sensitivity to market conditions


Current State of Risk Management in Oil and Gas IndustryCurrent State of Risk Management in Oil and Gas Industry3.0 Nature of Risk for Oil and Gas Projects3.0 Nature of Risk for Oil and Gas Projects

Many companies and teams do conduct their own risk assessments and analysis in ad-hoc manner

Down side: e.g., various spreadsheets spread within the team, lack of consistency in scoring, failures to follow-up

Important risk occurrences and/or lessons learned are often lost

Not formally recorded Influenced by job transfers and promotions

No true linkage between upfront risk analysis and project outcomes

No “Corporate” formal structured and methodological Risk Management Process

Technical, Planning, and Organizational Risks PreTechnical, Planning, and Organizational Risks Pre--dominatedominate((Highest Rated Capital Project Risk AreasHighest Rated Capital Project Risk Areas Listed in Order of Risk Severity)Listed in Order of Risk Severity)

-- Safety Incident8. Health, Safety, and Environment

-- Interference with on-going operations7. Commissioning & Startup (Operational)

-- Availability of staff and supporting equipment6. Procurement & Materials

-- Tie-ins with existing facilities (Brownfield modifications) -- Adequate understanding of OSBL (Outside Battery Limits) interfaces5. Scope Definition

-- Ensuring robust economic case (ROI)-- Cost escalation and budget constraints

4. Market/Commercial (Economic)

-- Adequate staffing, -- Effective team Integration and interface management-- Partner alignment

3. Organizational

-- Permitting takes longer than anticipated-- Long-lead times for major equipment2. Planning/Schedule

-- Ensuring adequate technical definition prior to detailed engineering-- Use of new or unproven technology -- Design flaws

1. Technology

SUB-CATEGORIESRISK CATEGORY


Based on 20 Recent Project Risk Registers

Oil and Gas Industry Project Performance Needs Oil and Gas Industry Project Performance Needs ImprovementImprovement


50%

40

30

20

10

0Exceed Budget

by 10%Exceed Cycle Time

by 10%

Mega Projects (> $1b)

Other (< $1b)

Per

cent

age

of P

roje

cts

Percentage of Projects Exceeding Budget and Cycle Time by More Than 10 Percent

Source: Booz Allen, Capital Project Execution in the Oil and Gas Industry

Oil and Gas Project Failures Have Increasing Public Exposure Oil and Gas Project Failures Have Increasing Public Exposure


Why Isn’t Risk Management Working BetterWhy Isn’t Risk Management Working Better

Part of the answer is that projects are larger and more complex and risks are simply more difficult to manage given the increasing amount of stakeholders, host country issues, increases in cost escalation, and technical step-out

However, another part of the answer lies with how risk management is being implemented at the project level:

--Failure to embed the risk management process in the day-to-day project work process

- Lack of consistent and rigorous risk scoring and quantification-Lack of involvement in the risk management process from all coreteam members

-Failure to follow-up on tracking risks and developing effective risk response plans

-Lack of visibility to management


Project Teams Fail to Complete the Risk Management Process Project Teams Fail to Complete the Risk Management Process


Setup & Define


Risk Identification


90%

75%

15%

30%Active Risk

Action Plans

Obtain Acceptance

Active Risk

Accepted Risk

NO


Monitor & Control

Contingency Plans


YES

YES

NO

Estimated Level of Implementation

There Are a Diverse Set of Barriers There Are a Diverse Set of Barriers Preventing Better ImplementationPreventing Better Implementation


Perceived value of risk management is not apparent to Project Management Leadership

Cannot demonstrate that risk management works

Requires upfront time and effort by team

Project team is busy and has other priorities – risk management is an extra burden

OutlineOutline

1.0 Introduction



4.0 Effective Risk Management 4.0 Effective Risk Management –– Tools and TechniquesTools and Techniques

Risk Management Case StudyRisk Management Case Study

4.0 Effective Risk Management4.0 Effective Risk Management

Deepwater floating oil production facility to recover > 500 MM Barrels.

Located in a developing region without a fully established infrastructure and government regulations are evolving

Estimated development CAPEX ca. $3 billion

Project was schedule-driven to fully exploit production license window

Key Initial Steps in Implementing an EffectiveKey Initial Steps in Implementing an EffectiveRisk Management StrategyRisk Management Strategy

4.0 Effective Risk Management4.0 Effective Risk Management

1. EducationAn upfront educational session was held with team leadership to explain how the Risk Management process works and the benefits

2. Buy-in and Acceptance Many team members were initially skeptical of the process and felt it was over-board. However, the Project Manager bought-in and supported using a rigorous risk management process.

3. Adequate ResourcingAppointment of a full-time risk coordinator to manage the risk process, provide support to risk and action owners, and highlight risks where actions are not being progressed

4. Regular ReviewProgress on action items reviewed at monthly team meetings

5. Standardized Approach and ToolsInitially an Excel spreadsheet was adopted, but as the project moved forward a web-based system was implemented.

4.0 Effective Risk Management 4.0 Effective Risk Management ––Tools and TechniquesTools and Techniques

4.1 Risk Identification

4.2 Risk Evaluation

4.3 Risk Management

4.4 Risk Control

Setup & Define


Risk Identification


Active Risk

Action Plans

Obtain Acceptance

Active Risk

Accepted Risk

NO


Monitor & Control

Contingency Plans


YES

YES

NO

4.0 Effective Risk Management 4.0 Effective Risk Management ––4.1 Risk Identification4.1 Risk Identification

4.0 Effective Risk Management 4.0 Effective Risk Management ––4.1 Risk Identification4.1 Risk Identification

A series of facilitated cross-functional Risk Workshops were held at key points in the project life-cycle to identify risks

CloseOut

Phase

CloseOut

PhaseFeasibility

Phase

FeasibilityPhase

Concept Phase

Concept Phase

DefinitionPhase

DefinitionPhase

ExecutionPhase

ExecutionPhase

Risk Workshop(s)

Project Development Phasing

OperationOperation

Risk registers were obtainedfrom ongoing projects to help brainstorm therisks, provide a starting point, andidentify lessons learned

The Project Used a Hierarchical RBS and WBS to EffectivelyCategorize Sources of Risks

4. Effective Risk Management 4. Effective Risk Management 4.1 Risk Identification4.1 Risk Identification

The Project Used a an External Facilitator toHelp Ensure an Open Mindset

4. Effective Risk Management 4. Effective Risk Management 4.1 Risk Identification4.1 Risk Identification

FAMOUS LAST WORDS…It’s never been a problem in the past…That’ll never happen…It is all under control…We could be getting on with the job instead of thinking about risks…Trust me, it’s going to be fine…We’ll know what to do on the day…I think it’ll be all right from what I’ve heard

QUESTION EVERYTHING…What if it’s not ready on time?What if it doesn’t work?What if the assumptions are wrong?How can it go wrong?Where are the weaknesses?

Setup & Define


Risk Identification


Active Risk

Action Plans

Obtain Acceptance

Active Risk

Accepted Risk

NO


Monitor & Control

Contingency Plans


YES

YES

NO

4.0 Effective Risk Management 4.0 Effective Risk Management ––4.2 Risk Evaluation4.2 Risk Evaluation

Very Low Low Medium High1 2 3 4

Neglectable [Probability of

Occurrence 1/1000]

Not Likely [Probability of

Occurrence 1/100]

Sometimes [Probability of

Occurrence 1/10]

Repeated Incidents [Probability of

Occurrence 1/1]

Very High 4 High

High 3 Medium

Medium 2 Acceptable

Low 1

IMPA

CT

PROBABILITY OF OCCURRENCE

R I S K S E V E R I T Y

The Project Adopted A Consistent Scoring MethodologyThe Project Adopted A Consistent Scoring Methodology4. Effective Risk Management 4. Effective Risk Management

4.2 Risk Evaluation4.2 Risk Evaluation

The Project Adopted A Consistent Scoring Method…(Risk Severity = Probability * Impact)

Very Low1

Low2

Medium3

High4

Neglectable[Probability of

Occurrence 1/1000]

Not Likely[Probability of

Occurrence 1/100]

Sometimes[Probability of

Occurrence 1/10]

Repeated Incidents[Probability of

Occurrence 1/1]

RISK

SEVERITY

PROBABILITY OF OCCURRENCE

Very High

High

Medium

Low

4

3

2

1

IMPA

CT

Medium

Acceptable

High

The Project Adopted A Consistent Scoring MethodologyThe Project Adopted A Consistent Scoring Methodology4. Effective Risk Management 4. Effective Risk Management

4.2 Risk Evaluation4.2 Risk Evaluation

…and Quantified Risks Impact Where Possible

4. Effective Risk Management 4. Effective Risk Management 4.2 Risk Evaluation4.2 Risk Evaluation

A quantitativerange is inputtedto determined ImpactRating. The “most likely” value drivesthe Rating. The project made use of the economic modelto help quantify the impactranges

Impact and Probability Values Were Quantified.Impact and Probability Values Were Quantified.

30

Setup & Define


Risk Identification


Active Risk

Action Plans

Obtain Acceptance

Active Risk

Accepted Risk

NO


Monitor & Control

Contingency Plans


YES

YES

NO

4.0 Effective Risk Management 4.0 Effective Risk Management ––4.3 Risk Management4.3 Risk Management

4. Effective Risk Management 4. Effective Risk Management 4.3 Risk Management4.3 Risk Management

The project initially struggled with developing response plans. There were over a hundred risks and they had to narrow them down to a manageable number

Developing Effective Responses Was the Most Difficult ChallengeDeveloping Effective Responses Was the Most Difficult Challenge


The project team used a Mitigation Index to help prioritize

Mitigation Index = Risk ReductionCost of Mitigation

Risk Reduction is Unmitigated Risk – Mitigated RiskCost of Mitigation is the total cost to mitigate the risk

This metric identified the actions with the potential to add themost value to the project

A Mitigation Index Was Used to Prioritize Action PlansA Mitigation Index Was Used to Prioritize Action Plans


Overdue Action Plans Were Quickly HighlightedOverdue Action Plans Were Quickly Highlighted


Risk Profile Was Initially Very HighRisk Profile Was Initially Very High

Risk Severity byWBS Area


However, the Team Felt that Most Risks Were ManageableHowever, the Team Felt that Most Risks Were Manageable

Risk Exposure =Manageability*Severity

Setup & Define


Risk Identification


Active Risk

Action Plans

Obtain Acceptance

Active Risk

Accepted Risk

NO


Monitor & Control

Contingency Plans


YES

YES

NO

4.0 Effective Risk Management 4.0 Effective Risk Management ––4.4 Risk Control4.4 Risk Control

4. Effective Risk Management 4. Effective Risk Management 4.4 Risk Control4.4 Risk Control

The Project Leadership Team Reviewed Progress on Closing Out RisThe Project Leadership Team Reviewed Progress on Closing Out RisksksOn a Regular BasisOn a Regular Basis

4. Effective Risk Management4. Effective Risk Management

The Project is Still Ongoing but the Results Are PromisingThe Project is Still Ongoing but the Results Are Promising

Project is on-schedule and only slightly over budget

Risk management is embedded in the daily dialogue of the project leadership team

AACE Presentation Final 2007

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