Value Adding Through Appropriate Integrated Risk Insight : Transforming Development Opportunities Into Projects.

Transcription

1 Value Adding Through Appropriate Integrated Risk Insight : Transforming Development Opportunities Into Projects. G. J. Hawkins LRMC PTY Ltd, 96 Stanley Street, Nedlands, Western Australia 6009 Tel: Fax: llanwern@iprimus.com.au 1.0 Abstract Front End Loading is described as taking sufficient time to properly assess an opportunity, identify value drivers, identify uncertainty to achieve a quality project solution prior to committing to major expenditure (Woodside Energy Ltd 2000). Opportunity and risk factors vary throughout the project lifecycle and Front End Loading (FEL) is used to influence the business and project success whilst the expenditure is relatively low. A mandatory and consistent implementation of a Risk Management System at the onset of development appraisal has the potential to improve project success. Reflecting best strategic industry practices to support decision-making, an overview is provided of the value adding process framework, methodology, tools, constraints and significant benefits for a company wide consistent approach to opportunity and risk analysis conducted during the early project phases by an independent review team. 2.0 Introduction Woodside Energy Ltd is a leading Australian resource company with substantial assets and a growing international reputation as a successful oil and gas explorer, developer and producer. In 1999, Woodside introduced the Opportunity and Project Realisation Process (OPREP) for a structured and systematic approach to improved management of capital projects through enhanced decision and execution quality. The OPREP methodology covers the project lifecycle phases and a decision milestone check point punctuates each project phase. Assurance Checks support the decision points to move to the next phase (refer Figure 1). They provide the decision makers assurance that the recommendations are sound and will deliver maximum value. Page 1 of 10

2 AC1 Is there a real understanding of what is being initiated and of the commitments being made? Do we have a meeting of minds with JV partners on objectives and expectations? AC2 Should we enter, can we make it work? Has the venture/project been effectively framed and is there sufficient knowledge to start the process of selecting the concept and defining the plan? Are there any showstoppers, have we identified all risks and opportunities? AC3 AC4 Assurance Checks AC5 Have we selected the Are all plans, strategies, Are the HSER manage- right alternatives? organisations, resources ment systems in place Has the optimum plan been selected and defined? Have we now fully defined what we are going to do? and systems in place to commence execution in an optimum manner? Have we set-up to successfully implement and effective? Have the staff been adequately trained on the operation, inspection and maintenance of the our plan, should funds be facilities? released? Are the start-up procedures sufficiently complete? Is the start-up organisation in place? AC6 Did we achieve the predicted performance? What can be learned from the project and what further opportunities are there? Value Identification Value Realisation OPERATE & ASSESS SELECT DEVELOP EXECUTE EVALUATE MANDATORY ASSURANCE CHECKS Project Initiation Feasibility Development Plan Final Investment Decision Pre Start Up Post Investment (Concept Selection) Benchmarking Benchmarking 7 7 (FEL Assessment) (FEL Assessment) 12 Cost Estimate 12 Cost Estimate 12 Cost Estimate 7 Benchmarking (Merit/Pacesetter) RECOMMENDED ASSURANCE CHECKS 9 Reserve Certification 8 HSER 8 HSER 8 HSER 8 HSER 9 Reserve Certification 9 Reserve Certification 10 Technical Integrity (Sub-surface) 10 Technical Integrity (Sub-surface) 11 Commercial 11 Commercial 11 Commercial 11 Commercial PEER ASSISTS 13 Peer Assists 13 Peer Assists 13 Peer Assists 13 Peer Assists 13 Peer Assists Figure 1: OPREP Assurance Checks AC2 Feasibility To confirm that resolution of uncertainties supports continuation of definition and moving to concept selection. AC3 Field Development Plan (Concept Selection) To gain confidence in support of the Field Development Plan and concept selection. Commit to resources where scope is fully defined and final business proposal is prepared. AC4 Final Investment Decision To provide support for the Final Business Proposal and provide confidence to stakeholders that decision to proceed with project execution is sound. Risk Management supports the practice of understanding uncertainty during the production of deliverables in each project phase. Implementation of a project risk analysis process as a mandatory Assurance Check prior to committing to major project expenditure is a focus area to reduce project failure rates in terms of capital cost and project schedule. The Project Integrated Risk Insight (PIRI) process, models and tools are implemented during the Select (pre AC2 / 3) and Develop (pre AC4) phases using a fit for purpose approach dependent of the level of definition. Opportunity and risk that can be quantified in terms of schedule and capital cost are modelled and the results are presented to the Assurance Teams and the Decision Board via the Opportunity / Development / Project Manager(s). Note: Schedule risk analysis is well documented and external to the doctoral project. Page 2 of 10

3 The Project Integrated Risk Insight (PIRI) process described extends the boundaries of conventional thinking by including strategic thinking underpinned by a rigorous data gathering and analysis process that adds value, permits innovation, supports business proposals and Senior Management in the decision-making process leading up to a Final Investment Decision (FID). Dependent on the level of project definition, the process uses a fit for purpose selection from three Navigators (Opportunity and Risk Breakdown Structure ORBS, Simplified Functional Analysis Systems Technique Diagram SimFAST and Key Assumptions Analysis and Testing KAAT), two qualitative models (Project Contingency Assessment Model - ProCAM and a Forensic Investigation Risk Model FIRM), a Project Relationships and Influence Map (ProRIM) and a quantitative (probabilistic) Integrated Risk Insight Model (i-rim). Comparing the outcomes of Woodside offshore projects (post 1999) with the PIRI reviews conducted prior to the Final Investment Decision (FID) indicates delivery of complex offshore oil and gas projects within the predicted capital cost accuracy range, a notable improvement on past performance. 3.0 Project Failure Industry benchmarking and historical data indicates a very high failure rate for oil and gas projects internationally and within Woodside. The hot spots 1 identified as increasing the potential for project failure are: Technical definition has not been adequately completed for the decisions being taken, too little attention has been made to the upside and downside cases Too little attention in looking for innovative or aggressive angles and strategies Insufficient number of staff and competencies to deliver project Organisation structure and interfaces are unrealistic for the project complexity Non-alignment of stakeholders Project objectives poorly communicated to project team and stakeholders Quality of opportunity and risk management systems is variable and / or poorly structured Plans are incomplete and / or not fully integrated s have been too late teams were not independent 4.0 Project Opportunity and Risk Categories There is a hierarchy of opportunity and risk pertaining to a project. It ranges from that which is managed at the project level and may be internal or external, through those managed at the Joint Venture level, to a corporate level. PIRI is designed to accommodate the project level. Opportunities and risks are grouped according to categories to assist in the identification, quantification, response development and control. The risk areas have been consolidated into TECOP (Woodside Energy Ltd 1999) technical, economic, commercial, organisational and political. 1 Excerpt from WEL OPREP / Shell E&P Learning s Jan 2002 Page 3 of 10

4 Date Stop,Hold,Recycle Framing Facilitator:Graham Hawkins Date Date Date Date TeamLeader: Stop, Hold, Recycle AC2 Feasibility Team Leader: Stop, Hold, Recycle AC3 FDP Team Leader: Stop,Hold,Recycle AC4 FID TeamLeader: Stop, Hold, Recycle Date Production Acceptance Team Leader: Stop, Hold, Recycle Date AIPM National Conference 2003 Alice Springs Value, Opportunity and Risk Workshops are facilitated with a requisite variety group and underpin the concept of risk management in capturing the knowledge, perception and appetite of the multidisciplined team and supporting participants. An opportunity and risk register is prepared and a rapid ranking technique is used to prioritise focus areas. 5.0 Project Integrated Risk Insight (PIRI) Process Project Integrated Risk Insight has been developed using structured uncertainty analysis and documented (refer Figure 2) to bridge the gap between the qualitative approach to opportunity and risk identification, scoring and ranking, and the traditional desktop reviews by individuals of capital cost estimates and extend beyond the classical cost model endorsement by modelling the uncertainty inherent to the options, configurations and scenarios being considered prior to the final investment decision. The deliverable from the analysis is an opportunity and risk report describing the le vel of project definition, supported by a calculated accuracy and contingency for the capital cost estimate. PROCESS MAP Opportunity, Value & Risk Identification Opportunity, Value & Risk Quantification Project Integrated Risk Insight (PIRI) Project Opportunity, Value & Risk Management Process Opportunity & Risk Opportunity & Response Risk Control Response Development Feedback, Learning & Improvement Value Adding through appropriate Integrated Risk Insight: Transforming Oil and Gas Development Opportunities into Projects Phase 1 Phase 2A Phase 2B Phase 3 Phase4 Phase 5 ASSESS SELECT SELECT DEVELOP EXECUTE OPERATE Qualitative Assessment Quantitative Analysis Reporting AC12 AC12 AC12 Figure 2: 5.1 Qualitative Assessment Assurance Check AC12 Strategy, Economics, Forecasting & Optimisation Integrated Risk Insight (PIRI) Otway Platform Otway Subsea Angel Subsea AUD 1 Billion Angel Concrete Gravity Structure Angel Jackup Trunkline System 2 nd Trunkline Expansion Project AUD 500 Million Blacktip Platform Echo Yodel Subsea GWA Platform Low Pressure Train Laminaria Phase 2 Laminaria Phase 2 Subsea Subsea AUD 100 Million Lambert 6 Subsea Pipeline Systems Modifications Lambert 5 Subsea Project Uncertainty assessment can never be exact; as with identification, the knowledge and perception of the multi-disciplined team and supporting participants is important in assessing the likelihood and impact. The opportunity and risks are scored according to the scope, quality, schedule and cost and ranked on a project opportunity and risk register, the primary deliverable from the workshop to the Opportunity / Project Manager. 5.2 Quantitative Analysis Risk Quantification involves evaluating opportunities and risks and their interactions. It uses probabilistic theory combined with a rigorous and structured tool in determining a range of possible outcomes. Page 4 of 10

5 6.0 Project Integrated Risk Insight (PIRI) Tools If a development / project team can come up with true insights then developing a strategy to exploit them is a viable task. Insight gives meaning to tactics and allows objectives to be set with the knowledge that they have a better chance of being achieved. In addition, for the opportunity and risk that can be quantified and modelled we can have a better level of confidence when classifying an estimate by calculating the accuracy and contingency for complex projects. 6.1 Opportunity and Risk Breakdown Structure (ORBS Navigator) Hillson (2002) defines the Risk Breakdown Structure as A source-oriented grouping of project risks that organises and defines the total risk exposure of the project. Each descending level represents an increasingly detailed definition of sources of risk to the project. The ORBS Navigator builds upon generic versions and is an industry specific risk breakdown structure for oil and gas developments / projects (ref Figure 3 for sample). LEVEL 0 DEVELOPMENT / PROJECT RISK LEVEL 1 TECHNICAL ECONOMIC COMMERCIAL ORGANISATIONAL POLITICAL LEVEL 2 Scope Function Technology Health & Safety Sub-surface Surface Operational Infrastructure Environment Reserves Production Market Price Market Demand Life Cycle Cost Schedule Joint Venture Participants Contracting Legal Framework Financing Insurance Competition Economy Structure Competencies Resourcing Execution Plan Knowledge Mgt IT Systems Procedures Processes Government Regulator Reputation Industrial Relations Shareholders Other Stakeholders Community Employment Location LEVEL 3 Systems Drilling Completions Subsea Structures Facilities Pipeline LEVEL 4 Equipment Process Figure 3: Installation ORBS Navigator Page 5 of 10

6 6.2 Simplified Function Analysis Systems Technique (SimFAST Navigator) The SimFAST Navigator (refer Figure 4 for example) uses a well established technique from Value Engineering to develop the base from which to build up a picture of the scope of work and key cost areas. It is used to prioritise focus areas for assessment and analysis of opportunity, risk and value enhancing initiatives. Produce, Process and Export Oil SCOPE LINE Inspection Maintenance Repair Maintain Integrity Lay Commission Construct Flowline Hydrate Mitigation Chemicals Maintain Flow Valves Isolate Wellhead SCOPE LINE Separate Product TRANSFER PRODUCT $? MM TRANSPORT PRODUCT $? MM COLLECT PRODUCT $? MM CONTROL FLOW $? MM Produce Reserves Equipment Equipment Equipment Equipment Value, Opportunity and Risk Figure 4: SimFAST Navigator 6.3 Key Assumptions Analysis & Testing Navigator (KAAT Navigator) Royer (2002 p 38) suggests that assumptions are introduced by organisationa l culture and, when unknowingly present in the project environment, foster incorrect perceptions and unrealistic optimism. The KAAT Navigator (refer Figure 5) uses a structured approach in relating the level 3 opportunity and risk breakdown items to the main component areas of the scope of work. Assumptions are analysed for inaccuracy, inconsistency and incompleteness. The outcomes are assessed as opportunities or risks. The key assumptions (and alternatives) are tested for stability and consequences. Level 3 ORBS Component Area 1 Component Area 2 Component Area 3 Client Direct Costs Assumptions Analysis Assumptions Testing Figure 5: KAAT Navigator Page 6 of 10

7 6.4 Forensic Investigation Risk Model (FIRM) This structured model provides the basis for a rigorous desktop assessment of project objectives and supporting documentation supplemented by project team interviews conducted by an independent review team. Key project areas are mapped against level 3 (systems) and level 4 (equipment) items. Information is extracted to assess the level of project definition as the basis for opportunity and risk analysis. Objectives Scope of work Options Cost Estimate Schedule Interfaces Other Project Documentation Technology Constructability Complexity Level 3 ORBS Level 4 ORBS Figure 6: FIRM 6.5 Project Contingency Assessment Model (ProCAM) The project contingency assessment model is adapted from the expected value method (Mak & Picken 2000; Mak et al. 1998). ProCAM (refer Figure 7) expands upon this method to include the assessment of fixed and variable opportunities, risks and value enhancing initiatives. The outcomes of the key assumptions and analysis testing and the forensic investigation support the decisions in identifying values prior to summation of allowances to calculate contingency. KAAT Figure 7: FIRM ProCAM Expected Cost ProCAM Page 7 of 10

8 6.6 Project Relationships and Influence Map (ProRIM) Key project component areas are allocated level 4 equipment items, design and operating parameters and activities are aligned. Scope, price, duration and complexity variables are mapped against the development / project components identifying accuracy and skew whilst building in value enhancing initiatives. Relationship Project Components Level 4 ORBS Design / Operating Parameters Figure 8: Activities (Design, Procure, Fabrication, Installation) ProRIM Scope Influence Accuracy Skew Value Enhancing Initiatives Price Duration Complexity 6.7 Integrated Risk Insight Model (i-rim) Scope, procurement items and installation activities are documented. Scope, price, duration and complexity variable distributions are transferred from ProRIM and dependencies created within the model. Monte Carlo simulation is used to calculate the expected cost and allocate a confidence range to that value. Scope Scope Procure Installation Price Duration Complexity Dependency Figure 9: i- RIM Page 8 of 10

9 7.0 Constraints (pre AC2 /AC3 vs. AC4) The following points have been identified: The tools provide for refinement of scope but no major changes in scope or catastrophes. Many risks carried on the register are intangible and cannot be quantified into schedule and / or cost metrics during the Select Phase 2. The relevance of the output values in the opportunity and risk report based on options may be short lived post AC3. It is not any quicker to run the AC12 process prior to AC2 if analysis is required. Some Development / Project Teams perceive the independent review to be an audit. Analysis is not always possible nor is it warranted pre-ac Benefits of Process / Tools The following points have been identified: Provides the opportunity to test the effect of buying flexibility of design. Allows for consideration of pre-investment. Models complexity. Considers all aspects of offshore / onshore field development from the Client, Contractor and Operator perspective. Uses consistent methodologies for comparison of configurations / options. Identifies key cost drivers. Provides an opportunity and risk adjusted capital expected cost and accuracy. Develops buy-in and use from internal customers and stakeholders. Provides valuable information to Senior Management decision-making. Leveraging experiences from other projects. Risk report provides observations and recommendations for action pre Final Investment Decision. 9.0 Applicability Examples of applicability are new onshore / offshore oil and gas facilities, existing oil and gas field expansions, pipeline and onshore terminals, systems modifications, asset functionality, asset life extension, equipment upgrades and technology changes. The process and tools have demonstrated improved qua lity of the information available to the decision makers from the implementation of a strategic, structured and practical process for a rigorous assessment of complex oil and gas projects. It adds new knowledge and understanding in the area of uncertainty management (value, opportunity and risk). The process has demonstrated capacity to influence opportunity and project realisation processes and practices. It demonstrates advanced professional practice and provides a record for ongoing development of the opportunity and risk analysis body of knowledge PIRI process and tools life expectancy The integrated analysis process and tools have an improvement life expectancy for the majority of twenty (20) years from now until the underlying premise to sustainables and renewables is realised and the energy chain is decarbonised with energy alternatives to gas, gas enabled or renewable sources of energy. Notwithstanding, the potential for adaptation to other industries is currently under evaluation Conclusions Appropriate Project Integrated Risk Insight is a discipline for thinking rigorously and systematically about uncertainty. It provides the basis of developing plans for the future based on patterns from the past, whilst approaching the virtual edge of embracing technology for project success. The model reflects complexity and provides cumulatively defined insights that have been independently and Page 9 of 10

10 interdependently built in. The process is intended to disturb and assist the development / project team in discovering and making decisions on a rational basis instead of dictating Acknowledgements The material for this paper was extracted from a Doctor of Technology (DTech) thesis in Project Risk Analysis through Deakin University, Victoria, Australia. The findings are based on a selection of ten case studies conducted for three Divisions / Business Units at Woodside Energy Ltd, Perth, Western Australia. The implementation of Risk Insight has demonstrated and proven exposure to AUD 13.2 Billion (disclosed) Development / Projects over a three year period through 50 workshops and 20 assurance reviews. Acknowledgement is given to Professor Peter Hodgson, Dr Richard White and Dr Julian Mote from Deakin University for their support and advice during the doctoral project. Thanks are due to Mr Roy Thompson (General Manager, Offshore Projects) and Mr Gary Keenan (Business Manager, NWSSDD Support Services) both of Woodside Energy Ltd, Perth, Western Australia for supporting the trialling and implementation of the development / project risk management and assurance processes. Contributions from the Woodside Energy Ltd Oil and Gas Business Units are also gratefully acknowledged References Hillson, D. 2002, 'Understanding risk exposure with the Risk Breakdown Structure (RBS)', PMI Risk Management Newsletter, vol. 4, no. 5. Mak, S. & Picken, D. 2000, 'Using risk analysis to determine construction project contingencies', Journal of Construction Engineering and Management, vol. 126, no. 2, pp Mak, S., Wong, J. & Picken, D. 1998, 'The effect on contingency allowances of using risk analysis in capital cost estimating: a Hong Kong case study', Construction Management and Economics, vol. 16, pp Royer, P. S. 2002, Project Risk Management: A Proactive Approach, Management Concepts, Vienna, VA, USA. Woodside Energy Ltd 1999, Value Improving Practice: Risk Management [Homepage of Woodside Intranet], [Online]. [2003, May]. Woodside Energy Ltd 2000, Opportunity Framing Facilitators Handbook, Perth, Australia. Page 10 of 10