Refining & Petrochemicals Middle East - - CONTENTS - Colin Chap­man is pres­i­dent and Eka­te­rina Ka­li­nenko is project di­rec­tor at Euro Petroleum Con­sul­tants (EPC), which is a technical oil and gas con­sul­tancy with of­fices in Dubai, Lon­don, Moscow, Sofia and Kuala Lumpur. EPC also or­gan­ises lead­ing con­fer­ences,

Colin Chap­man and Eka­te­rina Ka­li­nenko of Euro Petroleum Con­sul­tants on man­ag­ing risks in the in­vest­ment process

Risks can come about un­ex­pect­edly to com­pa­nies, es­pe­cially if they do not have re­li­able sources of in­for­ma­tion re­gard­ing chang­ing reg­u­la­tions, sanc­tions, and mar­ket price change for equip­ment, feed­stock and prod­ucts, in ad­vance. Projects still have to be com­pleted, some­times at a higher cost, com­ment Colin Chap­man and Eka­te­rina Ka­li­nenko

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 18 months later than ini­tial sched­uled date).

Five project stages

Projects can usu­ally be broken down into five ma­jor stages – eval­u­a­tion, se­lec­tion, def­i­ni­tion, im­ple­men­ta­tion, and op­er­a­tion.

Dur­ing the eval­u­a­tion stage, the ma­jor risks can in­clude in­cor­rect anal­y­sis of the po­ten­tial mar­ket de­mand for cer­tain prod­ucts, and in­cor­rect eco­nomic data such as in­vest-cost es­ti­ma­tions and 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 prob­lems dur­ing the early years of op­er­a­tion, or the se­lec­tion of a tech­nol­ogy part­ner that could limit in­vest­ment in fu­ture de­vel­op­ments. An­other risk is se­lec­tion of part­ners that may not pro­vide ad­e­quate support dur­ing the fu­ture project stages for dif­fer­ent rea­sons, for ex­am­ple, geopo­lit­i­cal, lack of re­sources, or com­pany takeover, etc.

We are see­ing more and more M&A ac­tiv­ity, es­pe­cially in the in­ter­na­tional engi­neer­ing and con­struc­tion sec­tor, and this cer­tainly can af­fect fu­ture progress on some projects – to men­tion a few in this di­rec­tion, ini­tially Fos­ter Wheeler with Amec, and now Wood within a few years, and CB&I and Mcder­mott com­bin­ing to be­come Mcder­mott. 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 to 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 three 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 and their ex­pe­ri­ences. Such mod­els as EPC LSTK, EPCM, pro­gres­sive lump sum, or re­im­bursable are ex­am­ples, which 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 cost 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 and help­ing mit­i­gate ma­jor risks may of course make projects more ex­pen­sive (risk pre­mium). How­ever, over the project life­cy­cle, such an ap­proach is usu­ally ben­e­fi­cial.

Un­cer­tainty in tak­ing risk

Can risks be man­aged, or just mit­i­gated? Since the lat­est cri­sis in the oil in­dus­try un­folded, busi­ness en­vi­ron­ment has be­come more un­pre­dictable than ever, and with the

cap­i­tal projects get­ting ev­er­more com­plex (for ex­am­ple, 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 a 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 18 months later than ini­tial sched­uled date). So, we can con­clude that there is still room for im­prove­ment to be done in the area of risk man­age­ment.

The ma­jor­ity of projects in oil and gas in­dus­try play strate­gic role for the lo­cal com­mu­nity and 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 the 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 con­trolled and man­aged well.

The ‘drill’ is quite sim­ple and in­cludes ma­jor four steps to be taken for risk man­age­ment – as­sess im­pact, quan­tify and range risks, mit­i­gate, and 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 the 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 a 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 the 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 labour (mostly ex­pats), lo­gis­tics, and cross-cur­rency rate changes with US$, 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.

Role of Risk ma­trix

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 and re­sources. There are many 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 cost­ef­fec­tive and easy so­lu­tion, as we learned from in­te­grated risk ses­sions on­site.

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.); and trans­fer the risk to third par­ties like in­sur­ance com­pa­nies.

The rule here is that risk should be split be­tween the par­ties in a way that min­imises po­ten­tial im­pact for each one. From a glance, it means that client will try to trans­fer over more re­spon­si­bil­ity to the 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 (for ex­am­ple, pro­cure­ment by a client, con­struc­tion by a gen­eral con­trac­tor, etc.).

We are also see­ing a change from the oil and gas com­pa­nies in their project re­quire­ments – due to mod­ern eco­nomic pa­ram­e­ters and also in­creased com­pe­ti­tion in mar­kets, there is a no­table move to­wards in­creased au­toma­tion – con­trac­tors and sup­pli­ers are asked to pro­vide au­to­mated process and safety sys­tems in their pack­ages.

(Im­age for il­lus­tra­tion only)

With So­har Re­fin­ery Im­prove­ment Project (SRIP), the So­har re­fin­ery of Or­pic will add 82,000bpd to its ex­ist­ing ca­pac­ity of 116,000bpd – tak­ing the to­tal ca­pac­ity to 198,000bpd.

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