(RISK-2737) Advancing Decision-Making in Oil & Gas Projects: Integrating Real Options and Monte-Carlo
Author(s)/Presenter(s): Zhang Daping; Jin Feng; Xiang Wenwu; Zhang Bochen
Time/Location: Sunday, June 24 from 1:00pm to 2:00pm / Nautical (4th Floor)
[Level: Intermediate] Volatility and an underlying deterioration in commodity prices, including oil and gas prices, have severely undermined confidence and the viability of Exploration and Production projects. In turn, this has amplified the need to undertake a thorough investigation into risks and uncertainties as part of the financial modeling and decision-making in oil Exploration and Production projects. To address this requirement– for increased rigor of decision-making and beyond the current practice of the mere deployment of a Discounted Cash Flow model, a new model integrating Real Options and Monte Carlo simulation of a project’s valuation is presented. The new model is mainly to be applied to explain the risks and uncertainty of the projects. More specifically, a case study of an oil Exploration and Production project is used to illustrate the effectiveness and validity of the proposed new model.
(RISK-2795) Project Risk Drawdown – A Structured Approach to Contingency Management
Author(s)/Presenter(s): Dr. Christopher Stroemich, P.Eng.; Dr. Manjula Dissanayake, CCP
Time/Location: Wednesday, June 27 from 8:00am to 9:00am / Nautical (4th Floor)
[Level: Intermediate] The most common approach to contingency management is contingency drawdown, i.e. reduction of contingency funds through financing realized risks. With this approach, correlation between remaining contingency and actual identified project risks is weak (risks are dynamic, contingency is quasi-static – the only changes are through drawdown.) This approach does not encourage project teams to efficiently manage project budgets, as it promotes the use of contingency as a slush fund to subsidize any underperforming project areas, instead of addressing actual execution inefficiencies.
This paper describes a structured approach to dynamically adjust contingencies based on periodic quantification of all identified and active project risks. The proposed methodology uses a Risk Drawdown Curve (RDC) representing a time-trend of the magnitude of all outstanding project risks at given probability levels. The RDC is forward-looking whereas the current practice of contingency drawdown is back-looking into the project’s history. The RDC enables strong correlation between available project contingency and the value of all remaining project risks. As a result, cost and current schedule updates during execution always accurately reflect remaining project uncertainties.
(RISK-2797) Perspectives of Risk for Balanced Financial Decision
Author(s)/Presenter(s): Rashmi Prasad
Time/Location: Sunday, June 24 from 4:00pm to 5:00pm / Nautical (4th Floor)
[Level: Intermediate] Asset owners realize that a significant amount of economic risk is inherent in their investments. Most also intuitively understand that if several assets are held, their total risk is reduced through the process of diversification. To analyze risk, they need to quantify the risk of the entire portfolio of assets including the effects of diversification and then manage the risk within a portfolio. After this, select strategically specific investments or properties for acquisition or disposition to optimize the total portfolio risk-return relationship. Rapidly changing capital markets, increased financial options, investor expectations and overall deal sophistication has changed the scale of capital requirements with more active consideration being given to timing, funding and leverage risks. The paper address how trade-offs in asset performance metrics may be tested and quantified across multiple scenarios or alternative strategies using portfolio analysis.
(RISK-2808) Non-Linear Probabilistic (Monte Carlo) Modeling of Systemic Risks
Author(s)/Presenter(s): Dr. Yuri Raydugin, P.Eng.
Time/Location: Sunday, June 24 from 5:15pm to 6:15pm / Nautical (4th Floor)
[Level: Advanced] Literature on project management contains an abundancy of references to abnormally high project cost overruns as well as complains that modern risk quantification methods could not accurately predict project cost outcomes in many cases. Although the accuracy could be high in some other cases.
Initially, a hybrid cost contingency development methodology was introduced as a major attempt to explain the low accuracy through introduction of so called ‘systemic risks’. It combined standard probabilistic (Monte Carlo) methodology for project-specific risks with parametric methodology for systemic risks.
The purpose of this paper is to introduce a replacement of the parametric part of the hybrid methodology by means of a non-linear probabilistic (Monte Carlo) modeling in a consistent way. Systemic risks are considered additional causes of project-specific cost risks giving rise to non-linear cost impacts.
This article provides with
• explanation and Monte Carlo modeling of abnormally high project cost overruns including modeling of ‘tipping in blow-out’,
• a link of systemic risks with a ‘project team’s quality’ concept reflecting a project team’s strengths and weaknesses,
• an explanation why most currently used standard probabilistic (Monte Carlo) methodologies are relevant to ‘strong teams’ only,
• introduction of a non-linear probabilistic (Monte Carlo) methodology to define adequate cost contingencies for projects managed by ‘weak teams’,
• a practical case of the non-linear probabilistic (Monte Carlo) modeling,
• rough calibration of non-linear probabilistic (Monte Carlo) models that could be practically used for rule-of-thumb estimating of project cost outcomes in case of ‘weak teams’.
(RISK-2813) Public-Private Partnership Projects – What, Why & How Is Risk Allocated?
Author(s)/Presenter(s): Peter V. Badala; Misbah Uddin; James G. Zack, Jr. CFCC FAACE Hon. Life
Time/Location: Monday, June 25 from 10:15am to 11:15am / Nautical (4th Floor)
[Level: Intermediate] This paper discusses the topic of risk assessment, management and allocation on typical P3 projects. The paper identifies what a P3 project is; what are the characteristics of the typical P3 project; and what P3 projects are not. It examines the various ways P3 projects may be structured, recognizing that different project structures may well have different project risks. The authors look at why project owners employ the P3 project delivery method including the perceived benefits and potential risks. In determining the above, the paper provides a list of risks typical P3 projects must be prepared to address; and identifies how risks on typical P3 projects are, or should, be allocated in the P3 agreement. Finally, the paper discusses some risk allocation clauses that seem inappropriate in P3 projects and may ultimately lead to project failure if left intact in a P3 agreement.
(RISK-2839) Risk Communication Throughout Project Lifecycle
Author(s)/Presenter(s): Stacey A. Dennee, CCP; Christopher P. Caddell, PE CCP DRMP; David C. Brady, P.Eng. DRMP
Time/Location: Monday, June 25 from 11:30am to 12:30pm / Nautical (4th Floor)
[Level: Basic] Many companies and organizations have implemented the four step project risk management process documented in the AACE International (AACE) Total Cost Management Framework. However, concerns arise during the fourth step of controlling risks. One of the main drivers behind this is a lack of communication.
This paper will discuss communication as it relates to risk management. The first topic is the purpose of communication regarding project risk and a very brief review of basic principles. Next the paper covers the stages of a project lifecycle and how to communicate during each phase. Then the paper will discuss communication roles and responsibilities, and the flow of communication with communication going both directions.
(RISK-2847) Two-Dimensional Risk Analysis for PPP Project Investment Decision Making
Author(s)/Presenter(s): Xiang Wenwu; Jin Feng; Sun Jianbo
Time/Location: Monday, June 25 from 2:15pm to 3:15pm / Nautical (4th Floor)
[Level: Intermediate] Because systematic and project specific risks exist during the PPP project feasibility phase, the variability and uncertainty of these risks included in economic modeling improve the estimation of an assets NPV or IRR or VfM. For PPP investment decision making, parameters are defined with uncertainties and variability's. Examples of these type of parameters include raw material and product prices, capital and operating expenses (CAPEX and OPEX), escalation, interest and exchange rates. The purpose for gathering these data is to simulate the probability distributions of NPV or IRR or VfM using two-dimensional Monte Carlo simulation. Sensitivity analysis, economic limit analysis and stress analysis are applied to optimize the final results for decision makers. This paper uses a case study to demonstrate the validity and effectiveness of a proposed method for PPP project investment decision making.
(RISK-2878) Simple Risk Policy as a Utility Function
Author(s)/Presenter(s): John R. Schuyler, PE CCP DRMP
Time/Location: Monday, June 25 from 4:00pm to 5:00pm / Nautical (4th Floor)
[Level: Intermediate] A good decision policy guides an organization in making logical, consistent decisions. There are usually trade-offs between objectives, time value, and risk. The risk component represents ‘risk policy.’ Decision makers often face alternatives with different values and risks. Is the value sufficient to justify the risk? A proper risk policy solves that dilemma with clarity.
A utility function represents perceived value as a function of the objective value measure, such as net present value (NPV). It works out fortunately that the decision maker's utility function represents his or her risk attitude (or preference). This function transforms NPV outcomes into utility units. Monte Carlo simulation, or some other probability-weighting method, coalesces a utility outcome distribution into expected (value) utility (EU). The decision rule is: Choose the alternative with the highest EU. With an additional step, the inverse utility function translates EU into its certain equivalent (or certainty equivalent; CE). CE is the risk attitude-adjusted NPV. For the decision maker, the CE is the cash-in-hand equivalent to the risky project or asset.
(RISK-2890) Journey-Map to a More Mature Schedule Risk Analysis (SRA) Process
Author(s)/Presenter(s): Dr. David T. Hulett, FAACE
Time/Location: Monday, June 25 from 5:15pm to 6:15pm / Nautical (4th Floor)
[Level: Intermediate] Organizations vary in their appreciation of the potential impact of the risks that could affect their achieving time and cost goals while completing the project’s scope. This paper lays out a risk analysis maturity model that allows organizations to determine: (1) where they are today on the scale from “not aware” to “advanced integrated cost-schedule risk analysis” and (2) where they want to be, what is their optimal level of risk analysis maturity. The levels of maturity are described along with their benefits and properties including tools and outputs that distinguish them from other maturity levels. [for a brief discussion of cost risk maturity see 11, p. 210].
This paper does not mandate that organizations strive to achieve full advanced cost-schedule integration methods and tools (level 5) unless that is desired. Often some projects will require more or less risk analysis maturity depending on size, complexity, type of project or other criteria.
(RISK-2891) The Art of Strategic Written Criticism to Effectively Mitigate Risk
Author(s)/Presenter(s): Shawn M. Paroline; Collins Solomon; Ramon Ruelas; Devang B. Dedhia, PSP
Time/Location: Tuesday, June 26 from 10:15am to 11:15am / Nautical (4th Floor)
[Level: Intermediate] Strict enforcement of contractually-required administrative procedures might first suggest to a seasoned construction professional that the owner is adopting an adversarial pre-litigation posture, or, worse yet, deliberately acting in bad faith and thwarting fair dealing. As a consequence, owners are often reluctant to challenge the contractor's CPM schedule since they may perceive that rigorous review comments from the owner will either assume unwanted liability or be perceived negatively by the contractor. How the owner phrases its oral and written inquiries will determine which of these perceptions becomes dominant in the contractor's mind and behavior. Despite the possible negative connotation, owners are well-served to question the contractor's schedule, write comprehensive minutes, initiate assertive formal written correspondence, record progress daily in field QA reports, and return detailed submittal review comments to effect the contractor's adherence to the specifications and prompt schedule revisions to more accurately model the contractor's plan. This paper proposes a recommended style of language that is devoid of criticism, emotion, or contention, and is in keeping with the philosophy of partnering that is so closely revered by executives, especially under alternative project delivery.
(RISK-2926) Project Controls & Data Analytics in the era of Industry 4.0
Author(s)/Presenter(s): James E. Arrow, DRMP; Arvid Markhus; Vijai Singh; Cesar Ramos; Stefan Bakker
Time/Location: Tuesday, June 26 from 11:30am to 12:30pm / Nautical (4th Floor)
[Level: Advanced] Economists predict that the Fourth Industrial Revolution (i.e. Industry 4.0) will cause fundamental disruption. Within the Engineering and Construction sector, a proliferation of data streams will provide new levels of diagnostic and predictive insight, increasing efficiency, decreasing uncertainty and improving the likelihood of successful project delivery. New technologies promise to make the theory of risk intelligent strategies a possibility for both companies large and small.
However, studies frequently highlight that the E&C sector is a technological laggard. Additionally, for this sector, the most significant barrier to digital progress is the lack of an overall strategy.
To prepare for disruptive change in the profession, this paper will explore:
a) goals for data science capability improvement,
b) how project controls professionals can develop and lead an effective digital strategy,
c) process steps for effective data science,
d) opportunities for employing machine intelligence throughout the investment funnel,
e) minimally viable metrics to support decision and risk management between entities.
Ultimately, the paper will advocate that the association consolidates related white papers and develops a Recommended Practice, guiding members on the skills and knowledge required to perform Total Cost Management Analytics (TCMA) and deliver effective, actionable insight that reduces capital project risk and uncertainty.
(RISK-2929) Improving Risk Management Effectiveness by Testing Risk Relevance
Author(s)/Presenter(s): James E. Arrow, DRMP
Time/Location: Tuesday, June 26 from 4:00pm to 5:00pm / Nautical (4th Floor)
[Level: Basic] The adage goes that, “you can’t manage what you can’t measure”. Furthermore, project teams cannot reasonably measure uncertainty if it is not clearly described. Additionally, the worthiness of an entire risk management program is in jeopardy if team members do not have faith that they are working to manage risks that matter.
This paper proposes a three-step test that decision and risk management (DRM) practitioners can employ to verify risk relevance. This simple work process, focusing on authenticity, topicality and conformability, will help project teams overcome many of the pitfalls encountered when attempting to either perform realistic quantitative risk assessments, make risk-informed decisions or facilitate a long-term continuous risk management program.
(RISK-2930) (Panel Discussion) DRM Subcommittee - Developing DRM Skills & Knowledge
Author(s)/Presenter(s): James E. Arrow, DRMP
Time/Location: Tuesday, June 26 from 5:15pm to 6:15pm / Nautical (4th Floor)
[Level: Intermediate] This discussion panel will provide an opportunity for:
- Potential DRMP certification candidates to become aware of the required decision and risk management skills and knowledge to become certified,
- Existing DRM practitioners to discuss common S&K gaps (or misconceptions) encountered when supporting multidiscipline stakeholders or large project teams, and
- Owner and contractor organizations to discuss ways in which they can guide project management teams and help raise their project risk management capability.
(RISK-2932) Utilizing a QRA Maturity Model for Continuous Improvement
Author(s)/Presenter(s): James E. Arrow, DRMP
Time/Location: Tuesday, June 26 from 2:15pm to 3:15pm / Nautical (4th Floor)
[Level: Intermediate] Organizations who rely on the successful delivery of capital assets, need to set stretch goals that can help improve their capability and develop or maintain a competitive advantage. Dr. D. Hillson once likened the successful application of a maturity model to, “walking up the down escalator”. This paper will review a high-level QRAMM or Quantitative Risk Assessment Maturity Model that describes the full spectrum of capabilities including: reactive, ad-hoc, centralized, mature and optimized.
The strategies and capabilities presented in this paper offer a Risk-based Kaizen approach, helping DRM practitioners identify performance gaps and develop plans for QRA capability improvement.
(RISK-2946) Oil & Gas Plant Project Activities Parallelization
Author(s)/Presenter(s): Francesco Cau; Franco Caron; Giambattista De Ghetto; Filippo Fratoni; Marika Guerra
Time/Location: Sunday, June 24 from 2:15pm to 3:15pm / Nautical (4th Floor)
[Level: Intermediate] In the current market with continuous evolution, especially in the Oil & Gas industry, projects under developed are presented with very challenging and competitive targets. Completing projects in the shortest possible time to anticipate revenues and competitors becomes fundamental. To fulfil this requirement, project schedules are compressed as much as possible and planners overlap activities with the fast tracking technique. This common behavior sometimes forces an exchange of inaccurate information among team members and contractors leading to reworks and extra costs.
The level of overlapping among the exploration and production activities of an upstream development project has been analyzed in this study, with particular attention to the risks and opportunities arising from this typology of planning. The purpose has been to create a statistical model based on historical data able to identify the possible delay due to an excessive activities overlapping and, if applicable, the best level of overlapping. Subsequently, the schedule time saving from fast tracking has been quantified in economic terms to identify the profit for the Company.
(RISK-2947) Probabilistic Inference and Elicitation of Structured Expert Knowledge in Industrial Megaprojects
Author(s)/Presenter(s): Pouya Zangeneh, P.Eng.; Dr. Brenda McCabe, P.Eng.; Murray Pearson, P.Eng.; Nick Mason
Time/Location: Wednesday, June 27 from 9:15am to 10:15am / Nautical (4th Floor)
[Level: Advanced] The uniqueness of megaprojects requires any effort to make sense of their behavior to successfully utilize expert knowledge. Success of industrial megaprojects relies heavily on the knowledge and experience of the owners, project managers, engineers, financiers and other organizations and parties within the project. This valuable project knowledge is held within organizations either as explicit and in documents, or, tacit and by the members of the project team. Quantifying and elicitation of this knowledge requires a framework that outlines its utilization. This paper outlines a methodology to systematically collect expert knowledge for probabilistic reasoning on megaproject behavior. The reasoning process is developed based on the failure path and driver view of project risk and failures mechanism. Results of a pilot survey study on the method, along with the created probabilistic model is presented.