strategic risk factors in projects norwegian center for project management trondheim, sept 5, 2007...
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Strategic Risk Factors in Projects
Norwegian Center for Project Management
Trondheim, Sept 5, 2007
Risk Resolution
Black Swans in the World of Capital Projects
Risk Resolution
The Impact of the Highly ImprobableThe Impact of the Highly Improbable
Avoiding the Turkey Trap
Thanksgiving!!!
What is a “Black Swan”?What is a “Black Swan”?
• An outlier “outside the realm of regular An outlier “outside the realm of regular expectations”expectations”
• Carries extreme impactCarries extreme impact
• We concoct explanations to make it seem We concoct explanations to make it seem predictable once it has occurredpredictable once it has occurred
Risk Resolution
Hunting Black Swans
Risk Resolution
Examples of Black Swans in Capital Projects?
• What was the project?• What was the Black Swan risk? (i.e. “an
outlier outside the realm of regular expectations”)
• Why was it not expected or planned for?
Consider Kashagan (per WSJ 8/28/07)
• Shell operator for Exploration – logistics challenges etc.• 2001: Eni=operator, 1st Oil 2005 – lack of benchmarks for estimating• issue of artificial islands delays project• 2004: new plan approved, 1st Oil 2008, $10G• 2007: update: 1st Oil end 2010, $19G (Life $57G->$136G)
– LQ too close to treatment plant, weak $, lack of benchmarks, inflation– Cost of drilling rigs, “soaring steel prices”, lack of engineers, PMs– Kashagan: deny permits, project on hold, fire Eni
-------------------------------------------------------------------------------------RISK FACTORS:• Reservoir: H2S, pressure (“costly stress-resistant pipes”)• Location: Caspian freezes 5 mo./yr. (“rig-wrecking ice-packs”), cold
winter, logistics, 10’WD • No export pipeline• Environmental: beluga, sturgeon, seals (no spills!) – permitting issues• Partners: strong, misaligned, dsyfunctional• Kazakh government new at this …
Questions:
– LQ too close to treatment plant, weak $, lack of benchmarks, inflation
– Cost of drilling rigs, “soaring steel prices”, lack of engineers, PMsRISK FACTORS:• Reservoir: H2S, pressure (“costly stress-resistant pipes”)• Location: Caspian freezes 5 mo./yr. (“rig-wrecking ice-packs”), cold
winter, logistics, 10’WD • No export pipeline• Environmental: beluga, sturgeon, seals (no spills!) – permitting issues• Partners: strong, misaligned, dsyfunctional• Kazakh government new at this …
• Were these really Black Swan risks?– Could they have been predicted?– If so, why weren’t they?
• If you were the Kazakhs, would you fire Eni? If so, why? If not, why not?
The Industry Today
• Poor project performance is not acceptable when capital markets are looking for predictability & strong returns
• >50% of execs are dissatisfied with project performance (eg 40% of projects overrun) – more-so than ever
• … cannot afford to miscalculate capital project risks – yet do not have a good grasp of how to manage (them)
Source: Capital Project Execution in the Oil & Gas Industry – Booz Allen Hamilton
Risk Resolution
Trends in Capital Project Investment & Complexity
1.00
1.50
2.00
2.50
3.00
2004 2005 2006 2007 2008
CA
PE
X I
nv
es
tme
nt
Ind
ex
Majors - CAPEX Plan Majors - Escal. Adjusted Independents - CAPEX Plan Indep. - Escal. Adjusted
Sources of data:Majors: COP, CVX, RDSIndependents: DVN, APCEscalation adjustments per CERA "Upstream Capital Cost Index"
Projects in 2007 portfolio characterized by more hostile locations, higher levels of technology (eg for ultra deep-water, deep oil sands, alternative energy), longer time to first oil, empowered NOC partners seeking greater control, and non-OECD locations.
CAGR = 37.5%
CAGR = 35.5%
Risk Resolution
Is Escalation the Culprit?
180
2002 200880
170
2000 2001 2003 2004 2005 2006 2007
CostIndex
(2000=100)
160
150
140
130
120
110
100
90
Q3–2006:167
Q1–2006:148
Q3–2005:126
Risk Resolution
A Look Outside Our Industry
• Mega-project performance has historically been poor
• Consider Infrastructure Projects– Cost overruns of 50 – 100% are common– Main causes1:
• Underestimated (“appraisal optimism”)• Risk analysis assumes “everything goes according to
plan” • “Delusion” is often necessary for projects to proceed
• How do these conclusions compare with oil & gas megaprojects?
1:“Megaprojects & Risks” – Bent Flybjerg
Risk Resolution
So What is the Problem Here?
A. Lack of “Front – End Loading”?B. Ineffective organization?C. Management does not want to hear bad
news?D. Outdated approach to Capital Project Risk
Management?E. ALL of the above?
CAPEX Predictability Requires A New Approach
1990 2000 2010
Av
era
ge
pro
jec
t s
ize
, ri
sk
& c
om
ple
xit
y
HAVE: Conventional HAVE: Conventional Project ManagementProject Management
PROJECT MANAGER & TEAM
NEED: Strategic NEED: Strategic
Risk ManagementRisk Management EXECUTIVE MANAGEMENT
today
Risk Resolution Copyright Westney Consulting Group Inc.
How Can We Improve?
A. Lack of “Front – End Loading”?– We have stage-gate processes – do we use them?– Are they “facilities - centric” or do they provide
cross – functional integration?– Are they used consistently – with discipline?
Capital Project Estimating Techniques
Risk Resolution
How Can We Improve?
B. Ineffective organization?
How do project organizations need to change?
• New or different roles & responsibilities?
• New or different skills?
How do corporate organizations need to change?
• New or different roles & responsibilities?
• Stronger governance?
Enterprise Risk Management: The Risk-Driven Project Delivery System
CAPEX Portfolio Characteristics
CAPEX VaR™ Competency Requirements
The PROJECT DELIVERY SYSTEM delivers each of the competencies The PROJECT DELIVERY SYSTEM delivers each of the competencies required to predictably execute the project portfolio:required to predictably execute the project portfolio:
Peo
ple
Peo
ple
(ski
lls,
ava
ilab
ilit
y, e
ffec
tive
nes
s)(s
kill
s, a
vail
abil
ity,
eff
ecti
ven
ess)
ProcessProcess (methods, systems, tools)(methods, systems, tools)
Governance
Governance
Risk Resolution Copyright Westney Consulting Group Inc.
How Can We Improve?
C. Management does not want to hear bad news?
How does management’s view of projects and project teams need to change?
Managing Risks at the Right Level
Risk Tactical Strategic
Au
thori
ty /
A
ccou
nta
bilit
y
PM
TM
anag
emen
t
e.g.:
• Political
• Global economic trends
• Partner / NOC issues
• Organizational alignment
e.g.:
• Project definition
• Contractor performance
• Pricing
• Logistics
e.g.:
• Unmitigated strategic risks become tactical problems for PMT
e.g.:
• Management intervention in PMT tactics leads to internally driven risks
Govern
an
ce
Risk Resolution
So What is the Problem Here?
D. Outdated approach to Capital Project Risk Management?
All Risks Must Be Considered
+
Risk Exposure
Risk-Conditioned Investment
Valuesm
Background Risks
Enterprise Risks +
Definition Risks
Performance Risks+ Estimate (incl.
Contingency)
Risk Resolution Copyright Westney Consulting Group Inc.
Strategic vs. Tactical Risks
Risk Resolution
STRATEGIC RISKS (outliers; managed at the executive level)
Background Risks
External outliers e.g., External outliers e.g., SCOPE-related: SCOPE-related: new or unproven new or unproven technology, edge of experience” technology, edge of experience” engineering solutions, prototype engineering solutions, prototype componentscomponentsMARKET-related: MARKET-related: extreme market extreme market conditions & trends, conditions & trends, LOCATIONLOCATION – – related:related: undefined site undefined site conditions, uncertain government conditions, uncertain government regulations & requirementsregulations & requirementsCOMMERCIAL – COMMERCIAL – related:related: business deal business deal issues, partner relationship risksissues, partner relationship risks
Definition Risks
Risks associated with the degree of Risks associated with the degree of technical and planning definitiontechnical and planning definition
TACTICAL RISKS (ranged around the deterministic estimate & schedule; managed at the project level)
Enterprise Risks
Internal outliers e.g., Internal outliers e.g., RESOURCE-related: RESOURCE-related: lack of project lack of project engineering and management resources engineering and management resources with requisite skills and experiencewith requisite skills and experienceGOVERNANCE-related: GOVERNANCE-related: inefficient of inefficient of misguided governance modelmisguided governance modelPROCESS-relatedPROCESS-related: inadequate or : inadequate or inappropriate project development and inappropriate project development and execution work processesexecution work processes
Performance Risks
Risks associated with owner and Risks associated with owner and contractor performance contractor performance
Copyright Westney Consulting Group Inc.
Risk Framing - Improving VOI for Executive Decision-Making
Risk Discovery
Risk Analysis
Decision Parameters
Risk Management
Risk Taxonomy
Performance Benchmarks
Risk Scenarios
Project Risk Indicative Modeling System™
Risk- Conditioned Investment
Value™
Risk Frames
Risk Strategies
““The goal of forecasting is not to predict the future but to tell you The goal of forecasting is not to predict the future but to tell you what you need to know to take meaningful action in the present” what you need to know to take meaningful action in the present”
Paul Saffo, HBR, July-Aug 2007Paul Saffo, HBR, July-Aug 2007“VOI”=Value of Information
Business Resilience
Decision Process
Decision Support Methodology
(PRIMS™) (RCIV)
Copyright Westney Consulting Group Inc.Risk Resolution
Risk Framing Shapes Capital Project OutcomesRisk Framing Shapes Capital Project Outcomes
PotentialRisk
Exposure
*Risk-Conditioned Investment Value *Risk-Conditioned Investment Value TM TM
Preliminary RCIV*
TO
TA
L P
RO
JEC
T C
OS
TT
OT
AL
PR
OJE
CT
CO
ST
Risk Framing
The “First
Number”
RiskExposure
The Project Budget
including Contingency
Sanctioned RCIV*
CAPEX VaR™ CAPEX VaR™ for Portfolio for Portfolio ManagementManagement
Strategic Risk ActionsStrategic Risk Actions
Execution PhaseDevelopment Phase
(Feasibility -> Pre-FEED -> FEED)
Copyright Westney Consulting Group Inc.Risk Resolution
Operations – OPEX RiskFacilities – CAPEX Risk
Drilling – DRILLEX Risk
Risk Resolution
Managing All Project Risks
Subsurface –Reserves Risk
Business – NPV Risk
Risk Management StrategiesRisk Management Strategies
Execution PhaseDevelopment Phase
(Feasibility -> Pre-FEED -> FEED)
Background Risks
Enterprise Risks
External Outliers: External Outliers: Scope, Market, Scope, Market, LocationLocation
Internal Outliers: Internal Outliers: Project Delivery Project Delivery System System EffectivenessEffectiveness
Definition Risks
Performance Risks
= f (technical & = f (technical & planning definition)planning definition)
= f (owner & contr. = f (owner & contr. performance)performance)
P.D.S. P.D.S. Health Health CheckCheck
Risk-Driven Risk-Driven Competency Competency
ModelModel
Leveraged Project OrganizationLeveraged Project Organization
(PMC / PMT / Owner’s Engineer)(PMC / PMT / Owner’s Engineer)
Value Value Improving Improving PracticesPractices
Stage-Gate Stage-Gate Process Process
RoadmapRoadmap
Project Project Readiness Readiness
ReviewReview
Risk-Risk-Driven Driven
Contract Contract PlanPlan
Risk Risk BrokeringBrokering
Business Resilience - Threat Surveillance & Business Resilience - Threat Surveillance & DashboardDashboard
Threat Threat Response Response
ModelModel
External External Threat Threat
AssessmentAssessment
Independent Independent Project ReviewsProject Reviews
Competency AssuranceCompetency Assurance
Non-Operator OversightNon-Operator Oversight
Strategic Strategic Program Program PlanningPlanning
Copyright Westney Consulting Group Inc.Risk Resolution
A Closing Thought ...
One of the best lessons children learn through video games is that standing still will get them killed quicker than anything else.
Jinx Milea, USC
Risk Resolution