APPLICATION OF PMBOK-RISK MANAGEMENT TO LNG PROJECTS

APPLICATION OF PMBOK-RISK MANAGEMENT TO LNG PROJECTSSubmitted By- 2013 D10 Rajesh Goel, 2013D19 Shagun Goyal

Significant savings can be made through more effective risk management in the LNG supply chain, say Erik Skramstad and Jon Wredmark

The demand of Liquefied Natural Gas (LNG) is on a steady increase, and the estimation of world LNG consumption will be doubled by 2030. In the wake of increasing demand, numerous LNG projects are under construction and many new projects are in the planning stage. However, since there are limited numbers of companies that have a full capability of core technologies and licenses related with LNG plant construction, companies that are less experienced in LNG plant projects suffer from a lack of project management ability, such as process planning, schedule management, and risk management particularly for early stage of project initiation. In general, engineering designs have a strong effect on the overall project costs, and frequently, an unsatisfactory design performance can lead to cost overrun and time delay at the downstream phases. Therefore, the design quality is very imperative in securing the positive outcomes in the whole project life cycle. The characteristics of LNG projects can be summarized as a mix of complexity and diversity of a number of activities. Since many areas, such as mechanical, piping, instrument, electrical, civil and architecture are involved, the connectivity of each activity is very crucial for the success of a project. Thus, the LNG plant projects are exposed to more various and complex risk factors. For this reason, LNG projects require considering more detailed risk factors and a tailor-made risk management framework, which are able to reflect the inherent attributes of LNG plant projects.Why Risk Management Framework is required?Liquefied Natural Gas is the second major option for monetising stranded natural gas resources. It involves gas feed gas supply, liquefaction, transportation through LNG Tankers and regasification terminal. LNG is a front-end capital intensive project, with technical complexity and long lead payback period. Therefore, like most infrastructural projects, LNG Projects are mostly financed through limited recourse financing. That is, the lender looks principally to the project cash flow for repayment of debt and interest. Aside from high capital, the need to share risk, desire to limit balance sheet debt obligation and tax incentives are other reasons that inform the sponsors choice of limited recourse financing. The LNG Chain may be broken and financed separately or finance as a single integrated project.From the lenders point of view, the major concern is to get repaid the full amount and interest as at when due. A bankable project therefore is one which is capable of debt repayment as specified under the loan agreement. However, since the payment is tied to cash flow the bank is concern about any factor that may affect the main components of cash flow time, amount and certainty. There is no project without risk; a bankable project is not a riskless deal but a project with a properly analysed, allocated and mitigated risk. It is the duty of the sponsors to make the risk profile acceptable to the bank. Integrated LNG projects may reduce the exposure of the lender to some risk while at the same time may introduce risk which financing just a part of the chain may not face. It will also require bigger financing as a single project. The recent global financial crisis has raised the challenges of financing LNG projects by affecting the LNG market and constrained the source of project funding. This raises further issues of level of acceptable risk and a workable strategy to obtain financing for integrated projects from a constraint debt market.LNG project developments face risks that can result in expensive delays. Prolonged commissioning and start-up periods, reduced performance, logistical challenges, cost overruns and other problems can all significantly affect a projects economics.The risks are significant and the underlying causes span political circumstances and unclear interfaces, to technology that does not deliver. LNG projects are large and complex, employing advanced technology, and such challenges must not be underestimated.

Thus at the early stage of the project it becomes imperative to examine the risks for the success of the project and look at the factors to make the project more bankable. What are the major risks and how were they analysed, allocated and mitigated? What are the main success drivers? Risk management framework will approach these questions by looking at the role of sponsors, risk allocation and management and the source of finance on the bankability of the project.Risk Management Framework

1. Risk IdentificationIt is very important to understand the target or objective of risk management by identifying risk factors. Firstly, we set up the purposes of risk management for LNG plant projects at the design phase, as follows: 1) compliance with requirement of the host country, such as design criteria and license, 2) prevention of cost increases and quality decreases due to design change, 3) reduction of contract and claim, related to design change,4) quality management of facilities to acquire performance standards, and5) management of the design packages interface and connectivity. Based on the purposes of risk management, risk factors were grouped according to specific criteria and sub-criteria considering their level of detail. To identify the risk factors, following steps could be identified1) Analysis of existing literature and several firms design reports related to LNG projects.2) Expert surveys and expert interviews to reflect the in-depth experience and know-how of practitioners. These experts have been experienced in the construction field more than 10 years. 3) Follow-up expert interviews to revise classification of risk categories and verify practical usability of risk factors.4) Risk Assessment Workshops5) Delphi-Technique6) Brain Storming7) Diagramming Methods to analyse the complex interface where we could find the maximum concentration of Risk.Thus by keeping the objectives and constraints in consideration here is the list of major Risks Identified. Hazardous MaterialsThe nature of this LNG facility is such that there will be three hazardous materials of sufficient volume on site which may have the potential for off-site consequences.

These are: CSG in either the gaseous or cryogenic state LPG, if required Refrigerants.A complete list of all hazardous substances that will be held and utilised on site will beidentified during detailed design of the LNG facility

Reserve Risk: Whether the reserves would be enough to provide the required returns which is backbone for the financial viability of the project

Construction Risk: Risks associated with the construction stage are cost overrun, delay and defect in design and construction to meet project specification and output. These are mainly mitigated by passing the construction risk to a turnkey contractor for a fixed term and price attached with incentives to performance and liquidated damages.

Operation Risk: The operation stage signal the cash flow and repayment period. Risks associated with the operational stage of an LNG projects include technological risk, operation performance and operating cost.

Market Risk: Financing an un-contracted integrated LNG project is not feasible in the absence of a mature spot market. There is no global spot market for LNG compare to oil to mitigate volume risk.

Political Risk: Most LNG projects are located in a high risk political environment; therefore the lender is concerned about the allocation and mitigation of political risk. The risk of expropriation, confiscatory fiscal regime, breach of sovereign agreements, political violence, change of law, refusal of licence and permits, arbitrary change in environmental standards, and restriction on repatriation of fund are major risks which may disrupt the project or undermine its Cash flow. Usually, lenders seek for government guarantees and draw out insurance policy to cover for political risks

Environmental Risk: LNG project is relatively environmental friendly compare to oil. However, environmental concern is always associated with major LNG projects. Especially, projects extending from development of gas fields, pipelines and LNG plant. There is an increasing demand for higher environmental standard and civil society agitations. This risk is mitigated through comprehensive environmental impact assessment, environmental management, rehabilitation reserve fund, insurance and sometimes environmental warranty from the sponsors.

Land Acquisition: This is one of the major risks in offshore LNG projects. If the sufficient amount of land is not available on time, it will result into cost-overruns which can further jeopardise the project and affects its financial viability

Pricing Risk: Gas may not be able to capture the right prices in light of fluctuating oil prices around the world

Force Majeure: It majorly involves the risks arising from the natural weather calamities, rebellion, wars, earthquakes etc. The risks flowing from an event of force majeure are particularly difficult to allocate. Force majeure is by definition uncontrollable and often excuses the non-performing party from liability. Where force majeure interrupts an LNG chain, the stranded facilities of the LNG chain may be without throughput and without recourse for contract breach. For example, if an LNG receiving terminal is forced to shut down for reasons beyond its control, the entire chain is disrupted. The LNG production facility and ships remain fully operational, but may be unable to supply LNG to the terminal or alternative markets. Yet, the producer may still be obligated to honour contracts with clients and creditors. The use of force majeure clauses in contracts, in theory, can help mitigate this problem. However, once the supply chain is disrupted it may take several months to get back on track, depriving lenders of revenues needed for debt service, eroding equity returns, and potentially exposing parties to liability for non-performance if force majeure provisions are not back-to-back.

2. Qualitative AnalysisThis analysis majorly helps in prioritizing the risks involved with in the projects which further gives helps to access the risks on strong ground and ascertain the mitigation risks plan for those who are likely to happen and have a greater impact on the project.The hazard assessment and its risks involved the following major steps Hazard Identification which majorly involves the review of potential hazards and identification of the possible causes of potential incidents. Consequence and effect analysis which involves the assessment of consequence of hazards involved Frequency analysis which involves the estimation of likelihood of event occurring. Risk Analysis Of each incident occurring defines risk as follows Risk= Consequence* Likelihood The risks having high values must be responded quickly

The following gives the snapshot of risk matrix

The most common and popular method to determine relative priority among risk factors is the Probability Impact (PI) method. This method determines priority by using two criteria, probability and impact as shown below

Applying the same concept to the various risks involved in LNG projects in the following tabular form is listed as given below

S.NoPotential HazardRisk Factor

Ignition of flammable materials leading to fire, incident of injury and destruction of propertyHigh

Purging and start-up of release of gas catching fireMedium

Health and safety while working at heights or under heavy loads, hazardous materials , exposure to wild-life leading to injury or death of work-manLow-Medium

Leakage in pipes carrying LNG or Refrigerants leading to explosionsHigh

Uncontrolled release from LNG storage tank leading to cold metal brittle failure, fire and explosionHigh

Maintenance Failures leading to shutdowns Medium

Gas turbine failure leading to fire or explosionMedium

Environmental Pollution due to failure to contain environmental polluting materialsLow

External Incidents causing Road Accidents that leads to release of flammable materialLow-Medium

Natural Events occurring like Earthquakes, Cyclones or wars or strikesMedium

Spills during construction, operation resulting in contaminated soil, injury or environmental pollution at decommissioningLow

Damage to storage vessels, hoses or pipes resulting into release of flammable or combustible materialsLow

Health and safety hazards to workers in pipeline or in confined spaces or at a heightLow-Intermediate

Health and safety hazards to workers in tunnel or in confined spaces or at a heightIntermediate

Use of heavy machinery leading to erosion or dustNegligible

Generic threats to pipeline like corrosion Intermediate

Natural event such as land subsistence, cyclone, storm and earthquake damagesIntermediate

Flooding of tunnel resulting in destruction to property and environmentLow

Damage to LNG carrier leading to a loss of containment and injuryMedium

Berthing and LNG loading and unloading accident or mechanical failure leading to an uncontrolled release of LNG causing pollution to the releasing environmentMedium

Terrorist ActivitiesHigh

Marine collision causing spills and leakages resulting into a lot of environmental damageLow-Intermediate

Reserve Risk affecting viabilityExtreme

3. Quantitative AnalysisQuantitative analysis helps in backing the results identified in qualitative analysis with numbers, thus gives a clear-cut indication how much contingencies to quantify in our budget if that risk occurs in order to curtail the extra cost over-runs without adjusting the profit margins affecting the project viability. Though there are various technologies involved as mentioned and explained below but the major one used is simulation using Risk Modelling on @Risk softwareSensitivity analysis.This involves analysing the project to determine how sensitive is to particular risks by analysing the impact and severity of each risk.Expected monetary value analysis.In broad terms, determining the expected monetary value is to multiply the likelihood by the cost impact to obtain an expected value for each risk, these are then added up to obtain the expected military value for the project. A typical way of calculating EMV is using decision trees;Quantitative risk analysis Decision tree analysis.These are in the form of a flow diagram where each node, represented by a rectangle, contains a description of the risk aspect and its cost. These rectangles are linked together via arrows each arrow leading to another box representing the percentage probability. These totals are calculated by multiplying the risk costs by the probability and adding that value to the initial cost.Tornado diagrams.These are named because of their funnel shaped and portray graphically the project sensitivity to cost or other factors. Each tornado diagram will represent the impact of risks in terms of particular aspects. These aspects may be the stages of phases of all project, and are ranked vertically and represented by a horizontal bar showing plus or minus cost impacts.Modelling and simulation.The most common form of this is Monte Carlo analysis which is normally calculated by computer by analysing many scenarios for the project schedule and calculating the impact of particular the risk events and is helpful in identifying risks and the effect they have on the project schedule.Risk modellingRisk may be expressed in several ways, by distribution, expected values, or single probabilities of specific consequences, but probably the most commonly used is the expected values. Approach used is the latter that describes the risk, which was considered a random variable. Expressing the random variable risk as a distribution is very useful, it takes into account uncertainties of input values, and seems mode accurate than single value. The risk of LNG tankers colliding with a tug, in yearly perspective, for a single collision scenario, was calculated using the following formula:Ri = Pi*Ciwhere Pi means a probability of LNG tanker-tug collision scenario, Ci consequences of a given collision scenarioThe probability for collision was assumed to be equal at all scenarios, and adopted value is presented inTable. The consequences of each collision scenario were calculated with use of MonteCarlo simulations. Also MonteCarlo simulations were adopted in order to estimate the distribution of random variablerisk. The distribution obtained of random variablerisk, which is the annual risk due to a collision between a LNG tanker and a tug is depicted in fig. Random variable risk may be also expressed as a single number, at adopted confidence level (95%), simply by following the formula:. Therefore the annual value of random variable risk calculated at 95% confidence level equals USD 12324.

Expert judgement.In a similar way to carrying out a structured interview, this would normally involve asking experts to review your risk data and the manner in which it has been gathered. As a consequence these experts may also identify additional risk areas.

4. Plan Risk ResponseAt the planning stage only apart from the identification of risks it becomes very important to plan the mitigation measures so that in future it that risk occurs than the team is prepared beforehand to deal with the risk and the resources could be planned and mobilized accordingly.This would make sure that the integrity of the project is maintained and the viability of project is sustained throughout the project life-cycle.There are majorly Four procedures in risk response as following Accept- Pricing Risk Avoid Transfer- will be through insurance MitigateHere is the list of response measures that could be done if that risk occurs.S.NoPotential HazardRisk Response/Mitigation Measure

1. Ignition of flammable materials leading to fire, incident of injury and destruction of propertySafe handling of materials and control of ignition source through combination of hardware features and procedural controls. The construction camp will be constructed away from hazardous effects of fire and explosions

2.

Purging and start-up of release of gas catching fireAll purging activities will be carried out through inert gases thus avoiding catching of fire

3. Health and safety while working at heights or under heavy loads, hazardous materials , exposure to wild-life leading to injury or death of work-manAll safety and health standards will be followed and insurance will be taken in case of life-deaths plus environmental management plan will be developed for managing such risks

4. Leakage in pipes carrying LNG or Refrigerants leading to explosionsMake sure that plant is designed according to standards and codes.Make sure that preventive maintenance and inspections are carried out regularly to tracks these things well in advance

5. Uncontrolled release from LNG storage tank leading to cold metal brittle failure, fire and explosionQuality control and tests of storage tanks to be undertaken

6. Maintenance Failures leading to shutdowns Range of start-up, shut-down and maintenance procedures with emergency response procedures to be adopted

7. Gas turbine failure leading to fire or explosionGas turbine to be maintained according to schedule. Additionally fire detectors to put in place and ventilation systems to be designed properly

8. Environmental Pollution due to failure to contain environmental polluting materialsChemicals will be stored and handled carefully. Alternate disposal and storage areas in case of failure. Surface water to be treated to remove oil and grease in case of spill

9. External Incidents causing Road Accidents that leads to release of flammable materialAccess roads to the site be properly maintained and a detailed traffic management plan will be built

10. Natural Events occurring like Earthquakes, Cyclones or wars or strikesInsurance can be undertaken for protection of works

11. Spills during construction, operation resulting in contaminated soil, injury or environmental pollution at decommissioningDetailed safety management plan to be developed. Additionally all corrosive chemicals and liquids to be captured to site drainage systems.

12. Damage to storage vessels, hoses or pipes resulting into release of flammable or combustible materialsStandards to be followed quite effectively regarding the storage of materials. Personals to be trained in handling storage of corrosive materials and further safeguards to be adopted

13. Health and safety hazards to workers in pipeline or in confined spaces or at a heightConstruction management plan to be developed focusing on safety methods and measures. All works to be carried in strict conformance to standards and permits. And emergency response plan to be developed.

14. Health and safety hazards to workers in tunnel or in confined spaces or at a heightConstruction management plan to be developed focusing on safety methods and measures. All works to be carried in strict conformance to standards and permits. And emergency response plan to be developed

15. Use of heavy machinery leading to erosion or dustVehicles to be operated with in permissible speed limits along with provision of a fire extinguisher

16. Generic threats to pipeline like corrosion Preventive maintenance and inspection programmes being implemented. Pipeline integrity plan to be prepared for detailed designing and fractured toughness

17. Natural event such as land subsistence, cyclone, storm and earthquake damagesThe pipeline to be constructed so that to take all natural events in account plus an insurance cover

18. Flooding of tunnel resulting in destruction to property and environmentTechnical solution of clamping

19. Damage to LNG carrier leading to a loss of containment and injuryLegislative compliance in this case

20. Berthing and LNG loading and unloading accident or mechanical failure leading to an uncontrolled release of LNG causing pollution to the releasing environmentControlled material transfer activities to be adopted. Gas and fire detector systems to be installed in case of any emergency. Operators to comply with port manuals. Emergency shutdown to take place

21. Terrorist ActivitiesAppropriate safety and security

22. Marine collision causing spills and leakages resulting into a lot of environmental damageCompliance with relevant maritime safety requirements

23. Reserve Risk affecting viabilityGeological and seismic surveys to be studied effectively

24. LaLand acquisitionProcedures to be started much more in advance

25. PPricing RiskTo be accepted as such

5. Monitoring RisksA risk management program is never finished. New risks will emerge and existing risks will disappear. You have to stay on top of it.The objectives of risk monitoring and updating are to:1. systematically track the identified risks2. identify any new risks3. effectively manage the contingency reserve4. capture lessons learned for future risk assessment and allocation effortsThe risk monitoring and updating process occurs after the risk mitigation, planning, and allocation processes. It must continue for the life of the project because risks are dynamic. The list of risks and associated risk management strategies will likely change as the project matures and new risks develop or anticipated risks disappear.Periodic project risk reviews repeat the tasks of identification, assessment, analysis, mitigation, planning, and allocation. Regularly scheduled project risk reviews can be used to ensure that project risk is an agenda item at all project development and construction management meetings. If unanticipated risks emerge or a risk's impact is greater than expected, the planned response or risk allocation may not be adequate. At this point, the project team must perform additional response planning to control the risk.Risk monitoring and updating tasks can vary depending on unique project goals, but three tasks should be integrated into design and construction management plans:1. Develop consistent and comprehensive reporting procedures.2. Monitor risk and contingency resolution.3. Provide feedback of analysis and mitigation for future risk assessment and allocation.Monitoring and review should be a planned part of the risk management process and involve regular checking or surveillance. The results should be recorded and reported externally and internally, as appropriate. The results should also be an input to the review and continuous improvement of the firm's risk management framework.Responsibilities for monitoring and review should be clearly defined. The firm's monitoring and review processes should encompass all aspects of the risk management process for the purposes of: Ensuring that controls are effective and efficient in both design and operation Obtaining further information to improve risk assessment Analysing and learning lessons from risk events, including near-misses, changes, trends, successes and failures Detecting changes in the external and internal context, including changes to risk criteria and to the risks, which may require revision of risk treatments and priorities Identifying emerging risks.As part of the monitoring process, the thresholds for the risk criteria should be reviewed at the commencement of each risk assessment cycle to identify the processes that may be subject to increased risks and, as such, would derive the greatest value from the risk assessment

Risk has a dynamic context resulting from the constantly changing external and internal environments. Organisations must monitor not only risks but also the effectiveness and adequacy of existing controls, risk treatment plans and the process for managing their implementation.