Why Traditional Risk Management
 Fails in The Oil and Gas Sector
-   Empirical Front-Line Evidence and Effective Solutions...
Outline

1.0 Introduction

2.0 Defining Risk Management

3.0 Nature of Risk for Oil and Gas Projects

4.0 Effective Risk M...
1.0 Introduction
               Why is Managing Risk Important?

The intent of risk management is to improve business (pro...
2.0 Defining Risk Management
      There is a Link Between Risk Management and
                    Project Outcomes*

    ...
Outline
1.0 Introduction


2.0 Defining Risk Management

3.0 Nature of Risk for Oil and Gas Projects

4.0 Effective Risk M...
2.0 Defining Risk Management
                  Defining Risk

                     Risk:
 Any uncertainty that, if it occu...
2.0 Defining Risk Management
       Risk Management is A Structured Process

Risk management is the methodology of identif...
2.0 Defining Risk Management
           Overview of The Risk Management Process
Setup & Define



                      Ri...
2.0 Defining Risk Management
The Risk Management Process Results in a Register
to Help Projects Track, Quantify, and Contr...
Outline
1.0 Introduction

2.0 Defining Risk Management


3.0 Nature of Risk for Oil and Gas Projects

4.0 Effective Risk M...
3.0 Nature of Risk for Oil and Gas Projects
            Oil and Gas Industry Must Manage
               Wide Array of Pote...
3.0 Nature of Risk for Oil and Gas Projects
Current State of Risk Management in Oil and Gas Industry

  Many companies and...
3.0 Nature of Risk for Oil and Gas Projects
Technical, Planning, and Organizational Risks Pre-dominate
 (Highest Rated Cap...
3.0 Nature of Risk for Oil and Gas Projects
                         Oil and Gas Industry Project Performance Needs
      ...
3.0 Nature of Risk for Oil and Gas Projects
Oil and Gas Project Failures Have Increasing Public Exposure
3.0 Nature of Risk for Oil and Gas Projects
       Why Isn’t Risk Management Working Better
Part of the answer is that pro...
3.0 Defining Risk Management
Project Teams Fail to Complete the Risk Management Process
    Setup & Define                ...
3.0 Nature of Risk for Oil and Gas Projects
           There Are a Diverse Set of Barriers
           Preventing Better Im...
Outline
1.0 Introduction

2.0 Defining Risk Management

3.0 Nature of Risk for Oil and Gas Projects

4.0 Effective Risk Ma...
4.0 Effective Risk Management

              Risk Management Case Study

Deepwater floating oil production facility to rec...
4.0 Effective Risk Management
          Key Initial Steps in Implementing an Effective
1.   Education
                    ...
4.0 Effective Risk Management –
       Tools and Techniques


4.1 Risk Identification
4.2 Risk Evaluation
4.3 Risk Managem...
4.0 Effective Risk Management –
                                   4.1 Risk Identification

Setup & Define



            ...
4.0 Effective Risk Management –
                           4.1 Risk Identification

 A series of facilitated cross-functio...
4. Effective Risk Management
                  4.1 Risk Identification
The Project Used a Hierarchical RBS and WBS to Effe...
4. Effective Risk Management
                     4.1 Risk Identification
        The Project Used a an External Facilitat...
4.0 Effective Risk Management –
                                   4.2 Risk Evaluation

Setup & Define



                ...
4. Effective Risk Management
The Project Adopted A Consistent Scoring Methodology
                 4.2 Risk Evaluation
   ...
4. Effective Risk Management
The Project Adopted A Consistent Scoring Methodology
                 4.2 Risk Evaluation
   ...
4. Effective Risk Management
         4.2 Risk Evaluation
Impact and Probability Values Were Quantified.
          30




...
4.0 Effective Risk Management –
                                   4.3 Risk Management

Setup & Define



                ...
4. Effective Risk Management
                   4.3 Risk Management
Developing Effective Responses Was the Most Difficult ...
4. Effective Risk Management
                     4.3 Risk Management
    A Mitigation Index Was Used to Prioritize Action...
4. Effective Risk Management
          4.3 Risk Management
Overdue Action Plans Were Quickly Highlighted
4. Effective Risk Management
        4.3 Risk Management
   Risk Profile Was Initially Very High


                       ...
4. Effective Risk Management
               4.3 Risk Management
However, the Team Felt that Most Risks Were Manageable


 ...
4.0 Effective Risk Management –
                                       4.4 Risk Control

Setup & Define



               ...
4. Effective Risk Management
                        4.4 Risk Control
The Project Leadership Team Reviewed Progress on Clo...
4. Effective Risk Management

   The Project is Still Ongoing but the Results Are Promising

Project is on-schedule and on...
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AACE Presentation Final 2007

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AACE Presentation Final 2007

  1. 1. Why Traditional Risk Management Fails in The Oil and Gas Sector - Empirical Front-Line Evidence and Effective Solutions- Brett Schroeder Jan Jackson Asset Performance Networks, LLC
  2. 2. Outline 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
  3. 3. 1.0 Introduction 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 risk recent analyses of petrochemical and energy projects showed that anywhere from 25% to 35% of major capital projects can be classified as a failure
  4. 4. 2.0 Defining Risk Management There is a Link Between Risk Management and Project Outcomes* 1.8 Combined Schedule/Cost Performance 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1 0.9 0.8 Not Partly Adequate Fully Adequate Adequate Adequate Adequacy of Assigning Risk Owners *Cook-Davies, 2005
  5. 5. Outline 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
  6. 6. 2.0 Defining Risk Management Defining Risk Risk: Any uncertainty that, if it occurs, would affect one or more objectives Threat: Opportunity: Any uncertainty that, if Any uncertainty that, if it occurs, would affect it occurs, would affect one or more objectives one or more objectives negatively positively
  7. 7. 2.0 Defining Risk Management 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 level Confidence in the project performance throughout the project life cycle Current schedule of risks identifying ownership, actions, status Method of prioritising key issues and effective actions
  8. 8. 2.0 Defining Risk Management Overview of The Risk Management Process Setup & Define Risk Eliminate Identification Trivial Risks Periodic Review No Risk Evaluation Latent Risk Immediate Action Active Risk Accepted Risk Action Plans Active Risk NO Obtain Contingency Acceptance Plans YES YES RISK NO Implement Monitor & Accepted Risk Closed Risk Action Plans Control OCCURS
  9. 9. 2.0 Defining Risk Management The Risk Management Process Results in a Register to Help Projects Track, Quantify, and Control Risks Sample Register
  10. 10. Outline 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
  11. 11. 3.0 Nature of Risk for Oil and Gas Projects Oil and Gas Industry Must Manage Wide 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
  12. 12. 3.0 Nature of Risk for Oil and Gas Projects Current State of Risk Management in Oil and Gas Industry 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
  13. 13. 3.0 Nature of Risk for Oil and Gas Projects Technical, Planning, and Organizational Risks Pre-dominate (Highest Rated Capital Project Risk Areas Listed in Order of Risk Severity) RISK CATEGORY SUB-CATEGORIES -- Ensuring adequate technical definition prior to detailed engineering 1. Technology -- Use of new or unproven technology -- Design flaws -- Permitting takes longer than anticipated 2. Planning/Schedule -- Long-lead times for major equipment -- Adequate staffing, 3. Organizational -- Effective team Integration and interface management -- Partner alignment 4. Market/Commercial -- Ensuring robust economic case (ROI) (Economic) -- Cost escalation and budget constraints -- Tie-ins with existing facilities (Brownfield modifications) 5. Scope Definition -- Adequate understanding of OSBL (Outside Battery Limits) interfaces 6. Procurement & Materials -- Availability of staff and supporting equipment 7. Commissioning & Startup -- Interference with on-going operations (Operational) 8. Health, Safety, and -- Safety Incident Environment Based on 20 Recent Project Risk Registers
  14. 14. 3.0 Nature of Risk for Oil and Gas Projects Oil and Gas Industry Project Performance Needs Improvement Percentage of Projects Exceeding Budget and Cycle Time by More Than 10 Percent 50% Percentage of Projects 40 30 Mega Projects (> $1b) 20 Other (< $1b) 10 0 Exceed Budget Exceed Cycle Time by 10% by 10% Source: Booz Allen, Capital Project Execution in the Oil and Gas Industry
  15. 15. 3.0 Nature of Risk for Oil and Gas Projects Oil and Gas Project Failures Have Increasing Public Exposure
  16. 16. 3.0 Nature of Risk for Oil and Gas Projects Why 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 core team members -Failure to follow-up on tracking risks and developing effective risk response plans -Lack of visibility to management
  17. 17. 3.0 Defining Risk Management Project Teams Fail to Complete the Risk Management Process Setup & Define Estimated Level of Implementation 90% Risk Eliminate Identification Trivial Risks 75% Periodic Review No Risk Evaluation Latent Risk Immediate Action Active Risk Accepted Risk 30% Action Plans Active Risk NO Obtain Contingency Acceptance Plans YES YES 15% RISK NO Implement Monitor & Accepted Risk Closed Risk Action Plans Control OCCURS
  18. 18. 3.0 Nature of Risk for Oil and Gas Projects There Are a Diverse Set of Barriers Preventing 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
  19. 19. Outline 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
  20. 20. 4.0 Effective Risk Management Risk Management Case Study 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
  21. 21. 4.0 Effective Risk Management Key Initial Steps in Implementing an Effective 1. Education Risk Management Strategy An 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 Resourcing Appointment 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 Review Progress on action items reviewed at monthly team meetings 5. Standardized Approach and Tools Initially an Excel spreadsheet was adopted, but as the project moved forward a web-based system was implemented.
  22. 22. 4.0 Effective Risk Management – Tools and Techniques 4.1 Risk Identification 4.2 Risk Evaluation 4.3 Risk Management 4.4 Risk Control
  23. 23. 4.0 Effective Risk Management – 4.1 Risk Identification Setup & Define Risk Eliminate Identification Trivial Risks Periodic Review No Risk Evaluation Latent Risk Immediate Action Active Risk Accepted Risk Action Plans Active Risk NO Obtain Contingency Acceptance Plans YES YES RISK NO Implement Monitor & Accepted Risk Closed Risk Action Plans Control OCCURS
  24. 24. 4.0 Effective Risk Management – 4.1 Risk Identification A series of facilitated cross-functional Risk Workshops were held at key points in the project life-cycle to identify risks Project Development Phasing Close Close Feasibility Feasibility Concept Concept Definition Definition Execution Execution Out Out Operation Operation Phase Phase Phase Phase Phase Phase Phase Phase Phase Phase Risk registers were obtained from ongoing projects to help brainstorm the risks, provide a starting point, and Risk Workshop(s) identify lessons learned
  25. 25. 4. Effective Risk Management 4.1 Risk Identification The Project Used a Hierarchical RBS and WBS to Effectively Categorize Sources of Risks
  26. 26. 4. Effective Risk Management 4.1 Risk Identification The Project Used a an External Facilitator to Help Ensure an Open Mindset FAMOUS LAST WORDS… QUESTION EVERYTHING… It’s never been a problem in What if it’s not ready on the past… time? That’ll never happen… What if it doesn’t work? It is all under control… What if the assumptions are We could be getting on with wrong? the job instead of thinking How can it go wrong? about risks… Where are the weaknesses? 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
  27. 27. 4.0 Effective Risk Management – 4.2 Risk Evaluation Setup & Define Risk Eliminate Identification Trivial Risks Periodic Review No Risk Evaluation Latent Risk Immediate Action Active Risk Accepted Risk Action Plans Active Risk NO Obtain Contingency Acceptance Plans YES YES RISK NO Implement Monitor & Accepted Risk Closed Risk Action Plans Control OCCURS
  28. 28. 4. Effective Risk Management The Project Adopted A Consistent Scoring Methodology 4.2 Risk Evaluation The Project Adopted A Consistent Scoring Method… (Risk Severity = Probability * Impact) PROBABILITY OF OCCURRENCE PROBABILITY OF OCCURRENCE RISK Very Low Very Low Low Low Medium Medium High High RISK 1 2 2 33 44 SEVERITY Neglectable Neglectable Not Likely Not Likely Sometimes Sometimes Repeated Incidents Repeated Incidents SEVERITY [Probability of [Probability of [Probability of [Probability of [Probability of [Probability of [Probability of [Probability of Occurrence 1/1000] Occurrence 1/100] Occurrence 1/1000] Occurrence 1/100] Occurrence 1/10] Occurrence 1/10] Occurrence 1/1] Occurrence 1/1] Very High Very High 4 4 High High IMPACT High High 3 3 Medium IMPACT Medium Medium Medium 2 2 Acceptable Acceptable Low Low 1 1
  29. 29. 4. Effective Risk Management The Project Adopted A Consistent Scoring Methodology 4.2 Risk Evaluation …and Quantified Risks Impact Where Possible
  30. 30. 4. Effective Risk Management 4.2 Risk Evaluation Impact and Probability Values Were Quantified. 30 A quantitative range is inputted to determined Impact Rating. The “most likely” value drives the Rating. The project made use of the economic model to help quantify the impact ranges
  31. 31. 4.0 Effective Risk Management – 4.3 Risk Management Setup & Define Risk Eliminate Identification Trivial Risks Periodic Review No Risk Evaluation Latent Risk Immediate Action Active Risk Accepted Risk Action Plans Active Risk NO Obtain Contingency Acceptance Plans YES YES RISK NO Implement Monitor & Accepted Risk Closed Risk Action Plans Control OCCURS
  32. 32. 4. Effective Risk Management 4.3 Risk Management Developing Effective Responses Was the Most Difficult Challenge 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
  33. 33. 4. Effective Risk Management 4.3 Risk Management A Mitigation Index Was Used to Prioritize Action Plans The project team used a Mitigation Index to help prioritize Mitigation Index = Risk Reduction Cost of Mitigation Risk Reduction is Unmitigated Risk – Mitigated Risk Cost of Mitigation is the total cost to mitigate the risk This metric identified the actions with the potential to add the most value to the project
  34. 34. 4. Effective Risk Management 4.3 Risk Management Overdue Action Plans Were Quickly Highlighted
  35. 35. 4. Effective Risk Management 4.3 Risk Management Risk Profile Was Initially Very High Risk Severity by WBS Area
  36. 36. 4. Effective Risk Management 4.3 Risk Management However, the Team Felt that Most Risks Were Manageable Risk Exposure = Manageability*Severity
  37. 37. 4.0 Effective Risk Management – 4.4 Risk Control Setup & Define Risk Eliminate Identification Trivial Risks Periodic Review No Risk Evaluation Latent Risk Immediate Action Active Risk Accepted Risk Action Plans Active Risk NO Obtain Contingency Acceptance Plans YES YES RISK NO Implement Monitor & Accepted Risk Closed Risk Action Plans Control OCCURS
  38. 38. 4. Effective Risk Management 4.4 Risk Control The Project Leadership Team Reviewed Progress on Closing Out Risks On a Regular Basis
  39. 39. 4. Effective Risk Management The 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

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