1. Why Traditional Risk Management
Fails in The Oil and Gas Sector
- Empirical Front-Line Evidence and Effective Solutions-
Brett Schroeder
Jan Jackson
Asset Performance Networks, LLC

2. Outline
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

3. 1.0 Introduction
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 risk
recent analyses of petrochemical and energy projects showed that
anywhere from 25% to 35% of major capital projects can be classified
as a failure

4. 2.0 Defining Risk Management
There is a Link Between Risk Management and
Project Outcomes*
1.8
Combined Schedule/Cost Performance
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
Not Partly Adequate Fully
Adequate Adequate Adequate
Adequacy of Assigning Risk Owners
*Cook-Davies, 2005

5. Outline
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

6. 2.0 Defining Risk Management
Defining Risk
Risk:
Any uncertainty that, if it occurs, would affect
one or more objectives
Threat: Opportunity:
Any uncertainty that, if Any uncertainty that, if
it occurs, would affect it occurs, would affect
one or more objectives one or more objectives
negatively positively

7. 2.0 Defining Risk Management
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 level
Confidence in the project performance throughout the project
life cycle
Current schedule of risks identifying ownership, actions, status
Method of prioritising key issues and effective actions

8. 2.0 Defining Risk Management
Overview of The Risk Management Process
Setup & Define
Risk Eliminate
Identification Trivial Risks
Periodic Review No
Risk Evaluation Latent Risk
Immediate Action
Active Risk
Accepted Risk
Action Plans Active Risk
NO Obtain Contingency
Acceptance Plans
YES
YES
RISK NO
Implement Monitor &
Accepted Risk Closed Risk
Action Plans Control OCCURS

9. 2.0 Defining Risk Management
The Risk Management Process Results in a Register
to Help Projects Track, Quantify, and Control Risks
Sample Register

10. Outline
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

11. 3.0 Nature of Risk for Oil and Gas Projects
Oil and Gas Industry Must Manage
Wide 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

12. 3.0 Nature of Risk for Oil and Gas Projects
Current State of Risk Management in Oil and Gas Industry
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

13. 3.0 Nature of Risk for Oil and Gas Projects
Technical, Planning, and Organizational Risks Pre-dominate
(Highest Rated Capital Project Risk Areas Listed in Order of Risk Severity)
RISK CATEGORY SUB-CATEGORIES
-- Ensuring adequate technical definition prior to detailed engineering
1. Technology -- Use of new or unproven technology
-- Design flaws
-- Permitting takes longer than anticipated
2. Planning/Schedule -- Long-lead times for major equipment
-- Adequate staffing,
3. Organizational -- Effective team Integration and interface management
-- Partner alignment
4. Market/Commercial -- Ensuring robust economic case (ROI)
(Economic) -- Cost escalation and budget constraints
-- Tie-ins with existing facilities (Brownfield modifications)
5. Scope Definition -- Adequate understanding of OSBL (Outside Battery Limits) interfaces
6. Procurement & Materials -- Availability of staff and supporting equipment
7. Commissioning & Startup -- Interference with on-going operations
(Operational)
8. Health, Safety, and -- Safety Incident
Environment
Based on 20 Recent Project Risk Registers

14. 3.0 Nature of Risk for Oil and Gas Projects
Oil and Gas Industry Project Performance Needs
Improvement
Percentage of Projects Exceeding Budget
and Cycle Time by More Than 10 Percent
50%
Percentage of Projects
40
30
Mega Projects (> $1b)
20
Other (< $1b)
10
0
Exceed Budget Exceed Cycle Time
by 10% by 10%
Source: Booz Allen, Capital Project Execution in the Oil and Gas Industry

15. 3.0 Nature of Risk for Oil and Gas Projects
Oil and Gas Project Failures Have Increasing Public Exposure

16. 3.0 Nature of Risk for Oil and Gas Projects
Why 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 core
team members
-Failure to follow-up on tracking risks and developing effective risk
response plans
-Lack of visibility to management

17. 3.0 Defining Risk Management
Project Teams Fail to Complete the Risk Management Process
Setup & Define Estimated Level of Implementation
90%
Risk Eliminate
Identification Trivial Risks
75%
Periodic Review No
Risk Evaluation Latent Risk
Immediate Action
Active Risk
Accepted Risk 30%
Action Plans Active Risk
NO Obtain Contingency
Acceptance Plans
YES
YES 15%
RISK NO
Implement Monitor &
Accepted Risk Closed Risk
Action Plans Control OCCURS

18. 3.0 Nature of Risk for Oil and Gas Projects
There Are a Diverse Set of Barriers
Preventing Better Implementation
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

19. Outline
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

20. 4.0 Effective Risk Management
Risk Management Case Study
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

21. 4.0 Effective Risk Management
Key Initial Steps in Implementing an Effective
1. Education
Risk Management Strategy
An 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 Resourcing
Appointment 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 Review
Progress on action items reviewed at monthly team meetings
5. Standardized Approach and Tools
Initially an Excel spreadsheet was adopted, but as the project moved forward a
web-based system was implemented.

22. 4.0 Effective Risk Management –
Tools and Techniques
4.1 Risk Identification
4.2 Risk Evaluation
4.3 Risk Management
4.4 Risk Control

23. 4.0 Effective Risk Management –
4.1 Risk Identification
Setup & Define
Risk Eliminate
Identification Trivial Risks
Periodic Review No
Risk Evaluation Latent Risk
Immediate Action
Active Risk
Accepted Risk
Action Plans Active Risk
NO Obtain Contingency
Acceptance Plans
YES
YES
RISK NO
Implement Monitor &
Accepted Risk Closed Risk
Action Plans Control OCCURS

24. 4.0 Effective Risk Management –
4.1 Risk Identification
A series of facilitated cross-functional Risk Workshops were
held at key points in the project life-cycle to identify risks
Project Development Phasing
Close
Close
Feasibility
Feasibility Concept
Concept Definition
Definition Execution
Execution Out
Out Operation
Operation
Phase
Phase Phase
Phase Phase
Phase Phase
Phase Phase
Phase
Risk registers were obtained
from ongoing projects
to help brainstorm the
risks, provide a starting point, and
Risk Workshop(s) identify lessons learned

25. 4. Effective Risk Management
4.1 Risk Identification
The Project Used a Hierarchical RBS and WBS to Effectively
Categorize Sources of Risks

26. 4. Effective Risk Management
4.1 Risk Identification
The Project Used a an External Facilitator to
Help Ensure an Open Mindset
FAMOUS LAST WORDS… QUESTION EVERYTHING…
It’s never been a problem in What if it’s not ready on
the past… time?
That’ll never happen… What if it doesn’t work?
It is all under control… What if the assumptions are
We could be getting on with wrong?
the job instead of thinking How can it go wrong?
about risks… Where are the weaknesses?
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

27. 4.0 Effective Risk Management –
4.2 Risk Evaluation
Setup & Define
Risk Eliminate
Identification Trivial Risks
Periodic Review No
Risk Evaluation Latent Risk
Immediate Action
Active Risk
Accepted Risk
Action Plans Active Risk
NO Obtain Contingency
Acceptance Plans
YES
YES
RISK NO
Implement Monitor &
Accepted Risk Closed Risk
Action Plans Control OCCURS

28. 4. Effective Risk Management
The Project Adopted A Consistent Scoring Methodology
4.2 Risk Evaluation
The Project Adopted A Consistent Scoring Method…
(Risk Severity = Probability * Impact)
PROBABILITY OF OCCURRENCE
PROBABILITY OF OCCURRENCE
RISK Very Low
Very Low Low
Low Medium
Medium High
High
RISK 1 2
2 33 44
SEVERITY Neglectable
Neglectable Not Likely
Not Likely Sometimes
Sometimes Repeated Incidents
Repeated Incidents
SEVERITY [Probability of
[Probability of [Probability of
[Probability of [Probability of
[Probability of [Probability of
[Probability of
Occurrence 1/1000] Occurrence 1/100]
Occurrence 1/1000] Occurrence 1/100] Occurrence 1/10]
Occurrence 1/10] Occurrence 1/1]
Occurrence 1/1]
Very High
Very High 4
4
High
High
IMPACT
High
High 3
3 Medium
IMPACT
Medium
Medium
Medium 2
2 Acceptable
Acceptable
Low
Low 1
1

29. 4. Effective Risk Management
The Project Adopted A Consistent Scoring Methodology
4.2 Risk Evaluation
…and Quantified Risks Impact Where Possible

30. 4. Effective Risk Management
4.2 Risk Evaluation
Impact and Probability Values Were Quantified.
30
A quantitative
range is inputted
to determined Impact
Rating. The “most
likely” value drives
the Rating.
The project made use
of the economic model
to help quantify the impact
ranges

31. 4.0 Effective Risk Management –
4.3 Risk Management
Setup & Define
Risk Eliminate
Identification Trivial Risks
Periodic Review No
Risk Evaluation Latent Risk
Immediate Action
Active Risk
Accepted Risk
Action Plans Active Risk
NO Obtain Contingency
Acceptance Plans
YES
YES
RISK NO
Implement Monitor &
Accepted Risk Closed Risk
Action Plans Control OCCURS

32. 4. Effective Risk Management
4.3 Risk Management
Developing Effective Responses Was the Most Difficult Challenge
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

33. 4. Effective Risk Management
4.3 Risk Management
A Mitigation Index Was Used to Prioritize Action Plans
The project team used a Mitigation Index to help prioritize
Mitigation Index = Risk Reduction
Cost of Mitigation
Risk Reduction is Unmitigated Risk – Mitigated Risk
Cost of Mitigation is the total cost to mitigate the risk
This metric identified the actions with the potential to add the
most value to the project

34. 4. Effective Risk Management
4.3 Risk Management
Overdue Action Plans Were Quickly Highlighted

35. 4. Effective Risk Management
4.3 Risk Management
Risk Profile Was Initially Very High
Risk Severity by
WBS Area

36. 4. Effective Risk Management
4.3 Risk Management
However, the Team Felt that Most Risks Were Manageable
Risk Exposure =
Manageability*Severity

37. 4.0 Effective Risk Management –
4.4 Risk Control
Setup & Define
Risk Eliminate
Identification Trivial Risks
Periodic Review No
Risk Evaluation Latent Risk
Immediate Action
Active Risk
Accepted Risk
Action Plans Active Risk
NO Obtain Contingency
Acceptance Plans
YES
YES
RISK NO
Implement Monitor &
Accepted Risk Closed Risk
Action Plans Control OCCURS

38. 4. Effective Risk Management
4.4 Risk Control
The Project Leadership Team Reviewed Progress on Closing Out Risks
On a Regular Basis

39. 4. Effective Risk Management
The 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