Managing Risk for Mega Global Energy Projects

Dr. Nick Lavingia, P.E.Project Management Consultant & Advisor

nicklavingia@gmail.com

PMI Symposium, Santa ClaraOctober 6-7, 2014

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Dr. Nick Lavingia, P.E.Project Management Consultant & Advisor

Nick has over 35 years of Global Project Engineering, Management, Consulting and Training experience in the Energy industry. As a Project Manager and Project Management Consultant/Advisor at Chevron until 2013, he supported projects worth well over $ 100 billion. Since retiring from Chevron, he continues to provide Consultation and Training to Project Professionals worldwide. His experience includes projects in Oil & Gas Development, Oil Sands, Liquefied Natural Gas, Refining, Chemicals and Mining.

Nick has a B.S. and M.S. in Chemical & Petroleum-Refining Engineering and a Ph.D. in Engineering Economics & Management from the Colorado School of Mines. He is a registered Professional Chemical Engineer in the State of California. Nick has published and presented many papers at technical organizations. He is a recipient of industry award from Pathfinder for outstanding contribution to the advancement of Project Management Technology and Chevron Chairman’s award for implementing Value Engineering throughout the corporation.

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Offshore Platform

FPSOFloating, Production, Storage & Offloading

Truck

• 400 tons empty• 400 tons load

• 800 tons total weight

Truck

Shovel & Truck

Liquefied Natural Gas Tanker

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Refinery & Petrochemical Complex

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Agenda

1. Business Case for Managing Risk--Impact on the Bottom Line of Company

2. Project Development & Execution Process--Effective Communication between Decision Makers, Multifunctional Project Teams and Stakeholders

3. Value Improving / Best Practices-- Optimize Cost, Schedule and Operability of project

4. Total Cost Management --Plan, Schedule, Estimate, Monitor and Report

4. Summary5. Q & A

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Business Case for Improvement

Improved Capital StewardshipLower Costs

More Projects

Better Projects

Improved ROCE

Higher Earnings Growth

Higher P/E

Higher Market Confidence

Improved TSR

ROCE = Return On Capital Employed, P/E = Price to Earnings , TSR = Total Shareholder Return

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Project Management’s Impact on the Bottom Line

Project Management Improves ROCE byIncreasing Revenues, Decreasing Expenses,and Reducing Capital Employed

REVENUE MINUS EXPENSES

CAPITAL EMPLOYED= ROCE

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Project Management Leads to Pacesetter Performance(Cost Efficient, Faster, and More Predictable)

1.25

1

0.750.75 1 1.25

Execution Schedule

Faci

lity

Cos

t

Industry Average

Indu

stry

Ave

rage

30%Improvement

30% Improvement

PacesetterCompany

Company X

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Project Development & Execution Process

A Process that Facilitates the OptimalUse of Resources (Dollars, People andTechnology) Over the Life of an Asset /Project to Maximize Value.

Desired Outcome• Select the Right Projects by Improving

Decision Making • Improve Project Outcomes through Excellence

in Execution of Decisions

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High

HighLow Mid

Random Success• Good Projects• Average Execution

Consistent Success• Good Projects• Good Execution

Success Unlikely• Poor Projects• Poor Execution

Random Success• Poor Projects• Good Execution

DecisionQuality

Execution Quality

Mid

Project Management Vision

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PHASE 2SELECT fromAlternatives

Determine Project Feasibility andAlignment withBusiness Strategy

Project Development & Execution Process

PHASE 1IDENTIFY & Assess

Opportunities

Finalize Project Scope, Cost and Schedule and Get the Project Funded

Select thePreferred Project Development Option

Evaluate Asset to Ensure Performance to Specifications and Maximum Return to the Shareholders

PHASE 3DEVELOP Preferred

Alternative

PHASE 4EXECUTE

(Detail EPC)

PHASE 5OPERATE &

Evaluate

Produce an Operating Asset Consistent with Scope, Cost and Schedule

1 2 3 4 5

FID

FID = Final Investment Decision

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VALU

EProject Management’s Impact on Creating Value

Phase 1Opportunity

Identified

Phase 2Generate &

Select Alternatives

Phase 4Execute

Phase 5Operate

Value Identification Value Realization

Phase 3Develop

Preferred Alternative

Poor Project Definition

Good Project

Definition

Poor Project Execution

Good Project

ExecutionA

B

C

DFID

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INFL

UEN

CE

Front End Planning

Major Influence Rapidly Decreasing Influence Low Influence

EXPEND

ITUR

ES

Final Authorization

IDENTIFY& ASSESS DSP

Gate

DSP

GateSELECTDSP

GateDEVELOPDSP

GateEXECUTE OPERATEDSP

GateGateGateGate

Influence vs. Expenditures

Front End Loading DSP = Decision Support Package

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PHASE 2SELECT fromAlternatives

Basin Model

Prospect Mapping

Reservoir Description

Drilling Program

Facilities Plan

Strrategic Fit

Phase 1 Est.

Project Development & Execution Process(Effective Communication between Decision Makers, Multi Functional

Project Team and Stakeholders)

PHASE 1IDENTIFY & Assess

OpportunitiesFully Define Scope

Develop Detailed Execution Plans

Refine Estimate

Submit Funding for Approval

~25 % Engng.

Phase 3 Est. (+/- 10 % Accuracy)

Generate Alternatives

Preliminary Development of Alternatives

Develop Expected Value

Identify Preferred Alternative

Phase 2 Est.

Operate Asset

Monitor & Evaluate Performance

Identify New Opportunities

PHASE 3DEVELOP Preferred

Alternative

PHASE 4EXECUTE

(Detail EPC)

PHASE 5OPERATE &

Evaluate

Implement Execution Plan

Min. Changes

Finalize Operating Plan

Business Plan for Phase 5

Project Review

1 2 3 4 5

FID

FID = Final Investment Decision

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• Pre-Funding Assessment

• Value Improving Practices by IPA

• Peer Review

(Share)

EPC Reviews

• Decision & Risk Analysis

• Project Execution Planning

• Lessons Learned(Seek)

Legend: D = Decision PointFID = Final Investment Decision PFD = Process Flow Diagram IPA = Independent Project Analysis, Inc. P&ID = Piping & Instrumentation Diagram

P&ID$

EST FIDPFDD D D DD$ EST

Phase 1IDENTIFY & Assess

Opportunities

Phase 2SELECT fromAlternatives

Phase 3 DEVELOP Preferred Alternative

Phase 4EXECUTE

(Detail EPC)

Phase 5OPERATE &

Evaluate

Value Improving / Best Practices (Optimize Cost, Schedule and Operability of any project)

• Post Project Assessment

• Business Evaluation

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High-Level Risk Management Process

Identify risks Assess risks Prioritize Risks

Develop Mitigation / Contingency

Plans

Monitor and Control Risks

Evaluate Effectiveness &

Capture Lessons Learned

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Sample Risk Areas

Project Management / Corporate Risks

Operations

Political / Regulatory

CommercialMarketing

Health, Environmental,

Safety

Interface

Technical

Industrial Relations

Types of Risks:TacticalStrategic

Nick Lavingia 22

Type of Risks for Global Oil & Gas Development Projects

• Technical• Cost• Schedule• Price• Operating Factor• Political

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Risk Management Plan

Risk Probability Of Occurrence(H/M/L)

Potential Impact(H/M/L)

Mitigation Strategies and Contingency Plan

Cost to Mitigate(H/M/L)

Probability of Success(H/M/L)

Who / When

Type 1 H H Implement L H

Type 2 L L Ignore H L

Type 3 M M Evaluate M M

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Major Risk Areas

30%

60%

Low Medium High

High

Low

$ 500k to

$ 2 million> $ 2 Million< $ 500k

LegendUpsideDownsideBoth

Execution Complexity

Technical & Operational

Country & Local Issues

Health, Safety, Environment

Markets/Commercial

Project Cost

Project Schedules

Business

1 2 3 4 5

Economic Technical Technical Reputation Insignificant Low Medium High Very High

People Assets Environment

NPV, Cum CPEX, or

Capex Cost

Impact ($)

Schedule delay

(months) from that planned at AFE

Lost production first year as a % of

plan

Reputation Occurs in 1 in 100

Projects

Occurs in 1 in

20 Projects

Occurs in every

other Project

Occurs more often

than not 2 out of 3 Projects

Occurs more or less in every

Project

5 Very High Multiple fatality

Extensive damage

Massive effect

>150 million >6 >30% International

impact 5 10 15 20 25

4 High Single fatality

Major damage Major effect 100 to 150

million 6 15 to 30% National impact 4 8 12 16 20

3 Medium Major injury

Localised damage

Localised effect

50 to 100 million 3 5 to 15% Considerable

impact 3 6 9 12 15

2 Low Minor injury

Minor damage Minor effect 10 to 50

million 2 1 to 5% Limited impact 2 4 6 8 10

1 Insignificant Slight injury

Slight damage Slight effect <10

million <1 <1% Slight impact 1 2 3 4 5

Severity

HSE

INCREASING PROBABILITYCONSEQUENCES

Risk Management - Quantification

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Tornado Diagram for Oil & Gas Development Project

$300 $500 $700 $900 $1,100 $1,300 $1,500 $1,700

NPV($ Millions)

Base Case = $ 1,350 Million

Reserves

Oil / Gas Price

Schedule

Facilities Cost

Well Count

Drilling Cost

P10, P50 and P90 Values of Key Variables

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Expected Value = $1,132

EV ROR = 20.0%

EV DPI = 1.50

Will be further refined for GO-36

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-1,000 -750 -500 -250 0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250

NPV ($ Millions)

Cum

ulat

ive

Prob

abili

tyS- Curve: Cumulative Probability of NPV

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Projects with Different Risk Profiles

0.1.2.3.4.5.6.7.8.9

1.0

$ 0 $ 10 $ 20 $ 30 $ 40 $ 50 $ 60NPV ($ Million)

Cum

ulat

ive

Prob

abili

ty

Project A

Project B

Project C

•Contracting/Procurement(Strategy)

•Cost Control/Forecasting(WBS)

•Progress reporting

•Finance/Audit

Total Cost Management (Plan, Schedule, Estimate, Monitor and Report)

Phase 1IDENTIFY & Assess

Opportunities

Phase 2SELECT fromAlternatives

Phase 3DEVELOP Preferred Alternative

Phase 4EXECUTE

(Detail EPC)

Phase 5OPERATE &

Evaluate

• Economic Analysis(NPV, ROR, Payout)

• Cost Estimating(Conceptual)

• Planning/Scheduling(Milestone)

• Benchmarking(Cost / Capacity)

Legend: FID = Final Investment Decision NPV = Net Present Value PFD = Process Flow DiagramD = Decision Point ROR = Rate of Return P&ID = Piping & Instrumentation DiagramEPC = Engineer, Procure & Construct CPM = Critical Path Method WBS = Work Breakdown Structure

P&ID$

EST FIDPFDD D D DD$ EST

(Funding +/- 10% Accuracy) (Definitive)

(CPM Bar Chart) (CPM Resource Loaded) (Monitor & Update)

(Pre-Funding Assessment) (Post-Project Assessment)

(Pre-Qualification) (Award / Monitor)

Performance Measurement(Establish Progress Payments) (Earned Value)

(Establish Cost Accounts & Budgets) (Trend / Forecast)

(Closeout)

(Cost Collection / Analysis)

(Set Pacesetter Target)

(Asset Accounting)(Capital versus Expense)

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Estimating & Contingency Determination

ContingencyVariance Base Estimate

+/- 50% +/- 25% +/-10%

Phase Phase Phase 1 2 3

1.0

Evaluate Alternative Develop Detailed Design Construction StartupConceptual

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MinimumCost

MaximumCost$1.0Million

MostLikelyValue

MODE

Frequencyof

Occurrence

$1.4(+40%)

$0.8(-20%) 50/50 Value

MEDIAN

CONTINGENCY

Contingency

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Cost Estimate Confidence

90 % Chance thatcost will not be exceeded

90 % Chance thatcost will be exceeded

Equal Chance of costexceeding or being lower

90/10

50/50

Base10/90

Contingency

Allowances

IdentifiedScope

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Estimates are inaccurate because they are predictions

of future events and the amount of variation that will actually occur is unknown.

Contingency or Float is Added to Estimates to Reduce the Risk of Overrun.

Cost Estimate Probability Analysis

100

105

110

115

120

125

130

135

140

145

150

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Probability

Cos

t ($m

illio

ns)

Appropriated Value

Cost w/o contingency

Schedule Probability Analysis

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21

22

23

24

25

26

27

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Probability

Sche

dule

(mon

ths)

Appropriated Value

Base Schedule

Cost Contingency Drawdown Curves

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0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

Cos

t % o

f Con

tinge

ncy

Time % of Project Schedule

Drawdown Plan

Actual Amount Allotted to DateTime Now

Cost and Schedule Performance Curves

Earned Value Performance Curve

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Summary

Structured Project Development & ExecutionProcess, Management’s active role, application ofValue Improving / Best Practices and Total CostManagement can help achieve World-ClassProject Performance:• Safer• Better• Cost Efficient• FasterPROJECTS

Q & A