Crisis Development 2008 02 06

Assessment of the Significance of Crises Through Examples from Various Industries and the use of a Development Model Franco Oboni & Cesar Oboni Riskope International SA ©, 2004-*, www.oboni.net

Our Lives, Corporations, Projects Can be seen as a never ending succession of cycles of growth, peace, turmoil, i.e. cycles of great changes we call crises. Fast growth can be seen as a positive crisis: in some cases it can, however, suddenly turn into a negative crisis. A crisis is a decisive moment, particularly in times of danger or difficulty. Riskope International SA ©, 2004-*, www.oboni.net

Generic Phased Crisis Model Phase 1 Phase 2 Phase 3 Phase 4 Phase 1 Potential Latent Acute Return Potential Emergency that Event Intensity : from Desired Level of does not evolve into Service emergency to crisis a crisis Tolerated level of disservice (minor Triggering emergency) point for the emergency plan Max tolerated Controlled disservice limit crisis (max emergency) Crisis Uncontrolled crisis…may evolve to catastrophic consequences Catastrophic crisis One crisis cycle (time) Riskope International SA ©, 2004-*, www.oboni.net

ERM excellence criteria: •Risk/reward optimization •Enterprise wide view of risks •Control processes for risks including: •Hazard identification •Risk evaluation •Risk management and loss control •Benchmarking against predefined risk tolerability criteria Riskope International SA ©, 2004-*, www.oboni.net

A Simplified Model of Public Reactions can be Suggested to Evaluate Crises Acceptability… but this approach is not sufficient to allow proper allocation of mitigative funds. Riskope International SA ©, 2004-*, www.oboni.net

Many Companies Start by Using Qualitative (indexed) Approaches to Risk Assessment. Likelihood of Occurrence Consequences Very High High Moderate Low Negligible Highest Risk Low Risk VH/H VH/M VH/L Very High VH/VH VH/N High Risk H/VH H/M H/L H/N High H/H High Risk Moderate Risk M/H M/L M/N Moderate M/VH M/M Low Risk L/VH L/H L/M L/N Low L/L Low Risk Negligible Risk VL/H VL/M VL/L Very Low VL/VH VL/N These approaches are ok at screening level. They may help technical people, but fail to properly inform decision makers and the CFO…do not help comparing risks throught the Entreprise…. Riskope International SA ©, 2004-*, www.oboni.net

All along this presentation we will show a simplified form of Quantitative Risk Assessment applied to world-wide famous cases. Some companies use ERM, some do not. Of those that use ERM, some use overly crude systems that blur reality either in too dark or too rosy tones. The future lies in using Risk to weigh decisions, rather than just guiding mitigation Riskope International SA ©, 2004-*, www.oboni.net

Example 1 Tailings Dam Failure at Los Frailes: Boliden Shares Quotes Direct costs: appx. 150MUS$ Riskope International SA ©, 2004-*, www.oboni.net

A useful metrics to measure, after the facts, the “Enterprise disservice” of a company can be: the Share Value drop in case of a crisis, which, of course, compounds with the direct costs of such a crisis Riskope International SA ©, 2004-*, www.oboni.net

Examples of other metrics that can be used: Loss of habitat (km2) • • Loss of species (biodiversity, number of species) • Loss of human lives (number of casualties) • Any complex metric that can be derived for example by using “multiple portfolio” analysis . Riskope International SA ©, 2004-*, www.oboni.net

Generic Phased Crisis Model Example: Potential Acute Return Latent 1999 Dec. Report on the causes of the dam failure is published by the regional government of Andalusia Loss of share value appx. 95%, still not fully recovered in May 2007 The Dam Failure Occurred 04/98, but the latency started many years before the crisis Riskope International SA ©, 2004-*, www.oboni.net

A priori Estimates of the probability of the disservice to happen (F. Oboni & C. Oboni, Improving Sustainability through Reasonable Risk & Crisis Management, Appendix 3, A Specific Tool for Estimating a Probability, 2007) Likelihood of Potential Frequency based Px to see the Example of common Example of Negative Example of Positive Phenomena on a “Case History” even next year events with the events with the same events with the same Approach (px min - px max) same level of level of likelihood level of likelihood likelihood Very High Happens Repeatedly (at least 0.1 - 1.0 Power loss at home Fender bender You find 1cent on the (10-1 - 100) Likelihood once last year, on a set of 1 to next year ground Phenomena 10 items or persons.) High Likelihood Happens Several Times 0.01 - 0.1 Someone in your A water tap leaks in your Someone in your circle (10-2 - 10-1) Phenomena (between 1 time last year and family moves house home gets pregnant 1 time in the 10 previous next year years, on a set of 10 items or persons.) Moderate Happens Once in a While 0.001 - 0.01 One of your friends A mirror is broken A person you know get a (10-3 - 10-2) Likelihood (between 1 time in the gets fired out of the huge career Phenomena previous years and 1 time in blue next year advancement the 10 previous years, on a set of 100 items or persons) Low Likelihood Rarely Happens (1 time in the 0.0001 - 0.001 Someone in your A tailing dam fails A person you know (10-4 - 10-3) Phenomena 50 previous years, on a set of family or your suddenly becomes a 20 to 200 items or persons.) friend’s family have a millionaire extremely severe car accident next year Very Low Extremely Rare (1 time in the 0.0001-0.00001 Total loss of a house An elevator get stuck A person you know (10-4 -10-5) Likelihood 50 previous years, on a set of in a village up to a inherits a very large sum Phenomena 200 to 2000 items or persons.) small city from an unknown family member Lower Get stuck by A Hydro dam fails A person you know wins probability exist lightning in a lottery Riskope International SA ©, 2004-*, www.oboni.net

A priori Estimates of Class State of Nature Example Descriptors VG Very Good Not in seismic area, firm foundation, regular the probability of the maintenance, new materials, sound design, good management, good communications. disservice to happen G Good (See reference on F Favourable prior slide) M Moderate P Poor Expert judgment in intermediate positions VP Very Poor High seismic area, poor foundation, bad maintenance, obsolete materials, poor design, bad management, bad communications. Likelihood of px VG px G px F px M px P px VP Phenomena 10-1 1.5 x 10-1 2.5 x 10-1 4.5 x 10-1 7.0 x 10-1 1.0 Very High Likelihood Phenomena 10-2 1.5 x 10-2 2.5 x 10-2 4.5 x 10-2 7.0 x 10-2 0.1 High Likelihood Phenomena 10-3 1.5 x 10-3 2.5 x 10-3 4.5 x 10-3 7.0 x 10-3 0.01 Moderate Likelihood Phenomena 10-4 1.5 x 10-4 2.5 x 10-4 4.5 x 10-4 7.0 x 10-4 0.001 Low Likelihood Phenomena 10-5 1.5 x 10-5 2.5 x 10-5 4.5 x 10-5 7.0x 10-5 0.0001 Very Low Likelihood Riskope International SA ©, 2004-*, www.oboni.net

Was that crisis tolerable, when compared to a “large company” tolerability curve? 1 0.9 0.8 Annual Probability 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0 100 200 300 400 500 Costs of Accident in MUS$ TOLERABLE from a large company’s tolerability point of view. As a matter of fact, Boliden did not fold up, it even sustained two similar accidents. Another company, Placer Dome, sustained a similar blow at Marcopper and also survived…. The latency lasted a few years before the crisis. Riskope International SA ©, 2004-*, www.oboni.net

Tolerability is interpreted very differently from site to site. 1.000000 0.100000 Probability of Event 0.010000 0.001000 0.000100 0.000010 0.000001 0.01 0.1 1 10 100 Cost of Events ($ Million) Each dot on the graph represents the centre of a risk scenario Riskope International SA ©, 2004-*, www.oboni.net

Other examples of tolerability curves. 1 99 0.9 128 0.8 Annual Probability 0.7 0.6 142 0.5 0.4 190 0.3 0.2 0.1 224 0 638 -100 100 300 500 700 Costs of Accident in MUS$ Riskope International SA ©, 2004-*, www.oboni.net

Application to Terrorism Risk Assessment and Management Riskope International SA ©, 2004-*, www.oboni.net

It is in the Latency Phase that the best returns are to be expected from: • Analysis of what could go wrong, and how much it would “cost” the company: Risk Assessments • Analysis of the means to bring the risks towards a tolerable level in a sustainable way: Risk Management • Analysis of how to behave when a residual risk hits, i.e. Crisis Management Riskope International SA ©, 2004-*, www.oboni.net

Risk management is a balancing exercise between mitigations, investment and residual exposure. RISK MITIGATIVE “Acceptable” COSTS Mitigative Threshold ALARA ALARP BACT Zero Risk Costs to Attain Acceptable Acceptable Residual Risk Residual Risk 0% 100% Residual Hazards Mitigated Hazards Riskope International SA ©, 2004-*, www.oboni.net

Example 2 Information warfare attack May 16th 2007: Apple Shares Quotes Direct costs: Nil Riskope International SA ©, 2004-*, www.oboni.net

Generic Explosive Crisis Model Example: Return Latent Potential Acute Loss of Share value: almost nil because crisis was perfectly contained (but some people did lose a total of 4BUS$, as other made that money) Latency is not applicable in this case Riskope International SA ©, 2004-*, www.oboni.net

Generic Explosive Crisis Model Phase 1 Phase 2 Phase 3 Phase 4 Phase 1 Potential Latent Acute Return Potential Event Intensity : from Desired Level of emergency to crisis Service Tolerated level of disservice (minor Triggering point for emergency) the emergency plan Max tolerated Controlled crisis disservice limit (max emergency) Crisis Uncontrolled crisis…may evolve to catastrophic consequences Catastrophic crisis One crisis cycle (time) Riskope International SA ©, 2004-*, www.oboni.net

Was that crisis tolerable, when compared to a “large company” tolerability curve? 1 0.9 0.8 Annual Probability 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0 100 200 300 400 500 Costs of Accident in MUS$ A priori INTOLERABLE from a large company’s tolerability point of view. Risk was mitigated by implementation of Information Warfare counter measures. The latency is not applicable to this type of crisis. The crisis got contained and dealt with right away thanks to proper planning and crisis management. Someone did an analysis similar to this one and designed proper risk management measures. You most likely did not even know about this crisis. Riskope International SA ©, 2004-*, www.oboni.net

Example 3 Project over costs lead to project suspension: Nova Gold Shares Quotes Direct costs: appx. 250MUS$ Riskope International SA ©, 2004-*, www.oboni.net

Generic Explosive with “long latency” Crisis Model Example: Latent Return Acute 2007, Nov. 26 Nova Gold Resources announcement that they will suspend construction at the Galore Creek Mine. Loss of Share Value 50% Latency started 6months to several years before the crisis Riskope International SA ©, 2004-*, www.oboni.net

Was that crisis tolerable, when compared to a “large company” tolerability curve? 1 0.9 0.8 Annual Probability 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0 100 200 300 400 500 Costs of Accident in MUS$ BARELY TOLERABLE from a large company’s tolerability point of view. The latency lasted at least six months to several years before the crisis. It was time to pull the plug on this project, and the company’s JV with a major mining company did exactly that. The JV is now reexamining the project. The major company’s losses were contained, and the minor JV member did not undergo immediate life breaking losses. Riskope International SA ©, 2004-*, www.oboni.net

Hazard at Road (Small Scale Events) Canrash Red Beds, South Peaks Yanashalla Area $200 & 1999 Failure Area Rockfalls km 17/18 Area Rockfalls 17.2 58.4 79.8 80.5 94.1 Rockfalls $180 Rockfalls from undercut 57.5 85.7 112.7 km 24-28 Area overblasted zones $160 Sackung 26.4 54.7 60.4 69.2 91.8 92.9 Rockfalls $140 82.6 93.2 102.1 Risk US$M Colluvium $120 Rockfalls 56.4 60.1 73 93.5 101.3 110.7 $100 57.1 86.4 93.7 102.8 Red Beds Area $80 15.819.3 16.7 22.3 17.6 18.7 19.5 16.3 53.9 60.8 62.3 69 81.5 83.2 83.9 105.3 111.9 107.7 113.1 108.5 113.7 115.1 17.9 18 22.9 23.6 $60 25.5 22.8 24.8 25.8 33.4 37.3 35.537.7 44.6 45.7 47.5 53.1 55.1 55.3 55.5 61.1 65.468.9 72.575.9 61.8 66.4 62.7 67.2 63.5 67.4 64.1 68.1 69.3 78.2 82.1 86.1 90.8 95.8 84.9 88.5 93.4 96.1 101.7106 109.8 116.6 104.2 111 107.1 113.4 19.7 30.5 $40 20.4 25.4 20.9 23.1 38.3 43.8 48.7 39.1 39.8 4546.7 50.3 56 51 51.4 59.8 64.7 69.7 61.3 64.9 65.1 65.6 65.9 66.2 66.7 81.1 98.7 114.8 21.6 22.4 $20 95 96.2 20.2 27.1 56.1 61.6 65.2 69.5 57.3 63 66.1 70 72.7 57.9 59.3 66.8 67 24.4 25.9 30.832.2 40.2 62.8 63.1 63.8 64.4 84.8 86 34.6 35 29 32.5 94.5 95.4 42.7 23.9 71.3 72.2 73.8 3.9 8.3 43.3 32.7 36.3 34.337 52.2 31.9 35.4 41.0 25.2 0.7 3.9 7.810.3 14.117.420.724.127.5 31.634.9 38.9 43.646.8 1112.7 17.8 22.2 25.929.3 33 35.3 404243.8 47.4 12.5 18.3 23.5 27.2 32.4 35.9 40.6 44.6 36.6 11.4 15.2 18.9 23.426.6 30.633.8 37.8 41.6 45.5 50.0 27.8 89.392.6 $0 2.6 2.7 11.8 19 19.5 24.627.9 19.9 2526.8 20.4 28.1 28.6 28.8 28.7 29.1 36.6 46.5 60.0 61.0 62.0 62.3 69.5 69.8 70.5 70.8 93.9 94.3 94.5 94.6 94.7 95 101 109 0 10 20 30 40 50 60 70 80 90 100 110 120 Highway Chainage Riskope International SA ©, 2004-*, www.oboni.net

Tolerability for Risks on Pipeline and Road 1.00000 0.10000 Probability of Occurrence 0.01000 0.00100 0.00010 0.00001 0.00000 0.001 0.01 0.1 1 10 100 1000 Cost of Consequence in MUS$ Riskope/client Guidelines BHP Guidelines Green triangle Pipeline Rupture Hazard at Road (Small Scale Events) Blockage / deformation of Road Riskope International SA ©, 2004-*, www.oboni.net

Hazard: Landslide 7,000 traffic hit 6,000 service disruption 5,000 infrastructure 4,000 Risk 3,000 2,000 1,000 0 7901 901 909 800 1 2 3 4 07 01 Segment # Province-wide “ERM” Riskope International SA ©, 2004-*, www.oboni.net

Examples of concrete actions suggested after a Risk Assessment: •Buses escorted like chemical trucks to the mine •Mining trucks parking policy in the pit •Check-in procedure for executives at hotels •Behavioral recommendation for people traveling with sensitive data •Pipeline monitoring (instrumentation and patrolling) •Transportation network modifications •Building an entire processing plant on a fill •Installing rockfall nets •Implementing proper crisis communication procedures Riskope International SA ©, 2004-*, www.oboni.net

Over the years we have identified a list of project potential risks as follows: Riskope International SA ©, 2004-*, www.oboni.net

3 phases and a total of five steps in the life of a project: • Design/Implementation/Construction – Infrastructure (setting the bases…) – Superstructure (implementing…) • Life/Service – Service (using, developing, …) – Maintenance (repairing, adapting…) • Disposal/demolition (ending, releasing…) Each step has its own hazards and related risks… Riskope International SA ©, 2004-*, www.oboni.net

CDA uses these potential project risks to evaluate and compare alternatives all along their expected life in a transparent way. CDA eliminates well known NPV approaches pitfalls Riskope International SA ©, 2004-*, www.oboni.net

• Tools exist and do work • Experience is eloquent • We all prefer to succeed rather than fail • Thinking and fixing before it happens is way cheaper than fixing afterwards • Thanks to specific techniques each decision you make can be supported by transparent and rational evaluations • ERM will not eliminate losses but reduce them and allow for quicker rebound Riskope International SA ©, 2004-*, www.oboni.net

Crisis Development 2008 02 06

by Oboni Riskope Associates Inc. on Dec 14, 2008

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Crisis Development 2008 02 06 — Presentation Transcript