4 November 2010 CSC Excellence in Risk Management 1 Quantifying Cost and Schedule Risks for Major Energy Projects PRMIA Luncheon Presentation 4 November

4 November 20101

CSCExcellence in Risk Management

QuantifyingCost and Schedule Risks

forMajor Energy Projects

PRMIA Luncheon Presentation4 November 2010

CSC Project Management Services200-321 19 Street NW. Calgary, Alberta. T2N 2J2

(403) 233-7994 [email protected]

4 November 20102


Major Project Blues

Over the last two decades, almost every major energy project has suffered significant cost overruns, significant schedule delays, and/or poor quality work.

Exceptions are rare and most projects that tout being “On Time and Under Budget” have re-cast schedules, significantly modified scope or revised base estimates.

The problem isn’t new. In the late 1980’s the Rand Corporation published a study showing that 80% of all major projects had significant cost and schedule overruns.

The problem is not restricted to the Alberta Environment, the oil industry, or to Canada. It is a global problem.

4 November 20103


Major Project Blues - the Issues

Major energy projects are truly colossal in scope. Capital costs are routinely in excess of $1 Billion, equipment is sourced world-wide, labour pools are stretched.

The boom in oil prices that drives new projects results in competing project impacts on everything from bulk materials to major equipment, from camp beds to hotel rooms and from field labour to construction management.

After many years of industry retrenchment, project management and construction supervision experience has been scarce. Owner groups are not resourced to deal with the issues driven by massive capital projects.

4 November 20104


Major Project Blues - the Solution

These major projects are being driven by economics. In order to capture the project value, a fully functioning (nameplate) project must be completed on schedule and within the capital budget.

The Project Team must identify and understand the wide range of risks facing them, and put in place an action plan that mitigates these risks. Failure to assess and identify risk issues will almost certainly doom a project.

The Project Team must bring resources to bear on the risk issues throughout the project execution life. As a project proceeds the risks change, and the risk management plan should reflect this changing reality.

4 November 20105


StrategicPlanning

ProjectDefinition

ProjectFinancing

Mid-Construction

ProjectStart Up

Year 1Full

Operations

ProjectExecution

Internal ReviewProject Execution Team

Operations Team

Risk Contractor Involvement

Risk Management Life Cycle

Corporate Planning

Corporate Review

4 November 20106


Risk Management:

• The most important risks and their impacts are identified and communicated to the project management and stakeholders.

• All sources of risk and opportunity are identified including “soft” items such as “organization performance” and “competing project environment”.

• Expert judgments about the likelihood of uncertain events are documented, and their impacts quantified.

• Budgets and performance targets are set at appropriate confidence levels, and areas for mitigation are identified and explored.

• Project strategies are tested in a “best case/worst case” scenario to analyze mitigation plans and alternatives.

4 November 20107


ProbabilityDistributions

Tornado Diagrams Step DiagramsInterview Issues Model and Test Options

Scheduled, Formal ReviewsUpdated Model Results(Probabilities, Tornados, Steps)Management Risk Reporting

Base Design & Operating Plans

Contingency Plans

Risk Monitoring

System

Project Targets Immediate RiskControl Measures

Risk Analysis

Risk Analysis is the centerpiece of a Risk Management Process

UncertainEnvironment

4 November 20108


The general Risk Analysis Process proceeds in a systematic sequence

1Frame

TheProblem

2DevelopAnalysis

Basis3

EvaluateThe

Risks4

InterpretThe

Results

RiskManagement

Recycle to Focus onMost Important Risks

ReviewAlternativeStrategies.

Identify allImportant Sources ofUncertainty.

Model how underlyinguncertaintiesinteract to influence outcomeson the Project.

Identify the Experts in eachof the uncertainvariables.

Assess the impact and theprobability ofoccurrence foreach uncertainvariable.

Calculate the uncertainty inthe key resultmeasures.

Quantify therisk & return for each scenario.

Analyze anddocument theresults.

Identifypreemptiveactions.

Developcontingencyplans.

Recommendactions.

5

4 November 20109


Framing the problem is often the most difficult but most valuable step in the process

• Project scope, basic assumptions, and cost & schedule milestones are identified.

• Strategic alternatives and logical development paths are identified, and decision criteria are defined.

• All project decisions (both made and not made), and the logical links between decisions, are identified.

• All risk issues and their potential impact areas for the project are identified.

4 November 201010


The Influence Diagram shows how the risks influence each other and their impact on the project. Correlations between variables must be properly captured.

Conditioning Variables

ImpactVariables

Results

CapitalCost

CapitalCost

MaterialRates

MaterialRates

OrganizationalPerformance

OrganizationalPerformance

RegulatoryEnvironment

RegulatoryEnvironment

CompetingProjects

CompetingProjects

ProductivityRates

ProductivityRates

RegulatoryDelays

RegulatoryDelays

OperatingCosts

OperatingCosts

LabourAvailability

LabourAvailability

ScopeChanges

ScopeChanges

WeatherDelays

WeatherDelays

ContractorRates

ContractorRates

ContractorDefault

ContractorDefault

OperatingRevenue

OperatingRevenue

ScheduleSchedule

NPVNPV

4 November 201011


Conditioning Variables

• Organization, Distribution of Authority• Continuity of Design, Coordination of Engineering• Information Gathering and Communication Tools• Baseline and Performance Measuring Tools• Contracting Strategies• Construction Productivity• Owner Involvement and Commitment

Organization Performance

Competing Project Environment• Labour Resources• Engineering Resources• Contractor Availability• Material / Vendor Shop Availability• Construction Equipment Availability

4 November 201012


Risk Variable Assessments

• Probability of a Cost Variance, a Specific Cost, or an increase / decrease from the Base Cost

Cost Variables

Schedule Variables• Probability of a Duration, a Specific Date, or a Delay / Advancement to the Base Schedule

• Discuss the Assumptions in the Base Cost / Schedule, including

Manpower and Equipment levels

• Identify Risk and Opportunity factors influencing the range of

uncertainty

• Discuss what factors are included and excluded from the risk

range for the item

• Collect the risk range information (Assessment is a value and

the probability of that value occurring)

• Identify what is driving the high and low values

Risk Discussion

4 November 201013


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1200 1600 2000 2400 2800

Pro

bab

ilit

y

CAPEX ($MM)

Base = 1600 $MM

P50 = 2000 $MM

P10 =1780 $MM-9%

P90 =2220 $MM+11%

The risk analysis calculates the probability distribution of potential cost outcomes. This distribution can be used to :

Slope of Class V Estimate

Slope of Class 2 Estimate

400 $MMContingencyRequired forP50 Confidence

1. Determine the contingency required for any confidence level (probability).2. Compare the estimate uncertainty (slope) with traditional estimate class definitions.

4 November 201014


-60 -40 -20 0 20 40 60Start Date

EV = 20-Dec-07

Days

The tornado diagram identifies and ranks the key project risks and is a tool that helps the project team to focus on the most important drivers.

Road Preparation Duration 3 6

Labour Productivity Delays -1.25 1.75

Plant Pad Preparation Duration 3 6

Labour Unrest Delays 0 2.3

Execution Organization Performance Best Worst

Regulatory Duration 11.3 16.5

Competing Project Environment Low Heated

Start-up & Commissioning Duration (Early Steam) 1.5 2.4

Terms of Reference - Duration 3 4

Regulatory Environment Relaxed Stringent

Terms of Reference - Application Date 1-Aug-02 1-Oct-02

Labour Availability Delays 0 1.4

OTSG Manufacture & Delivery Duration 12 16

Weather Delays 0 0.5

Long Lead Equipment Delays -1 2

4 November 201015


• Risk management is fundamental for accountability on corporate governance and on maximizing shareholder value.

It begins with strategic definition and continues in a consistent manner throughout the project life cycle.

• Range Estimating is not Risk Analysis.Risk analysis must consider the specific uncertainties of a project, and

incorporate these underlying risks into the project value. Processes that provide single-point outcomes or risk distributions based on the probability of fixed outcomes (decision trees, KT, range estimating) do not meet the definition of risk analysis.

• Risk Management ensures that there are no surprises. Documentation of assumptions and all risks. Communication of the risk management plan (avoid, accept, manage) focusing on the underlying project risks.

“Ignoring risks to a project is not an option; important decisions will be made anyway, shouldn’t they be made with the best information available?”

(Project Manager Today, October 2000)

Modern Day Application of Risk Management

4 November 201016


Specifics:

• Supports Owner Organizations in major project development.• Group formed in 1982, over 250 project assignments worldwide.• Extensive and varied background in Project Planning and Management.

Specialties:

• Risk & Decision Analysis for a wide range of capital Projects.• Strategic & Mitigation Planning for projects using risk models.• Facilitation of Project Management, Business Planning, Environmental &

Safety Planning & Management and Team Building.• Project Management Education Workshops.• Development of Contract Claims and disputes and litigation support.

CSC

Excellence In Risk Management

Documents

4 November 2010 CSC Excellence in Risk Management 1 Quantifying Cost and Schedule Risks for Major Energy Projects PRMIA Luncheon Presentation 4 November