dr. nick lavingia, p.e. project management consultant
TRANSCRIPT
Managing Risk for Mega Global Energy Projects
Dr. Nick Lavingia, P.E.Project Management Consultant & Advisor
PMI Symposium, Santa ClaraOctober 6-7, 2014
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Dr. Nick Lavingia, P.E.Project Management Consultant & Advisor
Nick has over 35 years of Global Project Engineering, Management, Consulting and Training experience in the Energy industry. As a Project Manager and Project Management Consultant/Advisor at Chevron until 2013, he supported projects worth well over $ 100 billion. Since retiring from Chevron, he continues to provide Consultation and Training to Project Professionals worldwide. His experience includes projects in Oil & Gas Development, Oil Sands, Liquefied Natural Gas, Refining, Chemicals and Mining.
Nick has a B.S. and M.S. in Chemical & Petroleum-Refining Engineering and a Ph.D. in Engineering Economics & Management from the Colorado School of Mines. He is a registered Professional Chemical Engineer in the State of California. Nick has published and presented many papers at technical organizations. He is a recipient of industry award from Pathfinder for outstanding contribution to the advancement of Project Management Technology and Chevron Chairman’s award for implementing Value Engineering throughout the corporation.
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Offshore Platform
FPSOFloating, Production, Storage & Offloading
Truck
• 400 tons empty• 400 tons load
• 800 tons total weight
Truck
Shovel & Truck
Liquefied Natural Gas Tanker
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Refinery & Petrochemical Complex
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Agenda
1. Business Case for Managing Risk--Impact on the Bottom Line of Company
2. Project Development & Execution Process--Effective Communication between Decision Makers, Multifunctional Project Teams and Stakeholders
3. Value Improving / Best Practices-- Optimize Cost, Schedule and Operability of project
4. Total Cost Management --Plan, Schedule, Estimate, Monitor and Report
4. Summary5. Q & A
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Business Case for Improvement
Improved Capital StewardshipLower Costs
More Projects
Better Projects
Improved ROCE
Higher Earnings Growth
Higher P/E
Higher Market Confidence
Improved TSR
ROCE = Return On Capital Employed, P/E = Price to Earnings , TSR = Total Shareholder Return
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Project Management’s Impact on the Bottom Line
Project Management Improves ROCE byIncreasing Revenues, Decreasing Expenses,and Reducing Capital Employed
REVENUE MINUS EXPENSES
CAPITAL EMPLOYED= ROCE
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Project Management Leads to Pacesetter Performance(Cost Efficient, Faster, and More Predictable)
1.25
1
0.750.75 1 1.25
Execution Schedule
Faci
lity
Cos
t
Industry Average
Indu
stry
Ave
rage
30%Improvement
30% Improvement
PacesetterCompany
Company X
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Project Development & Execution Process
A Process that Facilitates the OptimalUse of Resources (Dollars, People andTechnology) Over the Life of an Asset /Project to Maximize Value.
Desired Outcome• Select the Right Projects by Improving
Decision Making • Improve Project Outcomes through Excellence
in Execution of Decisions
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High
HighLow Mid
Random Success• Good Projects• Average Execution
Consistent Success• Good Projects• Good Execution
Success Unlikely• Poor Projects• Poor Execution
Random Success• Poor Projects• Good Execution
DecisionQuality
Execution Quality
Mid
Project Management Vision
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PHASE 2SELECT fromAlternatives
Determine Project Feasibility andAlignment withBusiness Strategy
Project Development & Execution Process
PHASE 1IDENTIFY & Assess
Opportunities
Finalize Project Scope, Cost and Schedule and Get the Project Funded
Select thePreferred Project Development Option
Evaluate Asset to Ensure Performance to Specifications and Maximum Return to the Shareholders
PHASE 3DEVELOP Preferred
Alternative
PHASE 4EXECUTE
(Detail EPC)
PHASE 5OPERATE &
Evaluate
Produce an Operating Asset Consistent with Scope, Cost and Schedule
1 2 3 4 5
FID
FID = Final Investment Decision
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VALU
EProject Management’s Impact on Creating Value
Phase 1Opportunity
Identified
Phase 2Generate &
Select Alternatives
Phase 4Execute
Phase 5Operate
Value Identification Value Realization
Phase 3Develop
Preferred Alternative
Poor Project Definition
Good Project
Definition
Poor Project Execution
Good Project
ExecutionA
B
C
DFID
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INFL
UEN
CE
Front End Planning
Major Influence Rapidly Decreasing Influence Low Influence
EXPEND
ITUR
ES
Final Authorization
IDENTIFY& ASSESS DSP
Gate
DSP
GateSELECTDSP
GateDEVELOPDSP
GateEXECUTE OPERATEDSP
GateGateGateGate
Influence vs. Expenditures
Front End Loading DSP = Decision Support Package
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PHASE 2SELECT fromAlternatives
Basin Model
Prospect Mapping
Reservoir Description
Drilling Program
Facilities Plan
Strrategic Fit
Phase 1 Est.
Project Development & Execution Process(Effective Communication between Decision Makers, Multi Functional
Project Team and Stakeholders)
PHASE 1IDENTIFY & Assess
OpportunitiesFully Define Scope
Develop Detailed Execution Plans
Refine Estimate
Submit Funding for Approval
~25 % Engng.
Phase 3 Est. (+/- 10 % Accuracy)
Generate Alternatives
Preliminary Development of Alternatives
Develop Expected Value
Identify Preferred Alternative
Phase 2 Est.
Operate Asset
Monitor & Evaluate Performance
Identify New Opportunities
PHASE 3DEVELOP Preferred
Alternative
PHASE 4EXECUTE
(Detail EPC)
PHASE 5OPERATE &
Evaluate
Implement Execution Plan
Min. Changes
Finalize Operating Plan
Business Plan for Phase 5
Project Review
1 2 3 4 5
FID
FID = Final Investment Decision
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• Pre-Funding Assessment
• Value Improving Practices by IPA
• Peer Review
(Share)
EPC Reviews
• Decision & Risk Analysis
• Project Execution Planning
• Lessons Learned(Seek)
Legend: D = Decision PointFID = Final Investment Decision PFD = Process Flow Diagram IPA = Independent Project Analysis, Inc. P&ID = Piping & Instrumentation Diagram
P&ID$
EST FIDPFDD D D DD$ EST
Phase 1IDENTIFY & Assess
Opportunities
Phase 2SELECT fromAlternatives
Phase 3 DEVELOP Preferred Alternative
Phase 4EXECUTE
(Detail EPC)
Phase 5OPERATE &
Evaluate
Value Improving / Best Practices (Optimize Cost, Schedule and Operability of any project)
• Post Project Assessment
• Business Evaluation
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High-Level Risk Management Process
Identify risks Assess risks Prioritize Risks
Develop Mitigation / Contingency
Plans
Monitor and Control Risks
Evaluate Effectiveness &
Capture Lessons Learned
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Sample Risk Areas
Project Management / Corporate Risks
Operations
Political / Regulatory
CommercialMarketing
Health, Environmental,
Safety
Interface
Technical
Industrial Relations
Types of Risks:TacticalStrategic
Nick Lavingia 22
Type of Risks for Global Oil & Gas Development Projects
• Technical• Cost• Schedule• Price• Operating Factor• Political
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Risk Management Plan
Risk Probability Of Occurrence(H/M/L)
Potential Impact(H/M/L)
Mitigation Strategies and Contingency Plan
Cost to Mitigate(H/M/L)
Probability of Success(H/M/L)
Who / When
Type 1 H H Implement L H
Type 2 L L Ignore H L
Type 3 M M Evaluate M M
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Major Risk Areas
30%
60%
Low Medium High
High
Low
$ 500k to
$ 2 million> $ 2 Million< $ 500k
LegendUpsideDownsideBoth
Execution Complexity
Technical & Operational
Country & Local Issues
Health, Safety, Environment
Markets/Commercial
Project Cost
Project Schedules
Business
1 2 3 4 5
Economic Technical Technical Reputation Insignificant Low Medium High Very High
People Assets Environment
NPV, Cum CPEX, or
Capex Cost
Impact ($)
Schedule delay
(months) from that planned at AFE
Lost production first year as a % of
plan
Reputation Occurs in 1 in 100
Projects
Occurs in 1 in
20 Projects
Occurs in every
other Project
Occurs more often
than not 2 out of 3 Projects
Occurs more or less in every
Project
5 Very High Multiple fatality
Extensive damage
Massive effect
>150 million >6 >30% International
impact 5 10 15 20 25
4 High Single fatality
Major damage Major effect 100 to 150
million 6 15 to 30% National impact 4 8 12 16 20
3 Medium Major injury
Localised damage
Localised effect
50 to 100 million 3 5 to 15% Considerable
impact 3 6 9 12 15
2 Low Minor injury
Minor damage Minor effect 10 to 50
million 2 1 to 5% Limited impact 2 4 6 8 10
1 Insignificant Slight injury
Slight damage Slight effect <10
million <1 <1% Slight impact 1 2 3 4 5
Severity
HSE
INCREASING PROBABILITYCONSEQUENCES
Risk Management - Quantification
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Tornado Diagram for Oil & Gas Development Project
$300 $500 $700 $900 $1,100 $1,300 $1,500 $1,700
NPV($ Millions)
Base Case = $ 1,350 Million
Reserves
Oil / Gas Price
Schedule
Facilities Cost
Well Count
Drilling Cost
P10, P50 and P90 Values of Key Variables
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Expected Value = $1,132
EV ROR = 20.0%
EV DPI = 1.50
Will be further refined for GO-36
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-1,000 -750 -500 -250 0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250
NPV ($ Millions)
Cum
ulat
ive
Prob
abili
tyS- Curve: Cumulative Probability of NPV
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Projects with Different Risk Profiles
0.1.2.3.4.5.6.7.8.9
1.0
$ 0 $ 10 $ 20 $ 30 $ 40 $ 50 $ 60NPV ($ Million)
Cum
ulat
ive
Prob
abili
ty
Project A
Project B
Project C
•Contracting/Procurement(Strategy)
•Cost Control/Forecasting(WBS)
•Progress reporting
•Finance/Audit
Total Cost Management (Plan, Schedule, Estimate, Monitor and Report)
Phase 1IDENTIFY & Assess
Opportunities
Phase 2SELECT fromAlternatives
Phase 3DEVELOP Preferred Alternative
Phase 4EXECUTE
(Detail EPC)
Phase 5OPERATE &
Evaluate
• Economic Analysis(NPV, ROR, Payout)
• Cost Estimating(Conceptual)
• Planning/Scheduling(Milestone)
• Benchmarking(Cost / Capacity)
Legend: FID = Final Investment Decision NPV = Net Present Value PFD = Process Flow DiagramD = Decision Point ROR = Rate of Return P&ID = Piping & Instrumentation DiagramEPC = Engineer, Procure & Construct CPM = Critical Path Method WBS = Work Breakdown Structure
P&ID$
EST FIDPFDD D D DD$ EST
(Funding +/- 10% Accuracy) (Definitive)
(CPM Bar Chart) (CPM Resource Loaded) (Monitor & Update)
(Pre-Funding Assessment) (Post-Project Assessment)
(Pre-Qualification) (Award / Monitor)
Performance Measurement(Establish Progress Payments) (Earned Value)
(Establish Cost Accounts & Budgets) (Trend / Forecast)
(Closeout)
(Cost Collection / Analysis)
(Set Pacesetter Target)
(Asset Accounting)(Capital versus Expense)
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Estimating & Contingency Determination
ContingencyVariance Base Estimate
+/- 50% +/- 25% +/-10%
Phase Phase Phase 1 2 3
1.0
Evaluate Alternative Develop Detailed Design Construction StartupConceptual
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MinimumCost
MaximumCost$1.0Million
MostLikelyValue
MODE
Frequencyof
Occurrence
$1.4(+40%)
$0.8(-20%) 50/50 Value
MEDIAN
CONTINGENCY
Contingency
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Cost Estimate Confidence
90 % Chance thatcost will not be exceeded
90 % Chance thatcost will be exceeded
Equal Chance of costexceeding or being lower
90/10
50/50
Base10/90
Contingency
Allowances
IdentifiedScope
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Estimates are inaccurate because they are predictions
of future events and the amount of variation that will actually occur is unknown.
Contingency or Float is Added to Estimates to Reduce the Risk of Overrun.
Cost Estimate Probability Analysis
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105
110
115
120
125
130
135
140
145
150
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Probability
Cos
t ($m
illio
ns)
Appropriated Value
Cost w/o contingency
Schedule Probability Analysis
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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Probability
Sche
dule
(mon
ths)
Appropriated Value
Base Schedule
Cost Contingency Drawdown Curves
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0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100
Cos
t % o
f Con
tinge
ncy
Time % of Project Schedule
Drawdown Plan
Actual Amount Allotted to DateTime Now
Cost and Schedule Performance Curves
Earned Value Performance Curve
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Summary
Structured Project Development & ExecutionProcess, Management’s active role, application ofValue Improving / Best Practices and Total CostManagement can help achieve World-ClassProject Performance:• Safer• Better• Cost Efficient• FasterPROJECTS
Q & A