RISK-INFORMED DECISION-MAKING INCREASES THE CHANCE OF SUCCESS
GERT MÜLLER, T. A. COOK CONSULTANTS INC., BERLIN
IN EARLY JULY, NASA's Juno spacecraft successfully entered Jupiter's orbit. The project's principal investigator claimed the feat was "the hardest thing NASA has ever done." The logistics of the mission were particularly challenging: Jupiter's magnetic radiation fields are so intense that electronics are easily fried, while the planet itself is five years and 1.7 billion miles away. This $1.1 billion project depended on the space agency making well-informed predictions to account for and alleviate as much risk as possible.
Similarly, companies in the oil and gas sector are exposed to a vast array of hazards, so developing an analytically deliberative, proactive approach to managing them is fundamental - not only to safety, but also to the health of the bottom line. This article explores risk - an undesired scenario, the probability of it occurring and its consequences - in the oil and gas industry and considers the best ways to manage it and eliminate accident scenarios.
CONTROLLING RISKS IN CAPITAL PROJECTS
The oil and gas industry has a particularly challenging framework of risks to consider. First, companies must acknowledge the political risk associated with the countries in which these particular resources are abundant. Many of these countries suffer from governmental instability, where the sudden nationalization of assets or even whole industries can occur with little notice, or where the safety of workers can be seriously compromised due to ongoing civil disputes. Taxes, export regulations and employee law vary widely and producers must weigh the dangers of doing business in some regions against the potential gains.
Second, as many wells become exhausted, companies are being forced to extract oil and gas from more difficult locations: building platforms in the middle of oceans or drilling ever deeper to reach untapped resources. In addition, companies are also exposed to commodity price instability, which in turn influences capex investment. Since the drop in oil price, the industry has been understandably hesitant to make significant monetary commitments to new exploration projects. However, continuous investment in maintaining existing assets and developing new installations for current sites is absolutely necessary to keep business going, which makes risk evaluations that much more paramount to successful operations.
These macro-level hazards are difficult - almost impossible - for companies to control, but other industry risk, such as operational risk, can be managed more easily. Operational risk is the possibility of losing money, or a company not reaching objectives, due to failed internal processes. These potential dangers are caused by a breakdown in the system or in procedure, poor management and human error. With the help of a variety of strategies and methods, management can regulate exposure to operational risk, increase site safety and reach financial goals.
IDENTIFYING AND EVALUATING
Managing risk helps manage the project. Frequently, people in the industry consider risk management to be an extremely time-consuming, costly activity that yields very little benefit. This does not have to be the case. In order to combat risk, decision makers need to know what they are up against, which begins with identifying all hazards that could occur, the probability of them happening, and what the resulting impact might be. This process needs to be repetitive to match the dynamic nature of risk as it changes over time. For example, the identification of a potential capital project delay risk as a result of delayed detailed engineering will have little impact during the early phase of a project but increase significantly the closer the project gets to the execution date.
To help best identify weaknesses and potential failures, a risk identification team should be made up of key stakeholders. The purpose of this diverse team is to collect opinions from the widest pool of perspectives possible. Group brainstorming sessions should be constructive and, at times, even confrontational to crowd-source the best ideas and then form the most accurate risk management plan.
The most popular tool for evaluating identified risks is the risk matrix, which uses two axes - one for probability of occurrence, the other to map the impact of a risk. This matrix is a useful starting point but supplementary and alternative tools can be utilized to help drive a structured, step-by-step approach to manage risks and their resulting economic consequences. The Bow Tie Method, for example, is unlike conventional approaches in that it documents preventative countermeasures alongside the usual risks and their consequences.
Implementing "barriers" will help reduce the likelihood of a risk occurring. In the case of an undesirable scenario occurring, the Bow Tie Method outlines a contingency plan in the form of potential countermeasures. The term "bow-tie" refers to the way in which hazards risks and effects are visualized (see Figure 1). The risk is placed in the center, with hazards and barriers to the left and impact and contingency measures to the right, resembling a bow. By listing all of the details of a single risk in such a way, the team will be able to evaluate all the facts quickly, record progress consistently and identify the risks that pose the highest threat and that should be addressed with urgency.
Consistently evaluating and meticulously recording the details of each individual hazard, is very important to mathematically calculate total risk which can be translated to a tangible monetary figure. While the Bow Tie Method is very useful to focus on individual accident scenarios, using this tool alone would give decision makers a tunnel vision view of the potential overall financial project risk. Finding the summation of these risks and assessing the costs, quality, environmental impact and potential health and safety problems provides managers with the overall project risk profile and exposure. Then, a project's general risk overview can be quantifiably calculated. The Risk Threat Potential (see Figure 2) gives a visual representation of the planned project costs combined with the possible additional costs represented through the additional risk.
MITIGATING AND MONITORING
In order to prepare for every situation, decision-makers must select the appropriate mitigation strategies. All alleviation efforts, especially for more probable risks, need to be planned thoroughly beforehand. The evaluation team needs to take the time to determine the causes of each potential danger and not just the possible consequences. To manage the mitigation and monitoring phase, sites are encouraged to appoint an employee to the rank of Risk Management Officer - an enthusiastic staff member to record all mitigation efforts and advocate vigilance in monitoring.
Constant vigilance is especially important for anticipating and recognizing risk cues. A key step in the mitigation process is predetermining the first symptoms that a particular risk may occur. This will help the Risk Management Officer determine the opportune moment for counteractive plans to be put in place. For example, in case of rain, a project would be delayed. To mitigate this risk, protective tents can be raised when necessary so work can continue uninterrupted. A risk cue for this situation could be if the barometric pressure reaches a certain level, then the tents would be raised immediately. Without this predetermined prompt, the manager may wait until the first drop of rain falls. Then, it would already be too late-the project would be interrupted. Having these indicators in place will take the guesswork out of calculating the current state of affairs and help manage risk.
There are a variety of risk alleviation methods, namely: avoid, limit, transfer or accept. By following the "avoid" technique, the part of the project that poses a certain difficulty would not be executed at all. Limiting risk includes implementing built-in buffer times during a project to allow staff enough time to counteract any hazards. Transferring or deferring refers to taking out an insurance policy or contractually passing the risk to someone else (e.g. a contractor). Finally, a site may accept a risk when there is nothing they can do about it or mitigation techniques are not worth the hassle and management believes the project will succeed anyway. Each mitigation technique will be specifically tailored for every risk. There is no one-size-fits-all solution. Once a risk alleviation option is decided upon and recorded, management should perform additional risk analyses on these alternatives.
CONCLUSION
Every site needs a comprehensive risk assessment and mitigation process. Individual tasks must first be evaluated for risk, and then overall risk can be combined and considered in a consistent manner. Then, quantitative measuring controls will help determine the right steps for reducing high-risk situations. Management may identify all the risks at the beginning of a project, but they will never be "finished" with this fluid, continuous process.
Although uncertainties will always be a part of the oil and gas business, risk-informed decision-making will increase the chance of success. As NASA has demonstrated, with the right risk management plan in place, it is literally possible to shoot for the stars.
ABOUT THE AUTHOR
As senior manager at T.A. Cook Consultants Europe, Gert Müller has more than 15 years of experience providing strategic and operational advice to clients in asset-intensive industries. Before joining T.A. Cook, he was a project manager at Touchstone Ltd. in London, UK, where he managed large ERP implementation projects, while also having worked as a business analyst in the UK. Currently, as a risk management and turnaround practice leader, Müller provides consulting services to clients worldwide with a focus on the oil, gas, and refining sectors.
