Quantifying Cost and Schedule Risks for Major Energy Projects PRMIA Luncheon Presentation

1. Quantifying Cost and Schedule Risks for Major Energy Projects PRMIA Luncheon Presentation 4 November 2010 CSC Project Management Services 200-321 19 Street NW. Calgary, Alberta. T2N 2J2 (403) 233-7994 cscmain@cscproject.com

2. Major Project Blues Over the last two decades, almost every major energy project has suffered significant cost overruns, significant schedule delays, and/or poor quality work. Exceptions are rare and most projects that tout being “On Time and Under Budget” have re-cast schedules, significantly modified scope or revised base estimates. The problem isn’t new. In the late 1980’s the Rand Corporation published a study showing that 80% of all major projects had significant cost and schedule overruns. The problem is not restricted to the Alberta Environment, the oil industry, or to Canada. It is a global problem.

3. Major Project Blues - the Issues Major energy projects are truly colossal in scope. Capital costs are routinely in excess of $1 Billion, equipment is sourced world-wide, labour pools are stretched. The boom in oil prices that drives new projects results in competing project impacts on everything from bulk materials to major equipment, from camp beds to hotel rooms and from field labour to construction management. After many years of industry retrenchment, project management and construction supervision experience has been scarce. Owner groups are not resourced to deal with the issues driven by massive capital projects.

4. Major Project Blues - the Solution These major projects are being driven by economics. In order to capture the project value, a fully functioning (nameplate) project must be completed on schedule and within the capital budget. The Project Team must identify and understand the wide range of risks facing them, and put in place an action plan that mitigates these risks. Failure to assess and identify risk issues will almost certainly doom a project. The Project Team must bring resources to bear on the risk issues throughout the project execution life. As a project proceeds the risks change, and the risk management plan should reflect this changing reality.

5. Risk Management Life Cycle Strategic Planning Project Definition Project Financing Project Execution Mid- Construction Project Start Up Year 1 Full Operations Project Execution Team Internal Review Corporate Planning Risk Contractor Involvement Operations Team Corporate Review

6. Risk Management: • The most important risks and their impacts are identified and • communicatedto the project management and stakeholders. • All sources of risk and opportunity are identified including “soft” • items such as “organization performance” and “competing project • environment”. • Expert judgments about the likelihood of uncertain events are • documented, and their impacts quantified. • Budgets and performance targets are set at • appropriate confidence levels, and areas for • mitigation are identified and explored. • Project strategies are tested in a • “best case/worst case” scenario to analyze • mitigation plans and alternatives.

7. Risk Analysis is the centerpiece of a Risk Management Process Base Design & Operating Plans Uncertain Environment Scheduled, Formal Reviews Updated Model Results (Probabilities, Tornados, Steps) Management Risk Reporting Risk Analysis Risk Monitoring System Tornado Diagrams Step Diagrams Interview Issues Probability Distributions Model and Test Options Project Targets Immediate Risk Control Measures Contingency Plans

8. The general Risk Analysis Process proceeds in a systematic sequence Recycle to Focus on Most Important Risks Frame The Problem Develop Analysis Basis Evaluate The Risks Interpret The Results Risk Management 5 1 2 3 4 Review Alternative Strategies. Identify all Important Sources of Uncertainty. Model how underlying uncertainties interact to influence outcomes on the Project. Identify the Experts in each of the uncertain variables. Assess the impact and the probability of occurrence for each uncertain variable. Calculate the uncertainty in the key result measures. Quantify the risk & return for each scenario. Analyze and document the results. Identify preemptive actions. Develop contingency plans. Recommend actions.

9. Framing the problem is often the most difficult but most valuable step in the process • Project scope, basic assumptions, and cost & schedule milestones • are identified. • Strategic alternatives and logical development paths are identified, and • decision criteria are defined. • All project decisions (both made and not made), and the logical • links between decisions, are identified. • All risk issues and their potential impact areas for the project are • identified.

10. Conditioning Variables Impact Variables Results The Influence Diagram shows how the risks influence each other and their impact on the project. Correlations between variables must be properly captured. Operating Costs Operating Revenue Scope Changes Organizational Performance Contractor Rates Capital Cost NPV Competing Projects Material Rates Contractor Default Productivity Rates Schedule Labour Availability Regulatory Delays Weather Delays Regulatory Environment

11. Conditioning Variables Organization Performance • Organization, Distribution of Authority • Continuity of Design, Coordination of Engineering • Information Gathering and Communication Tools • Baseline and Performance Measuring Tools • Contracting Strategies • Construction Productivity • Owner Involvement and Commitment Competing Project Environment • Labour Resources • Engineering Resources • Contractor Availability • Material / Vendor Shop Availability • Construction Equipment Availability

12. Risk Variable Assessments Risk Discussion • Discuss the Assumptions in the Base Cost / Schedule, including • Manpower and Equipment levels • Identify Risk and Opportunity factors influencing the range of • uncertainty • Discuss what factors are included and excluded from the risk • range for the item • Collect the risk range information (Assessment is a value and • the probability of that value occurring) • Identify what is driving the high and low values Cost Variables • Probability of a Cost Variance, a Specific Cost, or an increase / • decrease from the Base Cost Schedule Variables • Probability of a Duration, a Specific Date, or a Delay / • Advancement to the Base Schedule

13. The risk analysis calculates the probability distribution of potential cost outcomes. This distribution can be used to : 1. Determine the contingency required for any confidence level (probability). 2. Compare the estimate uncertainty (slope) with traditional estimate class definitions. Base = 1600 $MM 100% P90 =2220 $MM +11% 90% 80% Slope of Class V Estimate 70% 400 $MM Contingency Required for P50 Confidence 60% Slope of Class 2 Estimate Probability 50% 40% P50 = 2000 $MM 30% 20% P10 =1780 $MM -9% 10% 0% 1200 1600 2000 2400 2800 CAPEX ($MM)

14. Road Preparation Duration 3 6 Labour Productivity Delays -1.25 1.75 Plant Pad Preparation Duration 3 6 Labour Unrest Delays 0 2.3 Execution Organization Performance Best Worst Regulatory Duration 11.3 16.5 Competing Project Environment Low Heated Start-up & Commissioning Duration (Early Steam) 1.5 2.4 Terms of Reference - Duration 3 4 Regulatory Environment Relaxed Stringent Terms of Reference - Application Date 1-Aug-02 1-Oct-02 Labour Availability Delays 0 1.4 OTSG Manufacture & Delivery Duration 12 16 Weather Delays 0 0.5 Long Lead Equipment Delays -1 2 The tornado diagram identifies and ranks the key project risks and is a tool that helps the project team to focus on the most important drivers. Days Start Date -60 -40 -20 0 20 40 60 EV = 20-Dec-07

15. Modern Day Application of Risk Management • Risk management is fundamental for accountability on corporate governance and on maximizing shareholder value. • It begins with strategic definition and continues in a consistent manner • throughout the project life cycle. • Range Estimating is not Risk Analysis. • Risk analysis must consider the specific uncertainties of a project, and • incorporate these underlying risks into the project value. Processes that • provide single-point outcomes or risk distributions based on the probability • of fixed outcomes (decision trees, KT, range estimating) do not meet the • definition of risk analysis. • Risk Management ensures that there are no surprises. • Documentation of assumptions and all risks. Communication of the risk • management plan (avoid, accept, manage) focusing on the underlying project • risks. • “Ignoring risks to a project is not an option; important decisions will be • made anyway, shouldn’t they be made with the best information • available?” • (Project Manager Today, October 2000)

16. CSC Excellence In Risk Management • Specifics: • Supports Owner Organizations in major project development. • Group formed in 1982, over 250 project assignments worldwide. • Extensive and varied background in Project Planning and Management. • Specialties: • Risk & Decision Analysis for a wide range of capital Projects. • Strategic & Mitigation Planning for projects using risk models. • Facilitation ofProject Management, Business Planning, Environmental & • Safety Planning & Management and Team Building. • Project Management Education Workshops. • Development of Contract Claims and disputes and litigation support.