Strategic Risk Factors in Projects Strategic Risk Factors in Projects

Norwegian Center for Project Management

Trondheim, Sept 5, 2007
Risk Resolution
Consider Kashagan (per WSJ 8/28/07)
Shell operator for Exploration logistics challenges etc.
2001: Eni=operator, 1
st
Oil 2005 lack of benchmarks for estimating
issue of artificial islands delays project
2004: new plan approved, 1
st
Oil 2008, $10G
2007: update: 1
st
Oil end 2010, $19G (Life $57G->$136G)
LQ too close to treatment plant, weak $, lack of benchmarks, inflation
Cost of drilling rigs, soaring steel prices, lack of engineers, PMs
Kashagan: deny permits, project on hold, fire Eni
------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------
RISK FACTORS:
Reservoir: H2S, pressure (costly stress-resistant pipes)
Location: Caspian freezes 5 mo./yr. (rig-wrecking ice-packs), cold winter,
logistics, 10WD
No export pipeline
Environmental: beluga, sturgeon, seals (no spills!) permitting issues
Partners: strong, misaligned, dsyfunctional
Kazakh government new at this
Questions:
LQ too close to treatment plant, weak $, lack of benchmarks, inflation
Were these really Black Swan risks?
Could they have been predicted?
If so, why werent they?
If you were the Kazakhs, would you fire Eni? If so, why?
If not, why not?
LQ too close to treatment plant, weak $, lack of benchmarks, inflation
Cost of drilling rigs, soaring steel prices, lack of engineers, PMs
RISK FACTORS:
Reservoir: H2S, pressure (costly stress-resistant pipes)
Location: Caspian freezes 5 mo./yr. (rig-wrecking ice-packs), cold winter,
logistics, 10WD
No export pipeline
Environmental: beluga, sturgeon, seals (no spills!) permitting issues
Partners: strong, misaligned, dsyfunctional
Kazakh government new at this
The Industry Today
Poor project performance is not acceptable
when capital markets are looking for
predictability & strong returns
>50% of execs are dissatisfied with project
performance (eg 40% of projects overrun)
more-so than ever more-so than ever
cannot afford to miscalculate capital
project risks yet do not have a good grasp
of how to manage (them)
Source: Capital Project Execution in the Oil & Gas Industry Booz Allen Hamilton
Risk Resolution
Trends in Capital Project Investment & Complexity
2.50
3.00
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Majors - CAPEX Plan Majors - Escal. Adjusted Independents - CAPEX Plan Indep. - Escal. Adjusted
CAGR = 37.5%
CAGR = 35.5%
1.00
1.50
2.00
2004 2005 2006 2007 2008
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Sources of data:
Majors: COP, CVX, RDS
Independents: DVN, APC
Escalation adjustments per CERA
"Upstream Capital Cost Index"
Projects in 2007 portfolio
characterized by more hostile
locations, higher levels of
technology (eg for ultra deep-
water, deep oil sands,
alternative energy), longer
time to first oil, empowered
NOC partners seeking greater
control, and non-OECD
locations.
Risk Resolution
Is Escalation the Culprit?
180
170
Cost
160
150
140
Q32006:
167
Q12006:
148
2002 2008
80
2000 2001 2003 2004 2005 2006 2007
Cost
Index
(2000=100)
130
120
110
100
90
Q32005:
126
Risk Resolution
A Look Outside Our Industry
Mega-project performance has historically
been poor
Consider Infrastructure Projects
Cost overruns of 50 100% are common
Main causes
1
:
Underestimated (appraisal optimism) Underestimated (appraisal optimism)
Risk analysis assumes everything goes according to
plan
Delusion is often necessary for projects to proceed
How do these conclusions compare with oil &
gas megaprojects?
1:Megaprojects & Risks Bent Flybjerg
Risk Resolution
So What is the Problem Here?
A. Lack of Front End Loading?
B. Ineffective organization?
C. Management does not want to hear bad news?
D. Outdated approach to Capital Project Risk
Management? Management?
E. ALL of the above?
CAPEX Predictability Requires A New Approach
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NEED: Strategic NEED: Strategic
Risk Management Risk Management
EXECUTIVE
MANAGEMENT
1990 2000 2010
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HAVE: Conventional HAVE: Conventional
Project Management Project Management
PROJECT
MANAGER
& TEAM
Risk Management Risk Management
today
Risk Resolution
Copyright Westney Consulting Group Inc.
How Can We Improve?
A. Lack of Front End Loading?
We have stage-gate processes do we use them?
Are they facilities - centric or do they provide
cross functional integration?
Are they used consistently with discipline?
How Can We Improve?
B. Ineffective organization?
How do project organizations need to change?
New or different roles & responsibilities?
New or different skills? New or different skills?
How do corporate organizations need to change?
New or different roles & responsibilities?
Stronger governance?
Enterprise Risk Management: The Risk-Driven
Project Delivery System
CAPEX Portfolio
Characteristics
CAPEX VaR
Competency
Requirements
The PROJECT DELIVERY SYSTEM delivers each of the competencies The PROJECT DELIVERY SYSTEM delivers each of the competencies
required to predictably execute the project portfolio: required to predictably execute the project portfolio:
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Process Process (methods, systems, tools) (methods, systems, tools)
Risk Resolution
Copyright Westney Consulting Group Inc.
How Can We Improve?
C. Management does not want to hear bad news?
How does managements view of projects and
project teams need to change?
Managing Risks at the Right Level
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M
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te.g.:
Political
Global economic trends
Partner / NOC issues
Organizational alignment
e.g.:
Management
intervention in PMT
tactics leads to
internally driven risks
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Risk
Tactical Strategic
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P
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e.g.:
Project definition
Contractor performance
Pricing
Logistics
e.g.:
Unmitigated
strategic risks
become tactical
problems for PMT
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Risk Resolution
So What is the Problem Here?
D. Outdated approach to Capital Project Risk
Management?
All Risks Must Be Considered
+
Risk Exposure
Background
Enterprise
+
Definition
Risks
Performance
Risks
+
Estimate (incl.
Contingency)
Risk Exposure
Risk-
Conditioned
Investment
Value
sm
Background
Risks
Enterprise
Risks
+
Risk Resolution
Copyright Westney Consulting Group Inc.
Strategic vs. Tactical Risks
STRATEGIC RISKS (outliers; managed at the executive level)
Background
Definition
Risks
Risks associated with the degree of Risks associated with the degree of
technical and planning definition technical and planning definition
TACTICAL RISKS (ranged around the deterministic estimate & schedule; managed at
the project level)
Enterprise
Performance
Risks
Risks associated with owner and contractor Risks associated with owner and contractor
performance performance
Risk Resolution
Background
Risks
External outliers e.g., External outliers e.g.,
SCOPE SCOPE--related: related: new or unproven new or unproven
technology, edge of experience technology, edge of experience
engineering solutions, prototype engineering solutions, prototype
components components
MARKET MARKET--related: related: extreme market extreme market
conditions & trends, conditions & trends,
LOCATION LOCATION related: related: undefined site undefined site
conditions, uncertain government conditions, uncertain government
regulations & requirements regulations & requirements
COMMERCIAL COMMERCIAL related: related: business deal business deal
issues, partner relationship risks issues, partner relationship risks
Enterprise
Risks
Internal outliers e.g., Internal outliers e.g.,
RESOURCE RESOURCE--related: related: lack of project lack of project
engineering and management resources engineering and management resources
with requisite skills and experience with requisite skills and experience
GOVERNANCE GOVERNANCE--related: related: inefficient of inefficient of
misguided governance model misguided governance model
PROCESS PROCESS--related related: inadequate or : inadequate or
inappropriate project development and inappropriate project development and
execution work processes execution work processes
Copyright Westney Consulting Group Inc.
Risk Framing - Improving VOI for
Executive Decision-Making
Risk
Discovery
Risk
Analysis
Decision
Parameters
Risk
Management
Decision Process
Decision Support Methodology
Risk
Taxonomy
Performance
Benchmarks
Risk
Scenarios
Project Risk
Indicative
Modeling
System
Risk-
Conditioned
Investment
Value
Risk
Frames
Risk
Strategies
The goal of forecasting is not to predict the future but to tell you The goal of forecasting is not to predict the future but to tell you
what you need to know to take meaningful action in the present what you need to know to take meaningful action in the present
Paul Saffo, HBR, July Paul Saffo, HBR, July--Aug 2007 Aug 2007
VOI=Value of Information
Business
Resilience
(PRIMS)
(RCIV)
Copyright Westney Consulting Group Inc.
Risk Resolution
Risk Framing Shapes Capital Project Outcomes Risk Framing Shapes Capital Project Outcomes Risk Framing Shapes Capital Project Outcomes Risk Framing Shapes Capital Project Outcomes Risk Framing Shapes Capital Project Outcomes Risk Framing Shapes Capital Project Outcomes Risk Framing Shapes Capital Project Outcomes Risk Framing Shapes Capital Project Outcomes
Potential
Risk
Preliminary
RCIV*
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Risk
Framing
Risk
Sanctioned
RCIV*
CAPEX VaR CAPEX VaR
Execution Phase
Development Phase
(Feasibility -> Pre-FEED -> FEED)
Risk
Exposure
*Risk *Risk--Conditioned Investment Value Conditioned Investment Value
TM TM
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The
First
Number
Risk
Exposure
The
Project
Budget
including
Contingency
CAPEX VaR CAPEX VaR
for Portfolio for Portfolio
Management Management
Strategic Risk Actions Strategic Risk Actions
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Risk Resolution
Drilling DRILLEX Risk
Managing All Project Risks
Subsurface
Reserves Risk
Business NPV Risk
Operations OPEX Risk Facilities CAPEX Risk
Risk Resolution
Risk Management Strategies Risk Management Strategies Risk Management Strategies Risk Management Strategies Risk Management Strategies Risk Management Strategies Risk Management Strategies Risk Management Strategies
Execution Phase
Development Phase
(Feasibility -> Pre-FEED -> FEED)
Background
Risks
Enterprise
Risks
External Outliers: External Outliers:
Scope, Market, Scope, Market,
Location Location
P.D.S. P.D.S.
Health Health
Check Check
Risk Risk--Driven Driven
Competency Competency
Model Model
Leveraged Project Organization Leveraged Project Organization
(PMC / PMT / Owners Engineer) (PMC / PMT / Owners Engineer)
Business Resilience Business Resilience -- Threat Surveillance & Threat Surveillance &
Dashboard Dashboard
Threat Threat
Response Response
Model Model
External External
Threat Threat
Assessment Assessment
Internal Outliers: Internal Outliers:
Project Delivery Project Delivery
System Effectiveness System Effectiveness
Definition
Risks
Performance
Risks
= f (technical & = f (technical &
planning definition) planning definition)
= f (owner & contr. = f (owner & contr.
performance) performance)
Check Check Model Model
Value Value
Improving Improving
Practices Practices
Stage Stage--Gate Gate
Process Process
Roadmap Roadmap
Project Project
Readiness Readiness
Review Review
Risk Risk--
Driven Driven
Contract Contract
Plan Plan
Risk Risk
Brokering Brokering
Independent Independent
Project Reviews Project Reviews
Competency Assurance Competency Assurance
Non Non--Operator Oversight Operator Oversight
Strategic Strategic
Program Program
Planning Planning
Copyright Westney Consulting Group Inc.
Risk Resolution