Simulating uncertainties
Budget and schedule over-runs indicate the industry˙s lack of risk management
By
Bassam Samman
Posted: 30 October 2006
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Energy trends show that there is an unprecedented influx of new capital as projects in the oil and gas industry boom.
Funded projects in 2006 swelled to$76 billion, many of which are facing prolonged project life cycles and extended costs. Of these projects, almost 82% experienced schedule overruns and 51% are over budget.
This has brought to light the current lack of adequate project controls and their significant impact on increasing risks to projects success. Risk continues to grow in this industry as a result of increased complexity of petrochemical plants, high utilisation rates at refineries, and a resource utilisation crisis created by thousands of retiring industry workers.
 To manage these risks, oil and gas organisations need to adopt enterprise project risk management practices. A key requirement for is the ability to simulate the uncertainty at the project detail level into their potential impact on the project objectives, such as the schedule, budget, safety and quality.
Risk simulation for oil and gas projects must consider the life cycle that is tied to the five stage gate review cycle: opportunity, alternative selection, FEED, execution and operations.
Adopting a risk lifecycle methodology will enable combining capital investment and project cashflow cost risk approaches that will make it possible to visualise the ultimate objective of any project: the return on investment.
Simulation requires having a model that will detail the different project phases. Using the work breakdown structure, project scope is decomposed into work packages which will be detailed into activities for which duration and resource requirements can be estimated.
Sequencing activities will produce the critical path method schedule that will highlight activities critical for achieving the project milestone dates. Risk events will be then mapped on the project˙s activities. Some events might have general uncertainty about their exact duration or resource requirements or associated costs. Other events may have a probability of occurrence and when they do occur, they have an impact on the schedule such as the chance of finding rock when starting excavation. Sometimes the outcome of an event is not clear such as one is not certain if the x-ray test for the welded pipe will pass the test the first time or not.
The Monte Carlo simulation will simulate the risk events to produce three key outcomes: (1) the probability of any event to be critical for the project duration and budget, (2) the probability of completing the project on any specific day and (3) The probability of completing the project for any specific amount of cost.
Decision makers can then select risk responses that will reduce the project risk exposure into acceptable levels.
Those actions might include avoiding the causes of threats, mitigating the effects of threats; transferring threats to a third party or establishing contingency plans that will be implemented only if a risk do occur.
When this plan is approved, it will become the performance plan that will represent the investment that the organisation will be willing to commit for getting the promised benefits of the project. |
