DNV GL Confidential 9 May 2015SAFER, SMARTER, GREENERDNV GL Confidential 9 May 2015 Dedi Murdiadi, MSc MSaRS OIL & GAS Introduction to Risk Management 1 The Big 5 Construct Indonesia Workshop DNV GL Confidential 9 May 2015 The new risk reality 2 DNV GL Confidential 9 May 2015 Zero-tolerance for failure 3 DNV GL Confidential 9 May 2015 Environmental concerns 4 DNV GL Confidential 9 May 2015 Climate change 5 DNV GL Confidential 9 May 2015 Sustainable energy need 6 DNV GL Confidential 9 May 2015 Increased IT vulnerability 7 DNV GL Confidential 9 May 2015 Global value chains 8 DNV GL Confidential 9 May 2015 Transparency and corporate responsibility 9 DNV GL Confidential 9 May 2015 Eliminating risk is not always an option Its how we manageour most critical risks 10 DNV GL Confidential 9 May 2015 Turning risks into rewards 11 BUSINESS CHALLENGE Manage risks Get relevant decision support Build trust and confidencetowards stakeholders Achieve and maintain safe andsustainable performance BUSINESS RESPONSE DNV GL Confidential 9 May 201512 identifyassessmanagerisk DNV GL Confidential 9 May 2015 This workshop will answer the following questions: 1. why risk management 2. what is risk management 3. how to perform risk management Project risk management context 13 DNV GL Confidential 9 May 2015 This workshop will answer the following questions: 1. why risk management 2. what is risk management 3. how to perform risk management See some contexts and examples 14 DNV GL Confidential 9 May 2015 Why risk management? Every company has to take risk to create value and sustain business. It is critical to take (and manage) the appropriate risks to enhance business returns. Risk and opportunity are inherent parts of any activity. Risk can be controlled and opportunities exploited; risk management covers these two aspects. 15 DNV GL Confidential 9 May 2015 Reflection Why activity with significant risk levels are still carried out? Terminating the activity will also terminate the potential benefit from it. Some risks have to be acceptedand managed so that it can be reduced and the residual risk is controlled. 16 DNV GL Confidential 9 May 2015 This workshop will answer the following questions: 1. why risk management 2. what is risk management 3. how to perform risk management Project risk management context 17 DNV GL Confidential 9 May 2015 Common terminology Risk management process is concerned with both positive and negative aspects of uncertainties. Risk (undesired effect) and opportunity (desired effect) are expressed as combination of probability and consequence, and can be presented in different formats. 18 DNV GL Confidential 9 May 2015 Objective Risk and opportunities are always assessed in relation to specific objective(s). They are measured as consequence it may have towards the objective, and they usually have the same unit as the objective. Several typical objectives: cost, schedule, performance, HSE, reputation, market share, etc. 19 DNV GL Confidential 9 May 2015 Risk management example HAZARDS CONSEQUENCES PROBABILITY RISK RISK REDUCTION OPPORTUNITY 20 DNV GL Confidential 9 May 2015 Risk management example HAZARDS CONSEQUENCES PROBABILITY RISK RISK REDUCTION OPPORTUNITY Rain is a hazard that threatens your objective of protecting your property, i.e. your clothes 21 DNV GL Confidential 9 May 2015 Risk management example HAZARDS CONSEQUENCES PROBABILITY RISK RISK REDUCTION OPPORTUNITY Wearing jeans and t-shirt, the consequence of rain are minor. But wearing brand new, expensive suit, the consequence of rain is major. 22 DNV GL Confidential 9 May 2015 Risk management example HAZARDS CONSEQUENCES PROBABILITY RISK RISK REDUCTION OPPORTUNITY Sky is cloudy and some drizzles, probability of rain is high. Clear sky, probability is low. 23 DNV GL Confidential 9 May 2015 Risk management example HAZARDS CONSEQUENCES PROBABILITY RISK RISK REDUCTION OPPORTUNITY Drizzles and expensive suit: High risk Clear sky plus jeans & t-shirt: Low risk 24 DNV GL Confidential 9 May 2015 Risk management example HAZARDS CONSEQUENCES PROBABILITY RISK RISK REDUCTION OPPORTUNITY Drizzles and expensive suit: High risk => bring the umbrella 25 DNV GL Confidential 9 May 2015 Risk management example HAZARDS CONSEQUENCES PROBABILITY RISK RISK REDUCTION OPPORTUNITY Meeting your good school friends 26 DNV GL Confidential 9 May 2015 Definitions Hazard Risk Opportunity Risk analysis Risk evaluation Risk assessment Risk treatment 27 DNV GL Confidential 9 May 2015 Definitions Hazard Risk Opportunity Risk analysis Risk evaluation Risk assessment Risk treatment A condition or practice with potential for undesired event 28 DNV GL Confidential 9 May 2015 Definitions Hazard Risk Opportunity Risk analysis Risk evaluation Risk assessment Risk treatment A measure of how likely and how serious an undesired event can be 29 DNV GL Confidential 9 May 2015 Definitions Hazard Risk Opportunity Risk analysis Risk evaluation Risk assessment Risk treatment A measure of how likely of event and its positive consequence can be30 DNV GL Confidential 9 May 2015 Definitions Hazard Risk Opportunity Risk analysis Risk evaluation Risk assessment Risk treatment Systematic use of information to identify sources and to estimate risk 31 DNV GL Confidential 9 May 2015 Definitions Hazard Risk Opportunity Risk analysis Risk evaluation Risk assessment Risk treatment Evaluation of estimated risk against relevant criteria 32 DNV GL Confidential 9 May 2015 Definitions Hazard Risk Opportunity Risk analysis Risk evaluation Risk assessment Risk treatment Overall process of risk analysis and risk evaluation 33 DNV GL Confidential 9 May 2015 Definitions Hazard Risk Opportunity Risk analysis Risk evaluation Risk assessment Risk treatment Process of selection and implementation of measures to modify risk. Measures can include: avoiding, optimising, transferring 34 DNV GL Confidential 9 May 2015 Definitions Hazard Risk Opportunity Risk analysis Risk evaluation Risk assessment Risk treatment Management System The leadership and structure that ensures work is done in a consistent manner over time.35 DNV GL Confidential 9 May 2015 Reflection What is the relation between risk and probability of an accident? Risk is a function of probability of an accidentand the consequence if it happens 36 DNV GL Confidential 9 May 2015 What is risk management? Risk management coordinate activities to direct and control an organisation with regard to risk. Risk management generally includes risk assessment, risk treatment, risk acceptance and risk communication. Risk management also includes the management of opportunities, or risk with a positive contribution to he established organisational goals. 37 DNV GL Confidential 9 May 2015 Managing risk vs risk management 38 DNV GL Confidential 9 May 2015 Managing risk vs risk management 39 DNV GL Confidential 9 May 2015 Managing risk vs risk management 40 Most actions with reference to prescriptive rules, codes and standards, are not necessarily based on actual risk level, but it contributes to reducing inherent risk. DNV GL Confidential 9 May 2015 Managing risk vs risk management 41 Certain new regulations are based on risk assessments; the trend is moving into the area of risk management. DNV GL Confidential 9 May 2015 Buzz Quiz which category this activity belongs to? Inspection of scaffold structure Wearing PPE Carrying out job safety analysis Executing permit to work system Assigning riggers during lifting Preparation of lifting plan Carrying out lifting risk assessment 42 DNV GL Confidential 9 May 2015 Core elements of risk management 43 1. What are the objectives of the activity 2. What events may affect the ability to meet the objectives 3. What are the probability of these events to occur 4. What are the consequences for the objectives given that the events occur 5. Can the risk be accepted and should the opportunity be taken 6. What can be done to mitigate risks and exploit opportunities 7. How can the residual risk be controlled DNV GL Confidential 9 May 2015 This workshop will answer the following questions: 1. why risk management 2. what is risk management 3. how to perform risk management Project risk management context 44 DNV GL Confidential 9 May 2015 Risk management framework Risk management policy Risk management approach Risk management structure Risk management tools Risk management culture 45 DNV GL Confidential 9 May 2015 Risk management framework Risk management policy describes requirements and risk acceptance levels Risk management approach Risk management structure Risk management tools Risk management culture 46 DNV GL Confidential 9 May 2015 Risk management framework Risk management policy Risk management approach describes the process and methods to be usedRisk management structure Risk management tools Risk management culture 47 DNV GL Confidential 9 May 2015 Risk management framework Risk management policy Risk management approach Risk management structure describes the organisational setup for risk management Risk management tools Risk management culture 48 DNV GL Confidential 9 May 2015 Risk management framework Risk management policy Risk management approach Risk management structure Risk management tools supports the process Risk management culture 49 DNV GL Confidential 9 May 2015 Risk management framework Risk management policy Risk management approach Risk management structure Risk management tools Risk management culture cultivates and stimulates the process 50 DNV GL Confidential 9 May 2015 Reflection A regulation prescribe certain safety equipment; risk assessment indicates limited risk reduction by implementing this equipment. What will you do? Use the same risk assessment process to compare alternatives of measures, and select the most cost-efficient solution. Be mindful of statutory requirements; non-compliance is a risk to manage in itself. 51 DNV GL Confidential 9 May 2015 Risk management process 52 DNV GL Confidential 9 May 2015 Risk management system Risk management system is the set of elements in an organisations management system concerned with managing risk. It takes into account organisations vision, policy and strategic / tactical plans. It integrates with organisational philosophy, practices and business plans, rather than a separate program. Risk management policy explains the organisations objectives and commitment to risk management. 53 DNV GL Confidential 9 May 2015 Risk communication Two-fold objectives of risk communication: Provide people with a basis for making an informed decision. Provide objective information of risks involved to other stakeholders who will/might be affected by the decision. Communication is the most challenging aspect of risk management process: Different perception for different parties Lack of common understanding of terms 54 DNV GL Confidential 9 May 2015 Initiating and focusing Establish context Define scope and objectives Define limits (physical, operational and organisational) Establish risk parameters: reliability, reputation, schedule, cost, etc 55 DNV GL Confidential 9 May 2015 Uncertainty identification Process of identifying the sources of risk or opportunity (identification of hazards): Technology, politics, safety, people, operation, finance, market, organisation, etc Tools: checklist, experience / expert judgment, brainstorm, etc. Approach shall be well-structured and systematic to ensure all potential sources of risk / opportunity; risk and opportunity can only be managed if they are properly identified. 56 DNV GL Confidential 9 May 2015 Risk analysis Risk and opportunity analysis considers sources identified to make estimates of: Likelihood, or potential in terms of probability of frequency Consequences, related the defined objectives The estimates can be qualitative or quantitative. 57 DNV GL Confidential 9 May 2015 Risk analysis Qualitative approach will be relying on knowledge of issues, judgement and experience with similar circumstances. Quantitative approach are based on same factors, but also make numerical estimates based on historical data and simulation techniques. 58 DNV GL Confidential 9 May 2015 Risk analysis The estimated risk is then evaluated and compared against given risk criteria to determine the significance. Risk criteria shall be established before risk analysis is performed. Based on the comparison, risk can be deemed acceptable or requiring further treatment. 59 DNV GL Confidential 9 May 2015 ALARP Principle As low as reasonably practicable Indicates regions of risk tolerability three regions Also used to evaluate opportunity (vs risk) ALARP region indicates that risk is tolerable, where any further cost of reducing risk exceed benefit of the risk reduction 60 DNV GL Confidential 9 May 2015 Risk Matrix Commonly used as criteria for qualitative risk analysis. 61 DNV GL Confidential 9 May 2015 Action Planning Options: Elimination, e.g. use alternative tools / materials / approach Prevention / reduce likelihood, e.g. introduce safety prevention equipment Mitigation / reduce consequence, e.g. PPE, emergency preparedness Accept and manage residual risk, e.g. control procedures Transfer to other, e.g. insurance 62 DNV GL Confidential 9 May 2015 Action Planning Consideration shall be emphasized on the balance of: cost risk reduction / introduction benefit & opportunity 63 DNV GL Confidential 9 May 2015 Implementation and Follow Up Monitoring and review. Risk management is a continuous process, expect iteration of processes. Update of risk assessment arises due to various changes: working practices, business processes, equipment, management system, etc. Ensure control measures remain effective. 64 DNV GL Confidential 9 May 2015 Documentation Risk documentation targeted towards a specific need or specific milestone is often reported in a dedicated reports. Continuous risk management process are ideally integrated into overall business process, e.g. captured within business review, progress report, annual report, etc. Live record of risk items are normally used to continuously manage risk items, e.g. risk database in various formats. 65 DNV GL Confidential 9 May 2015 Reflection In risk management, perceived risk is as important as the objective measure. Why? Decision is made by the perception of risk by decision maker; risk communication is critical to update such perception, otherwise any objective measures will never be taken into account. 66 DNV GL Confidential 9 May 2015 This workshop will answer the following questions: 1. why risk management 2. what is risk management 3. how to perform risk management Project risk management context 67 DNV GL Confidential 9 May 2015 Transport infrastructure A Caltrans-ordered investigation into the Bay Bridge fiascoblames the bulk of the $2.5 billion in cost overruns on thechoice of a relativelyuncommon single-tower suspensionspan, an unforeseen spike in steel prices and repeateddelays. Bostons Big Dig project -- the most expensive road project in American history -- is officially bankrupt.A federal audit has concluded that Bostons Central Artery/Third Harbor Tunnel (called the Big Dig) project should be viewed as bankruptand the projects managers should be replaced. The chief of the project subsequently submitted his resignation. When Congress originally approved construction of the project, it was to cost $2.5 billion and be completed by 1998. According to the audit, the projects total cost could reach a staggering $13.6 billion $2.8 billion more than projected just six months ago.BIG DIG BILLIONS OVER BUDGETVol. 5 No. 13 April 12th, 2000BIG DIG BILLIONS OVER BUDGETVol. 5 No. 13 April 12th, 200068 DNV GL Confidential 9 May 2015 Aviation and space December 15, 2004 - Planemaker Airbus's A380 superjumbo project is running 1.45 billion euros ($1.93 billion) over budget because of work to improve theefficiency and weight of the aircraft, the co-head of parentcompany EADS said. Total costs for the mammothdoubledecker are currently estimated at over 12 billion euros. 69 DNV GL Confidential 9 May 2015 Oil and gas Shell-Russia Clash On OverrunsMay Cost $2.5B Wednesday, November 02, 2005 10:53:54 AM ETDowJ ones Newswires1532 GMT [DowJ ones]--If Royal Dutch Shell (RDSB.LN) fails to reach agreement withthe Russian state on itsSakhalin $10B overruns, the project could lose $2.5B netpresent value, says Morgan Stanley. Russian president Putinreportedlyslammed costs rise, which is normally splitbetween government and operating company. Norway's Statoil is battling to regain control of its Snohvitliquefied natural gas development in the Barents Sea, afterit had to admit another massive cost increase and an equally troubling eight-month delay.Statoil boss Helge Lund has informed the field partners that theproject's second investment estimate has ballooned by anotherNkr7 billion ($1.1 billion) and nowstands at Nkr58.3 billion, almost 50% above the original Nkr39.5 billion estimate.However, possiblymore frustrating for the partners will be to see first gas exports being pushed back eight months to J une 2007. www.upstreamonline.com22 September 2005 70 DNV GL Confidential 9 May 2015 Project risk management Project risk management (PRM) has been developed to improve project success. PRM is a systematic approach to identify, analyse and manage risk against project goals. It supports management decisions in all phases of a project's life cycle. It is an integrated part of best practice project management, i.e. it is an "add-in" not an "add-on" to best practice project management. It is characterised by specific processes, tools and organisational capabilities. 71 DNV GL Confidential 9 May 2015 Project phases and size of riskDevelop project Explore Appraise Choose solution Budgets & schedule Execute project Manage against cost, time and quality Manage interfaces Decision gate reviews Operate "Set targets""Meet targets""Realise benefits" Decision risk (uncertainty in decision basis) Installation and commissioning Specify and rank concepts Explore (technical viability) Award contracts for long lead items Decide budget & schedule ms5 (Final Investment Decision) Engineering Hand-over Appraise (commercial viability) Accumulatedinvestments Abandonment Award contracts 72 DNV GL Confidential 9 May 2015 Identify & Acquire ExploreSelectDefine Execute Operate& Evaluate Stage GateReviews ////////////// Day-to-DayRisk Management TimeAggregated Risk Reviews Decision GateReviews Appraise Aggregated Risk Reviews Day-to-day Risk Management. Risk management activities related to the day-to-day identification, assessment and control of risks. Stage Gate Reviews. Risk management activities related to the passing of stage gate reviews. Aggregated Risk Reviews. Risk management activities related to the aggregated assessment of achieving project objectives. 74 Different types of project risk management DNV GL Confidential 9 May 2015 Buzz Quiz which category this activity belongs to? Project risk review in support of a concept selection decision. Job safety analysis for a lifting activity. Schedule & cost risk modelling. 75 Identify & Acquire ExploreSelectDefine Execute Operate& Evaluate Stage GateReviews ////////////// Day-to-DayRisk Management TimeAggregated Risk Reviews Decision GateReviews Appraise Aggregated Risk Reviews DNV GL Confidential 9 May 2015 What have we learnt? 76 DNV GL Confidential 9 May 2015 Have we learnt anything today? We do risk management to ensure the objectives of our activity is not compromised, and we can satisfactorily grab the opportunity from such an activity. Risk management coordinate activities to direct and control an organisation with regard to risk. Risk management generally includes risk assessment, risk treatment, risk acceptance and risk communication. 77 DNV GL Confidential 9 May 2015 What else have we learnt? Project risk management is an "add-in" not an "add-on" to best practice project management. Project risk management typically include: Day-to-day risk management Stage gate risk reviews Aggregated risk reviews 78 DNV GL Confidential 9 May 2015 SAFER, SMARTER, GREENER www.dnvgl.com Thank you 79 DNV GL Indonesia Gedung GKM Green Tower, 5th floor, Jl. TB. Simatupang Kav. 89 G, Kebagusan,Pasar Minggu, Jakarta Selatan, 12520, Indonesia Dedi.Murdiadi@dnvgl.com +62 21 29705888