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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
2.0 Defining Risk Management
3.0 Nature of Risk for Oil and Gas Projects
4.0 Effective Risk Management – Tools and Techniques
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
2.0 Defining Risk Management2.0 Defining Risk Management
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
2.0 Defining Risk Management2.0 Defining Risk Management
Overview of The Risk Management ProcessOverview of The Risk Management Process
2.0 Defining Risk Management2.0 Defining Risk Management
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
2.0 Defining Risk Management2.0 Defining Risk Management
Sample Register
OutlineOutline
1.0 Introduction
2.0 Defining Risk Management
3.0 Nature of Risk for Oil and Gas Projects3.0 Nature of Risk for Oil and Gas Projects
4.0 Effective Risk Management – Tools and Techniques
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
3.0 Nature of Risk for Oil and Gas Projects3.0 Nature of Risk for Oil and Gas Projects
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
3.0 Nature of Risk for Oil and Gas Projects3.0 Nature of Risk for Oil and Gas Projects
Based on 20 Recent Project Risk Registers
Oil and Gas Industry Project Performance Needs Oil and Gas Industry Project Performance Needs ImprovementImprovement
3.0 Nature of Risk for Oil and Gas Projects3.0 Nature of Risk for Oil and Gas Projects
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
3.0 Nature of Risk for Oil and Gas Projects3.0 Nature of Risk for Oil and Gas Projects
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
3.0 Nature of Risk for Oil and Gas Projects3.0 Nature of Risk for Oil and Gas Projects
Project Teams Fail to Complete the Risk Management Process Project Teams Fail to Complete the Risk Management Process
3.0 Defining Risk Management3.0 Defining Risk Management
Setup & Define
EliminateTrivial Risks
Risk Identification
Risk Evaluation Latent Risk Periodic Review No Immediate Action
90%
75%
15%
30%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
Estimated Level of Implementation
There Are a Diverse Set of Barriers There Are a Diverse Set of Barriers Preventing Better ImplementationPreventing Better Implementation
3.0 Nature of Risk for Oil and Gas Projects3.0 Nature of Risk for Oil and Gas Projects
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
2.0 Defining Risk Management
3.0 Nature of Risk for Oil and Gas Projects
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
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
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
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
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
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
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
4. Effective Risk Management 4. Effective Risk Management 4.3 Risk Management4.3 Risk Management
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
4. Effective Risk Management 4. Effective Risk Management 4.3 Risk Management4.3 Risk Management
Overdue Action Plans Were Quickly HighlightedOverdue Action Plans Were Quickly Highlighted
4. Effective Risk Management 4. Effective Risk Management 4.3 Risk Management4.3 Risk Management
Risk Profile Was Initially Very HighRisk Profile Was Initially Very High
Risk Severity byWBS Area
4. Effective Risk Management 4. Effective Risk Management 4.3 Risk Management4.3 Risk Management
However, the Team Felt that Most Risks Were ManageableHowever, the Team Felt that Most Risks Were Manageable
Risk Exposure =Manageability*Severity
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
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