By enhancing risk awareness, we seek to enhance stakeholders value. We do this through fostering an environment where the uncertainties associated with significant ‘downside’ risks are reduced and rewards from taking ‘upside’ risks are realized. This is not easy; however, it is vitally important and it is expected.
Mark Moody-Stuart
Introduction
A manager’s role can be seen as having the following basic functions:
- Set objectives and plans
- Manage people, processes and interfaces
- Improve performance
- Identify and manage risk
It is this important latter part of the manager’s role that is discussed in this section and is
dealt with in three parts: Downside Risk, Upside Risk and Insurance.
Downside Risk
Downside risk is defined as the combined effect of the likelihood of an occurrence of an undesirable event and the severity of its outcome.
Downside risk management is a method of managing that concentrates on identifying and controlling the areas or events (the uncertainties) that have a potential of causing unwanted change. (See Figure 3.8.1)
In an environment with little change, project planning is relatively straight forward and
concentrates on fine-tuning the activities to achieve the goal. However, when the external
environment is unpredictable, as is often the case in EP activities, planning is inherently
more complex because the goals can change. It is thus essential to retain the focus on the goals and be able to respond quickly if and when they do by:
- identifying the areas of uncertainty and the assumptions which have gone into the planning;
- eliminating or reducing the uncertainty where possible, and then,
- developing in advance, alternative strategies (contingency planning) for the residual uncertainties, should changes occur.
If this is not done up-front and the goals subsequently change, the execution team will
be ill prepared and faced with a crisis. Solving crises during the execution phase of a
project often result in expedient short-term solutions, to enable execution activities to
continue. When reviewed in hindsight these solutions are often found to be sub-optimal
and not in the best long-term interests of the project.
The assumptions and uncertainties associated with each objective should therefore be
identified. Where the uncertainty is within the control of the project manager, it must
either be removed or controls established to manage it. Where the uncertainties are
outside the control of the project (e.g. the oil price, weather, government approvals,
strikes) contingency planning is required and should be reflected in the proposed
execution strategies.
The types of risk that a project might meet are discussed below. Risk cannot be
eliminated entirely, but much of it can be anticipated and reduced. That which remains
needs to be given the engineer’s attention and specifically controlled during the project.
The decision making process described in 2.5, Assuring the Value of the Opportunity,
concentrates largely on the risks and the management of those risks in any opportunity
and it is the responsibility of the Decision Makers to satisfy themselves that the risks are
acceptable as the opportunity moves from phase to phase.
Read Types of Risks in Project Management, then continue below topic.
Upside Risk
While most risks are seen as ‘downside’ risks as discussed in 3.8.2 and hence are managed so as to avoid them altogether or mitigate their consequences, there are risks that, if they can be managed to create or exploit an opportunity or make better outcomes more likely, can be referred to as ‘upside’ risks. Using the word ‘risk’ to describe such opportunities means that there will be a downside if the risk taken does not ‘come-off ’. Management of such risks, therefore, must accommodate both management of achievement of the upside potential and minimising the consequences of failure.
The same process can be used for identification and management of these risks as described in 3.8.2.
Insurance
An important element of Risk Management is insurance and the identification of insurance requirements and whether risks should be self-insured (i.e. the Group “insures” the risk) or insured through the insurance market place should be part of the contracting strategy development when it is decided which risks will remain the liability of the project, which should be insured against and which should be passed on to contractors.
Whilst SIEP advice may always be sought on the subject of insurance (and should be by new ventures), the general guidelines are as follows:
In addition to statutory requirements, the following insurances are always necessary:
- General Third-Party Liability (GTPL)
- Cost of Control (COC) of well (Blow-out) (including Seepage and Pollution for offshore operations)
- Construction All Risks (CAR)
- Fire Lightening and Explosion (FLE) howsoever arising – for plant, offices and warehouses (for onshore operations)
- All Risks Property (for offshore operations)
- Transit of materials and equipment to country of operation
- Motor-vehicle liabilities
- Staff insurances
And the following insurances should be considered:
- FLE for materials equipment and consumables (while onshore)
- Fidelity guarantee
- Transportation of materials within country of operation (including to and from offshore units)
- Hurricane, flood and/or earthquake as applicable
Contractors must be required to insure their own personnel and equipment (including vessels and motor-vehicles). They must also insure against liabilities up to an amount of at least US$10 million per occurrence.
Indemnities, liabilities and responsibilities for insurance are to be defined in all contracts at
the tender stage. Most OUs’ general conditions of contract, and Shell standard contracts (in particular the Group Contracting Guidelines contract conditions) clearly mention these items. If other forms of contract are used the appropriate clauses need to be included.
Advice and assistance in placing insurances is available through SIEP who should,
legislation permitting, always be used for GTPL, COC, and Fidelity, as well as other major insurances if effected. Where local insurance is obligatory, SIEP should still be
involved, as reinsurance of the local insurance company may be possible. Local staff and
motor-vehicle insurances should be effected locally.
One can never rely on the assumption that someone else is liable and/or will have taken
out insurance. Contracts should always stipulate who is liable and who is to take out insurance, and subsequent checks that such insurance has indeed been effected need to be carried out.