There are many types of RISKS in the Investment Process Cycle for companies.
Risk is inherent to any type and size of project, thus it should be treated as something you cannot really avoid. It is important to understand what are the major Risks at each stage of the project and how best to manage or mitigate such risks.
Projects can usually be broken down into 5 major stages:
- Evaluation
- Selection
- Define
- Implementation
- Operation
During the Evaluation stage the major risks can include such things as incorrect analysis of the potential market demand for certain products, incorrect economic data such as Invest cost estimations, Pricing of feedstocks and products. These risks can be minimised by investigating several scenarios to ensure that there are no surprises down the road.
During the Selection Stage major risks could include: Selection of Technology, which does not have extensive Industrial experience - this could lead to future problems during the early years of Operation or the selection of technology partner that could limit investment in future developments.
Selection of Partners that may not provide adequate support during the future project stages for different reasons, e.g. geopolitical, lack of resources or company takeover, etc.
We are seeing more and more M&A activity, especially in the International E&C sector, and this certainly can affect future progress on some projects.
To mention a few:
- Initially Foster Wheeler with Amec, and now WOOD in the space of a few years;
- CB&I and McDermott now McDermott, and so on.
Such mergers can have an impact on Technology ownership and may result in sell-offs or restricted support in some regions. Such risks are of course very difficult to foresee and therefore mitigate.
During the Definition Stage major risks could include inaccurate Invest Cost analysis and poor definition of ISBL and OSBL facilities. Performing in-depth analysis and studies during these 3 early stages of the project help to minimise future project Risks.
The next stage is Project Implementation. Choosing the most appropriate project implementation strategy is key to future project success to meet the required deadlines and control the quality and, of course, the project costs. Whichever model a Client chooses will depend on the actual project, location, resources & their experiences.
Such models, as EPC LSTK, EPCM, Progressive Lump Sum or Reimbursable are examples that can be applied in certain cases. Before deciding on which model best fits for a specific project all the risks must be assessed – notably those that can impact schedule, cost and quality.
Change Order management is a key activity to manage the project costs risks. Clients must ensure they can control any proposed changes during implementation, especially for EPC LSTK contracts. Such terms must be included in detail in the EPC Contract.
The final stage is Operations. It is crucial to ensure early successful operations and manage any risks that could impact this, such as lack of training of operators, extent of Process Integration, Process Controls, Safety features built into the design and work processes, partners for product offtake, etc.
Understanding the different risks and building into the project features - helping mitigate major risks may of course make projects more expensive (risk premium), however, over the project lifecycle such an approach is usually beneficial.
Risks can be managed or just mitigated? Since the latest crises in the Oil industry unfolded, business environment has become more unpredictable than ever, and with the capital projects getting evermore complex (e.g. Integrated refinery-petrochemical complexes), at times it makes final project decisions extremely difficult due to the many factors to consider. The uncertainty of taking the risk is almost too much to take, especially with brand projects in new fields such as renewables. Additional investment to manage risks can impact the project economics and in some cases can lead to the project being considered less attractive.
We regularly analyse markets and projects, and we have seen that significant investments have been put into downstream facilities in regions around the world. We can see that there has been significant number of projects with large cost overruns. Over 50% of projects come online later than expected (in average 1.5 years later than initial scheduled date) - so we can conclude from this that there is still room for improvement to be done in the area of Risk management.
Risks can come about unexpectedly to companies, especially if they do not have reliable sources of information regarding changing regulations, sanctions, market price change for equipment or feedstock and products in advance – and many do not – projects still have to be completed, sometimes at a higher cost. The majority of projects in O&G play strategic role for the local community, region, and since quite a number of parties are usually involved, the decision to ‘abort’ the project at any stage of the process if it does not make economic sense is not an easy one to introduce. The good news is that most of factors that can contribute to a project’s failure or success, like resource availability and allocation, labour issues, quality and construction control, contracting, etc., can be well controlled & managed.
The ‘drill’ is quite simple and includes major 4 steps to be taken for Risk management
- Assess Impact
- Quantify and Range Risks
- Mitigate
- Manage
Managers should always remember that it is a recurring process, and risks should be reassessed regularly, as with changing external and internal conditions previous assumptions might become irrelevant.
The key to success is not WHAT, but rather HOW it should be done in practice to make the theory work its way through project activities. For this matter, leadership and guidance is of utmost importance, as it helps communicate the vision throughout the organisation and allows project teams to clearly understand the importance of the input of each member to the final result.
Risk screening is a worthy instrument for finding out important factors. Generic risks are similar for typical industry projects and could be drawn from reference lists of past projects or from consultants’ practice. Nevertheless, risks that are harder to investigate, which might decide on project’s future, are project-specific risks. For instance, for a project we worked on a couple of years ago in Russia, the largest risks were quality and compatibility of equipment supplied by different manufacturers in Asia, and also the lack of adequate inspection and control of local construction company – a company that might try to save on costs under a fixed price agreement through using more economic equipment and materials wherever possible.
In another region the biggest concern was the lack of local specialists and cost of qualified labor (mostly expats), logistics, and cross-currency rate changes with USD - which was the contract currency for all contractors. Every risk assessment shall start with market review and be done by experienced specialists, that way critical factors would not be overseen.
A tool that has proven its worth is a Risk matrix – it can give a simple yet illustrative outlook on risks that the team should focus on and those that could work for other projects but in this precise case would only be a waste of time & resources. There is a number of matrixes; the easiest one in our opinion is a probability-impact matrix. Risk evaluation shall start with the analysis of Probability, and then, consecutively, Impact on Cost, Schedule, and Performance (meeting technical specification). All the proceedings should be formulated in the matrix, eliminating the irrelevant options at each step.
From our project experience, we could say that having a high-quality Risk Questionnaire ensures input data from responsible and competent company workers and project team – it is always important to look at the project through the eyes of those who face these types of problems in their everyday routine. They could even suggest a cost-effective and easy solution, as we learned from integrated risk sessions onsite.
Conclusions
Projects can never be Risk Free – However, there are three main strategies to manage risk:
- Retain The Risk And Implement Internal Risk Control Procedures And Practices
- Transfer The Risk To Project Counterparties (EPC Contractors, O&M Agreements, Etc.)
- Transfer The Risk To Third Parties – Insurance Companies.
The rule here is that risk should be split between the parties in a way that minimizes potential impact for each one. From a glance it means that client will try to transfer over more responsibility to contractor and vice versa, but actually it makes sense that each party should take ownership for those stages that they have more control over and are ‘comfortable’ with (i.e. procurement by a client, construction by a general contractor, etc.).
Euro Petroleum Consultants is a technical oil and gas consultancy with offices in Dubai, London, Moscow, Sofia and Kuala Lumpur. Euro Petroleum Consultants also organises leading conferences and training courses worldwide. For further details please visit www.europetro.com.
EPC also organises leading conferences including the Gulf Safety Forum 2019 and OPEX MENA 2019 – Operational Excellence in Oil, Gas & Petrochemicals - which will take place in Bahrain from 25–28 March. During the week, there are also OE and Safety training courses to choose from.
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