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APPLICATION OF PMBOKRISK MANAGEMENT TO

LNG PROJECTS
Submitted By- 2013 D10 Rajesh Goel, 2013D19 Shagun Goyal

Significant savings can be made through more effective risk management in the LNG
supply chain, say Erik Skramstad and Jon Wredmark
The demand of Liquefied Natural Gas (LNG) is on a steady increase, and the estimation of
world LNG consumption will be doubled by 2030. In the wake of increasing demand,
numerous LNG projects are under construction and many new projects are in the planning
stage. However, since there are limited numbers of companies that have a full capability of
core technologies and licenses related with LNG plant construction, companies that are less
experienced in LNG plant projects suffer from a lack of project management ability, such as
process planning, schedule management, and risk management particularly for early stage of
project initiation.
In general, engineering designs have a strong effect on the overall project costs, and
frequently, an unsatisfactory design performance can lead to cost overrun and time delay at
the downstream phases. Therefore, the design quality is very imperative in securing the
positive outcomes in the whole project life cycle. The characteristics of LNG projects can be
summarized as a mix of complexity and diversity of a number of activities. Since many areas,
such as mechanical, piping, instrument, electrical, civil and architecture are involved, the
connectivity of each activity is very crucial for the success of a project. Thus, the LNG plant
projects are exposed to more various and complex risk factors. For this reason, LNG projects
require considering more detailed risk factors and a tailor-made risk management framework,
which are able to reflect the inherent attributes of LNG plant projects.
Why Risk Management Framework is required?
Liquefied Natural Gas is the second major option for monetising stranded natural gas
resources. It involves gas feed gas supply, liquefaction, transportation through LNG Tankers
and regasification terminal. LNG is a front-end capital intensive project, with technical
complexity and long lead payback period. Therefore, like most infrastructural projects, LNG
Projects are mostly financed through limited recourse financing. That is, the lender looks
principally to the project cash flow for repayment of debt and interest. Aside from high
capital, the need to share risk, desire to limit balance sheet debt obligation and tax incentives
are other reasons that inform the sponsors choice of limited recourse financing. The LNG
Chain may be broken and financed separately or finance as a single integrated project.
From the lenders point of view, the major concern is to get repaid the full amount and
interest as at when due. A bankable project therefore is one which is capable of debt
repayment as specified under the loan agreement. However, since the payment is tied to cash
flow the bank is concern about any factor that may affect the main components of cash flow
time, amount and certainty. There is no project without risk; a bankable project is not a
riskless deal but a project with a properly analysed, allocated and mitigated risk. It is the duty
of the sponsors to make the risk profile acceptable to the bank.
Integrated LNG projects may reduce the exposure of the lender to some risk while at the
same time may introduce risk which financing just a part of the chain may not face. It will
also require bigger financing as a single project. The recent global financial crisis has raised
the challenges of financing LNG projects by affecting the LNG market and constrained the

source of project funding. This raises further issues of level of acceptable risk and a workable
strategy to obtain financing for integrated projects from a constraint debt market.
LNG project developments face risks that can result in expensive delays. Prolonged
commissioning and start-up periods, reduced performance, logistical challenges, cost
overruns and other problems can all significantly affect a projects economics.
The risks are significant and the underlying causes span political circumstances and unclear
interfaces, to technology that does not deliver. LNG projects are large and complex,
employing advanced technology, and such challenges must not be underestimated.
Thus at the early stage of the project it becomes imperative to examine the risks for the
success of the project and look at the factors to make the project more bankable. What are the
major risks and how were they analysed, allocated and mitigated? What are the main success
drivers? Risk management framework will approach these questions by looking at the role of
sponsors, risk allocation and management and the source of finance on the bankability of the
project.
Risk Management Framework

Risk
Identification

Qualitativ
e Analysis

Quantitati
ve
Analysis

Plan Risk
Response

Monitor
Risks

1. Risk Identification
It is very important to understand the target or objective of risk management by identifying
risk factors. Firstly, we set up the purposes of risk management for LNG plant projects at the
design phase, as follows:
1)
2)
3)
4)
5)

compliance with requirement of the host country, such as design criteria and license,
prevention of cost increases and quality decreases due to design change,
reduction of contract and claim, related to design change,
quality management of facilities to acquire performance standards, and
management of the design packages interface and connectivity.

Based on the purposes of risk management, risk factors were grouped according to specific
criteria and sub-criteria considering their level of detail.
To identify the risk factors, following steps could be identified
1) Analysis of existing literature and several firms design reports related to LNG
projects.
2) Expert surveys and expert interviews to reflect the in-depth experience and know-how
of practitioners. These experts have been experienced in the construction field more
than 10 years.
3) Follow-up expert interviews to revise classification of risk categories and verify
practical usability of risk factors.
4) Risk Assessment Workshops

5) Delphi-Technique
6) Brain Storming
7) Diagramming Methods to analyse the complex interface where we could find the
maximum concentration of Risk.
Thus by keeping the objectives and constraints in consideration here is the list of major
Risks Identified.

Hazardous Materials
The nature of this LNG facility is such that there will be three hazardous materials
of sufficient volume on site which may have the potential for off-site
consequences.
These are:
CSG in either the gaseous or cryogenic state
LPG, if required
Refrigerants.
A complete list of all hazardous substances that will be held and utilised on site
will be
identified during detailed design of the LNG facility

Reserve Risk: Whether the reserves would be enough to provide the required
returns which is backbone for the financial viability of the project

Construction Risk: Risks associated with the construction stage are cost overrun,
delay and defect in design and construction to meet project specification and
output. These are mainly mitigated by passing the construction risk to a turnkey
contractor for a fixed term and price attached with incentives to performance and
liquidated damages.

Operation Risk: The operation stage signal the cash flow and repayment period.
Risks associated with the operational stage of an LNG projects include
technological risk, operation performance and operating cost.

Market Risk: Financing an un-contracted integrated LNG project is not feasible in


the absence of a mature spot market. There is no global spot market for LNG
compare to oil to mitigate volume risk.

Political Risk: Most LNG projects are located in a high risk political environment;
therefore the lender is concerned about the allocation and mitigation of political
risk. The risk of expropriation, confiscatory fiscal regime, breach of sovereign
agreements, political violence, change of law, refusal of licence and permits,
arbitrary change in environmental standards, and restriction on repatriation of
fund are major risks which may disrupt the project or undermine its Cash flow.
Usually, lenders seek for government guarantees and draw out insurance policy to
cover for political risks

Environmental Risk: LNG project is relatively environmental friendly compare to


oil. However, environmental concern is always associated with major LNG
projects. Especially, projects extending from development of gas fields, pipelines
and LNG plant. There is an increasing demand for higher environmental standard
and civil society agitations. This risk is mitigated through comprehensive
environmental impact assessment, environmental management, rehabilitation
reserve fund, insurance and sometimes environmental warranty from the sponsors.

Land Acquisition: This is one of the major risks in offshore LNG projects. If the
sufficient amount of land is not available on time, it will result into cost-overruns
which can further jeopardise the project and affects its financial viability

Pricing Risk: Gas may not be able to capture the right prices in light of fluctuating
oil prices around the world

Force Majeure: It majorly involves the risks arising from the natural weather
calamities, rebellion, wars, earthquakes etc. The risks flowing from an event of
force majeure are particularly difficult to allocate. Force majeure is by definition
uncontrollable and often excuses the non-performing party from liability. Where
force majeure interrupts an LNG chain, the stranded facilities of the LNG chain
may be without throughput and without recourse for contract breach. For example,
if an LNG receiving terminal is forced to shut down for reasons beyond its
control, the entire chain is disrupted. The LNG production facility and ships
remain fully operational, but may be unable to supply LNG to the terminal or
alternative markets. Yet, the producer may still be obligated to honour contracts
with clients and creditors. The use of force majeure clauses in contracts, in theory,
can help mitigate this problem. However, once the supply chain is disrupted it
may take several months to get back on track, depriving lenders of revenues
needed for debt service, eroding equity returns, and potentially exposing parties to
liability for non-performance if force majeure provisions are not back-to-back.

2. Qualitative Analysis
This analysis majorly helps in prioritizing the risks involved with in the projects which
further gives helps to access the risks on strong ground and ascertain the mitigation risks plan
for those who are likely to happen and have a greater impact on the project.
The hazard assessment and its risks involved the following major steps

Hazard Identification which majorly involves the review of potential hazards and
identification of the possible causes of potential incidents.
Consequence and effect analysis which involves the assessment of consequence of
hazards involved
Frequency analysis which involves the estimation of likelihood of event occurring.
Risk Analysis Of each incident occurring defines risk as follows
Risk= Consequence* Likelihood
The risks having high values must be responded quickly

The following gives the snapshot of risk matrix

The most common and popular method to determine relative priority among risk factors is the
Probability Impact (PI) method. This method determines priority by using two criteria,
probability and impact as shown below

Applying the same concept to the various risks involved in LNG projects in the following
tabular form is listed as given below

S.No

Potential Hazard
Risk Factor
Ignition of flammable materials leading to fire, High
incident of injury and destruction of property
Purging and start-up of release of gas catching fire Medium
Health and safety while working at heights or
under heavy loads, hazardous materials , exposure
to wild-life leading to injury or death of work-man
Leakage in pipes carrying LNG or Refrigerants
leading to explosions
Uncontrolled release from LNG storage tank
leading to cold metal brittle failure, fire and
explosion
Maintenance Failures leading to shutdowns
Gas turbine failure leading to fire or explosion
Environmental Pollution due to failure to contain
environmental polluting materials
External Incidents causing Road Accidents that
leads to release of flammable material
Natural Events occurring like Earthquakes,
Cyclones or wars or strikes
Spills during construction, operation resulting in
contaminated soil, injury or environmental
pollution at decommissioning
Damage to storage vessels, hoses or pipes
resulting into release of flammable or combustible

Low-Medium

High
High

Medium
Medium
Low
Low-Medium
Medium
Low

Low

materials
Health and safety hazards to workers in pipeline
or in confined spaces or at a height
Health and safety hazards to workers in tunnel or
in confined spaces or at a height
Use of heavy machinery leading to erosion or dust
Generic threats to pipeline like corrosion
Natural event such as land subsistence, cyclone,
storm and earthquake damages
Flooding of tunnel resulting in destruction to
property and environment
Damage to LNG carrier leading to a loss of
containment and injury
Berthing and LNG loading and unloading
accident or mechanical failure leading to an
uncontrolled release of LNG causing pollution to
the releasing environment
Terrorist Activities
Marine collision causing spills and leakages
resulting into a lot of environmental damage
Reserve Risk affecting viability

Low-Intermediate
Intermediate
Negligible
Intermediate
Intermediate
Low
Medium
Medium

High
Low-Intermediate
Extreme

3. Quantitative Analysis
Quantitative analysis helps in backing the results identified in qualitative analysis with
numbers, thus gives a clear-cut indication how much contingencies to quantify in our budget
if that risk occurs in order to curtail the extra cost over-runs without adjusting the profit
margins affecting the project viability. Though there are various technologies involved as
mentioned and explained below but the major one used is simulation using Risk Modelling
on @Risk software
Sensitivity analysis.
This involves analysing the project to determine how sensitive is to particular risks by
analysing the impact and severity of each risk.
Expected monetary value analysis.
In broad terms, determining the expected monetary value is to multiply the likelihood by the
cost impact to obtain an expected value for each risk, these are then added up to obtain the
expected military value for the project. A typical way of calculating EMV is using decision
trees;
Quantitative risk analysis Decision tree analysis.
These are in the form of a flow diagram where each node, represented by a rectangle,
contains a description of the risk aspect and its cost. These rectangles are linked together via

arrows each arrow leading to another box representing the percentage probability. These
totals are calculated by multiplying the risk costs by the probability and adding that value to
the initial cost.
Tornado diagrams.
These are named because of their funnel shaped and portray graphically the project
sensitivity to cost or other factors. Each tornado diagram will represent the impact of risks in
terms of particular aspects. These aspects may be the stages of phases of all project, and are
ranked vertically and represented by a horizontal bar showing plus or minus cost impacts.
Modelling and simulation.
The most common form of this is Monte Carlo analysis which is normally calculated by
computer by analysing many scenarios for the project schedule and calculating the impact of
particular the risk events and is helpful in identifying risks and the effect they have on the
project schedule.
Risk modelling
Risk may be expressed in several ways, by distribution, expected values, or single
probabilities of specific consequences, but probably the most commonly used is the expected
values. Approach used is the latter that describes the risk, which was considered a random
variable. Expressing the random variable risk as a distribution is very useful, it takes into
account uncertainties of input values, and seems mode accurate than single value. The risk of
LNG tankers colliding with a tug, in yearly perspective, for a single collision scenario, was
calculated using the following formula:
Ri = Pi*Ci
where Pi means a probability of LNG tanker-tug collision scenario,
Ci consequences of a given collision scenario
The probability for collision was assumed to be equal at all scenarios, and adopted value is
presented inTable. The consequences of each collision scenario were calculated with use of
MonteCarlo simulations. Also MonteCarlo simulations were adopted in order to estimate the
distribution of random variable
risk. The distribution obtained of random variable
risk, which is the annual risk due to a collision between a LNG tanker and a tug is depicted
in fig.
Random variable risk may be also expressed as a single number, at adopted confidence
level (95%), simply by following the formula:

Therefore the annual value of random variable risk calculated at 95% confidence level equals
USD 12324.

Expert judgement.
In a similar way to carrying out a structured interview, this would normally involve asking
experts to review your risk data and the manner in which it has been gathered. As a
consequence these experts may also identify additional risk areas.

4. Plan Risk Response


At the planning stage only apart from the identification of risks it becomes very important to
plan the mitigation measures so that in future it that risk occurs than the team is prepared
beforehand to deal with the risk and the resources could be planned and mobilized
accordingly.
This would make sure that the integrity of the project is maintained and the viability of
project is sustained throughout the project life-cycle.
There are majorly Four procedures in risk response as following

Accept- Pricing Risk


Avoid
Transfer- will be through insurance
Mitigate

Here is the list of response measures that could be done if that risk occurs.
S.No

Potential Hazard

1.

Ignition of flammable materials leading to fire,


incident of injury and destruction of property

2.

Purging and start-up of release of gas catching fire

3.

Health and safety while working at heights or


under heavy loads, hazardous materials , exposure
to wild-life leading to injury or death of workman

4.

Leakage in pipes carrying LNG or Refrigerants


leading to explosions

5.

6.

Uncontrolled release from LNG storage tank


leading to cold metal brittle failure, fire and
explosion
Maintenance Failures leading to shutdowns

7.

Gas turbine failure leading to fire or explosion

Risk Response/Mitigation
Measure
Safe handling of materials
and control of ignition
source through combination
of hardware features and
procedural controls. The
construction camp will be
constructed
away
from
hazardous effects of fire and
explosions
All purging activities will be
carried out through inert
gases thus avoiding catching
of fire
All safety and health
standards will be followed
and insurance will be taken
in case of life-deaths plus
environmental management
plan will be developed for
managing such risks
Make sure that plant is
designed
according
to
standards and codes.
Make sure that preventive
maintenance and inspections
are carried out regularly to
tracks these things well in
advance
Quality control and tests of
storage
tanks
to
be
undertaken
Range of start-up, shut-down
and maintenance procedures
with emergency response
procedures to be adopted
Gas turbine to be maintained
according
to
schedule.
Additionally fire detectors to

8.

Environmental Pollution due to failure to contain


environmental polluting materials

9.

External Incidents causing Road Accidents that


leads to release of flammable material

10. Natural Events occurring like Earthquakes,


Cyclones or wars or strikes
11. Spills during construction, operation resulting in
contaminated soil, injury or environmental
pollution at decommissioning

12. Damage to storage vessels, hoses or pipes


resulting into release of flammable or combustible
materials

13. Health and safety hazards to workers in pipeline


or in confined spaces or at a height

14. Health and safety hazards to workers in tunnel or


in confined spaces or at a height

15. Use of heavy machinery leading to erosion or dust

put in place and ventilation


systems to be designed
properly
Chemicals will be stored and
handled carefully. Alternate
disposal and storage areas in
case of failure. Surface water
to be treated to remove oil
and grease in case of spill
Access roads to the site be
properly maintained and a
detailed traffic management
plan will be built
Insurance can be undertaken
for protection of works
Detailed safety management
plan to be developed.
Additionally all corrosive
chemicals and liquids to be
captured to site drainage
systems.
Standards to be followed
quite effectively regarding
the storage of materials.
Personals to be trained in
handling storage of corrosive
materials
and
further
safeguards to be adopted
Construction
management
plan to be developed
focusing on safety methods
and measures. All works to
be
carried
in
strict
conformance to standards
and permits. And emergency
response
plan
to
be
developed.
Construction
management
plan to be developed
focusing on safety methods
and measures. All works to
be
carried
in
strict
conformance to standards
and permits. And emergency
response
plan
to
be
developed
Vehicles to be operated with

16. Generic threats to pipeline like corrosion

17. Natural event such as land subsistence, cyclone,


storm and earthquake damages

18. Flooding of tunnel resulting in destruction to


property and environment
19. Damage to LNG carrier leading to a loss of
containment and injury
20. Berthing and LNG loading and unloading
accident or mechanical failure leading to an
uncontrolled release of LNG causing pollution to
the releasing environment

21. Terrorist Activities


22. Marine collision causing spills and leakages
resulting into a lot of environmental damage
23. Reserve Risk affecting viability

24. Land acquisition


La
25. Pricing Risk
P

in permissible speed limits


along with provision of a fire
extinguisher
Preventive maintenance and
inspection
programmes
being implemented. Pipeline
integrity plan to be prepared
for detailed designing and
fractured toughness
The
pipeline
to
be
constructed so that to take all
natural events in account
plus an insurance cover
Technical
solution
of
clamping
Legislative compliance in
this case
Controlled material transfer
activities to be adopted. Gas
and fire detector systems to
be installed in case of any
emergency. Operators to
comply with port manuals.
Emergency shutdown to take
place
Appropriate
safety
and
security
Compliance with relevant
maritime safety requirements
Geological
and seismic
surveys to be studied
effectively
Procedures to be started
much more in advance
To be accepted as such

5. Monitoring Risks
A risk management program is never finished. New risks will emerge and existing risks
will disappear. You have to stay on top of it.
The objectives of risk monitoring and updating are to:
1. systematically track the identified risks

2. identify any new risks


3. effectively manage the contingency reserve
4. capture lessons learned for future risk assessment and allocation efforts
The risk monitoring and updating process occurs after the risk mitigation, planning, and
allocation processes. It must continue for the life of the project because risks are dynamic.
The list of risks and associated risk management strategies will likely change as the project
matures and new risks develop or anticipated risks disappear.
Periodic project risk reviews repeat the tasks of identification, assessment, analysis,
mitigation, planning, and allocation. Regularly scheduled project risk reviews can be used to
ensure that project risk is an agenda item at all project development and construction
management meetings. If unanticipated risks emerge or a risk's impact is greater than
expected, the planned response or risk allocation may not be adequate. At this point, the
project team must perform additional response planning to control the risk.
Risk monitoring and updating tasks can vary depending on unique project goals, but three
tasks should be integrated into design and construction management plans:
1. Develop consistent and comprehensive reporting procedures.
2. Monitor risk and contingency resolution.
3. Provide feedback of analysis and mitigation for future risk assessment and allocation.
Monitoring and review should be a planned part of the risk management process and involve
regular checking or surveillance. The results should be recorded and reported externally and
internally, as appropriate. The results should also be an input to the review and continuous
improvement of the firm's risk management framework.
Responsibilities for monitoring and review should be clearly defined. The firm's monitoring
and review processes should encompass all aspects of the risk management process for the
purposes of:

Ensuring that controls are effective and efficient in both design and operation
Obtaining further information to improve risk assessment
Analysing and learning lessons from risk events, including near-misses, changes,
trends, successes and failures

Detecting changes in the external and internal context, including changes to risk
criteria and to the risks, which may require revision of risk treatments and priorities

Identifying emerging risks.


As part of the monitoring process, the thresholds for the risk criteria should be reviewed at
the commencement of each risk assessment cycle to identify the processes that may be
subject to increased risks and, as such, would derive the greatest value from the risk
assessment

Risk has a dynamic context resulting from the constantly changing external and
internal environments. Organisations must monitor not only risks but also the
effectiveness and adequacy of existing controls, risk treatment plans and the process for
managing their implementation.