User friendly risk management - Simon White

Quantitative Risk …

• Assessment

– Beliefs: what do we believe about the risk?

• Analysis

– Effects: what does it mean to the overall project?

• Awareness

– Actions: what should we do about it?

experience; questioning; expressing risk;

using historical data; confidence in process; methodology

Value from our:

“adding them up” – logical consequence of assessments Value from our:

communicating; understanding; experience; methodology Value from our:

Assessment → Analysis → Awareness

• Never been done before

• Challenging conditions

• Uncertain regulations

• Early phase

• Been done before

• Easy conditions

• Established regulations

• Mid-execution

P10P50

P90

Base

P10P50

P90

Base

• “Cheaper but

more risky”

• “More expensive,

less risky”

Assessment → Analysis → Awareness

• Techniques to help assessment

Credit: from Centrica Energy’s PACE guidelines.


• Assessment


• Analysis


• Awareness


“adding them up” – logical consequence of assessments



communicating; understanding; experience; methodology

Value from our:

discussion; organised thought; committing to “paper” Benefit:

Value from our:

Value from our:

ownership of risks and actions; demonstrate active management Benefit:

Benefit: logical, repeatable, indisputable


• Given the risk as we have expressed it:

– How valuable is response x?

– How much overall contingency is likely needed?

– Where is it likely needed?

– And when?

– What’s our biggest risk at P50?

– At P90?

– What contractual incentivisations are appropriate?

Where is it likely needed?

WE DON’T KNOW

“I don’t know”

1 – Deterministic

2 – Single +/-

3 – Individual +/-

4 – Explicit causes

Base estimate 16.4 MM USD

1 – Deterministic

• No expression of risk

1 – Deterministic

• As a breakdown, but still no expression of risk

Base

estimate

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9

Heavy lift vessel 1.6

Hook-up and

commissioning

4.3

Project services 0.6

Total 16.4

1 – Deterministic

• Logic is important (cost and schedule)

P10 Base P90

Base estimate 12 16.4 25 MM USD

P10 P50 P90

Base

2 – Single +/-

• Express risk with a single distribution

P10 Base P90

Base estimate 12 16.4 25 MM USD

P10 P50 P90

Base

P10 Base

(MM USD)

P90

Bulks 2.3

Fabrication 5.7

Transportation 1.9


Hook-up and

commissioning

4.3


Total 12 16.4 25

P10 P50 P90

Base

2 – Single +/-

• Breakdown, but still single +/-

P10 Base

(MM USD)

P90

Bulks 2.3

Fabrication 5.7

Transportation 1.9


Hook-up and

commissioning

4.3


Total 12 16.4 25

P10 P50 P90

Base

2 – Single +/-

• Use the uniform distribution, or better

Single value 1-point estimateMore knowledge /

less uncertainty

Beta Pert(larger shape parameter,

default shape parameter of 4)

3-point estimate

Triangle / Trigen 3-point estimate

Beta Pert(smaller shape parameter)

3-point estimate

Uniform 2-point estimateLess knowledge /

more uncertainty

Credit: from Centrica Energy’s QRA training manual

P10 Base

(MM USD)

P90

Bulks 1.7 2.3 3.5

Fabrication 4.2 5.7 8.7

Transportation 1.4 1.9 2.9

Heavy lift vessel 1.2 1.6 2.4

Hook-up and

commissioning

3.1 4.3 6.6

Project services 0.4 0.6 0.9

Total 12 16.4 25

- % + %

Base

P10 P50 P90

Base

2 – Single +/-

• Assume same proportional uncertainty, with single common cause

P10 Base

(MM USD)

P90

Bulks 1.7 2.3 3.5

Fabrication 4.2 5.7 8.7

Transportation 1.4 1.9 2.9

Heavy lift vessel 1.2 1.6 2.4

Hook-up and

commissioning

3.1 4.3 6.6

Project services 0.4 0.6 0.9

Total 12 16.4 25

- % + %

Base

P10 P50 P90

Base

3 – Individual +/- on each element

• Can express multiple common causes

Base

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9


Hook-up and

commissioning

4.3


Total 16.4

- % + %

Base

- % + %

Base

P10P50

P90

Base

Base

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9


Hook-up and

commissioning

4.3


Total 16.4

- % + %

Base

- % + %

Base

P10P50

P90

Base

4 – Explicit risk elements

• Specify “causes” explicitly, and how response could reduce risk

Base

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9


Hook-up and

commissioning

4.3


Total 16.4

- % + %

Base

- % + %

Base

P10P50

P90

Base

MitigateBase

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9


Hook-up and

commissioning

4.3


Total 16.4

- % + %

Base

- % + %

Base

P10P50

P90

Base

Mitigate


• Assessment


• Analysis


• Awareness


overall cost distribution, considered as a whole




what could cause deviation from base estimates; how much;

(+ why, who, when)

discussion; organised thought; committing to “paper”


overall level of risk; value of response; (+ visibility, management)

ownership of risks and actions; demonstrate active management

Value from our:

Ask about:

Benefit:

Ask about:

Value from our:

Ask about:

Value from our:

Benefit:

Benefit:

logical, repeatable, indisputable

“I don’t know”

• As long as we are clear about the assumptions we are making,

the QRA is useful

• QRA is challenged by challenging its assumptions

• Level of detail not so important

– The right level is where the team are thinking about the risk.

INDEPENDENCE I

Independence – problem 1

• Roll a die


• Roll 2 dice

• Roll 3 dice


• and more …

• Independence + abundance = certainty

• Allows us to spread risk

– e.g. insurance, acquisitions, diversification, portfolio

management

• “Central Limit Theorem”

– (but it isn’t)

• Important to recognise common causes

Recognise common causes

INDEPENDENCE II


P90 = 98 would be 135


Credit: from Centrica Energy’s PACE guidelines


Credit: from Centrica Energy’s PACE guidelines

Attempts to split the P90

(Costs in £m)

QRA output:

Base Mean P70 P90 P70 P90 P70 P90 P70 P90

Facilities

Long lead items 92.7 102.6 104.8 105.6 105.3 109.3 102.1 103.5 121.0 125.6

EPIC installation 278.7 403.9 431.3 443.1 414.5 430.4 420.0 434.4 363.7 377.6

CAR insurance 9.3 15.8 17.4 18.6 16.2 16.8 16.9 18.2 12.1 12.6

Drilling

10 wells complete 716.6 876.4 922.4 953.5 899.4 933.8 898.3 934.7 935.2 971.0

Overall project

Pre-define 46.5 46.5 46.5 46.5 47.7 49.5 45.3 45.6 60.7 63.0

JV costs 35.1 53.8 57.9 62.6 55.2 57.3 56.4 61.4 45.8 47.6

Project services 21.4 27.2 27.8 28.8 27.9 29.0 27.1 28.2 27.9 29.0

Total capital expenditure

TOTAL 1,200 1,526 1,566 1,626 1,566 1,626 1,566 1,626 1,566 1,626

Sum of individual lines: 1,200 1,526 1,608 1,659 1,566 1,626 1,566 1,626 1,566 1,626

Allocated by

mean proportion:

… or allocated by

percentile proportion:

… or allocated by

base proportion:

Credit: from Centrica Energy’s QRA training manual

Splitting the P90

• Use conditional averages, conditional on the overall outcome

• P90 factiles are conditional on overall outcome

being (on average) its P90

– Factiles of individual costs sum to the P90 total cost

– Factiles show what each element is “doing” (on average), when

total cost is P90 (on average)

– Condition is based on largest possible subset

• Any split or breakdown

– We can “account for” the risk

– Helps with validation (or invalidation) with the team

– Used by GDF Suez, ConocoPhillips, Centrica …

Splitting the P90

• The total contingency can be shown (on average) against the

individual costs

Splitting the P90

• The total contingency can also be shown against different types of

risk

Splitting the P90

• The contribution of risks to the overall project cost or schedule can

be calculated

Splitting the P90

• The total contingency can be shown (on average) phased over time


• Assessment


• Analysis


• Awareness


overall cost distribution, considered as a whole




what could cause deviation from base estimates; how much; (+ why,

who)

discussion; organised thought; committing to “paper”


overall level of risk; value of response; (+ visibility, management)

ownership of risks and actions; demonstrate active management

Value from our:

Ask about:

Benefit:

Ask about:

Value from our:

Ask about:

Value from our:

Benefit:

Benefit:

logical, repeatable, indisputable

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User friendly risk management - Simon White