Risky Business: The risk analysis game is changing right under our noses
Have asset-intensive industries learned anything from recent disasters and world events? Because the risk analysis game is not just for oil & gas companies.
Organizations around the world have grown in size and spread across the globe over several years with the nature, scale and range of operations changing with newer technologies and processes. In the face of increasing competition and demand, organizations, especially in highly asset-intensive industries like oil & gas, utilities, and discrete and process manufacturing, have ramped up their output generation by expanding their operational, production and distribution facilities and channels.
The risk analysis game is changing right under our noses, and not for the better. The resource industry, for example, may be grossly underestimating its potential liabilities. Over the years, potential liabilities from accidents have jumped from calculable with a decent level of certainty to incalculable with a high degree of uncertainty. Risk analysis and risk management are struggling to keep up.
Numerically speaking, risk can be simplified to a formula: anticipated cost multiplied by likelihood or, if deemed likely, multiplied by frequency. Common sense tells us, however, these estimates and predictions will never be easy. Actual costs from roughly similar operating failures and accidents can vary from a few million dollars to more than a billion dollars, an enormous range to fit into any calculation. Because they require predicting the future, likelihood/frequency can be even harder to quantify.
Among many other imponderables in risk analysis are the consequences of on-the-spot operational decisions that have enormously different consequences. An example comes from two drilling rigs owned by Transocean Ltd., one of the world’s largest offshore drilling contractors, and decisions made just a few days apart in April 2010. The decisions were to replacing drilling fluids (“mud”) with seawater, a common practice in offshore operations. On both rigs, blowouts occurred.
The blowout on one rig, Sedco 711 in the North Sea, was contained by the rig’s blowout preventer; there were no serious injuries and damage was less than US$10 million. The other blowout was the Deepwater Horizon in the Gulf of Mexico. As it caught fire, exploded and sank, 11 workers died. For BP, to which Transocean had contracted Deepwater Horizon, that disaster has led to pretax charges against earnings of US$43.5 billion as of May 2011.
Virtually all industry players are rethinking how they design, engineer and build for the Gulf of Mexico. The same is true for Canada’s sprawling oilsands in Northern Alberta and the pipeline projects that get this oil to market.
Technological advances need to go hand in hand with changes in corporate culture. Designers need to speak out about risks they perceive and explain why they are skeptical. Risk analysts and risk managers need to be more open to the skeptics and be more skeptical themselves about safety margins, engineering rules of thumb, and industry standards that have been in use for many years.
Upper managements need to allocate time and money in globally competitive marketplaces for deep dives into real-world risks and liabilities, and ascertaining the ramifications of responsibilities and decisions.
In oil & gas, engineers are tasked with designing equipment that grows bigger and more complex every year. As every engineer is taught, uncertainty can grow geometrically, and perhaps even exponentially, as size and complexity increase. Layers of uncertainty pile on — starting with who really, deep down, fully understands how these enormous new oil & gas structures work. Economy of scale leads to mammoth projects to extract hydrocarbons profitably from increasingly difficult places.
Industry standards, safety factors and rules of thumb have a built-in bias toward incremental steps and away from innovation. And in part due to litigation, a hostile media and unfriendly regulators, risk taking is being discouraged just when it’s most needed. Unfortunately these challenges aren’t going away anytime soon. From a business perspective, however, understanding risks properly can be an opportunity to differentiate one’s firm from the competition.
Risk-analysis experts are fully aware that many time-honored guidelines no longer stand up to scrutiny. Common sense tells us these guidelines bear hidden risks of their own; over-reliance on them makes iffy situations worse. This adds up to what SimuTech Group regards as Exhibit A for the transformation in the ways we look at risk.
Engineering-intensive organizations, such as SimuTech Group, are being contracted more frequently to apply the latest numerical techniques and solutions — especially for analytics, the science of understanding inherent behaviors of systems. Our insights, based on decades of experience, are sought by many oil & gas companies to beef up their internal risk-analysis processes.
Over the past 20-plus years, we have learned that nothing is ever foolproof. Nor are there any straightforward, easily grasped answers, much as we wish there were. We at SimuTech Group believe the oil & gas industry has entered a new era of risk analysis and risk management. In this new era, anything may be dangerous if its engineering relies on outdated company safety margins/factors, obsolete engineering rules of thumb, or industry standards that no longer apply. We can help build the requisite body of knowledge, put it through peer review and then transfer that knowledge to the users’ simulation tools and, finally, add it to their best practices.
There are four fundamental factors in up-to-date risk analyses:
- Accidents and spills, even in remote areas, are televised and often go viral on YouTube and other social media.
- There is no real security for corporate and professional reputations in conforming to guidelines, yesterday’s or today’s. Many once-reliable margins, rules and standards have been made irrelevant. They are industry road kill, kicked to the curb by technology, economics and the steady accumulation of experience and understanding of the systems and components we build.
- Caps on damage liabilities, statutory or otherwise, have been made meaningless by litigation, especially in the U.S. Litigation can dwarf all the other costs of an accident combined; for engineers, it is becoming the risk factor.
- Liabilities have become open ended and can quickly can add two or three zeroes to a company’s exposure.
This means conventional, tried-and-true risk metrics cannot reliably assess the scale, scope and magnitude of foreseeable impacts — especially if the metrics are simply based on the costs of reimbursing customers for failed components, assemblies or systems.
Constraining the liability metrics to a bill of materials is completely inadequate and unrealistic. This blinkered approach can lead to grossly underestimating potential impacts. This is why traditional risk analysis is losing ground to the more predictive approach of failure mode and effects analysis (FMEA).
Other factors are at work in the persistent underestimation of risk. At the leading edge in any industry, accidents happen more frequently than across the entire industry; this is obscured by industry averages commonly used to calculate risks. Historical industry data underestimate future costs of spills, blowouts, fires and rig explosions; some indirect costs may have been left out.
Conventional risk analyses usually represent too conservative a view of conditions in the field, and often embody outdated views of components and systems. This gets to an engineering and risk-analysis paradox: What seems like a prudent, and even cautious, approach itself has hidden risks, in some of them unacceptably high.
Risk lies at the heart of engineering. For us at SimuTech Group dealing successfully with risk is the heart of engineering, and thus at the heart of innovation as well.
What to do? Start with words, numbers and expertise. “Failures in waiting” is a much more descriptive, and more accurate, way to characterize risks than “potential liabilities.” Viewing risk as the sum of potential liabilities can never suffice. It’s too easy to ignore or rationalize away, and won’t grab the attention of hard-pressed upper managements. “Potential” merely implies a probabilistic eventuality, a statistical function, a bell-shaped curve. Statistics, dry or otherwise, rarely change the course of events except maybe after the fact, when it’s too late.
Then insist on questioning all the numbers in every risk evaluation. That won’t be easy, of course, but avoiding euphemisms in favor of more compelling terminology should help garner the necessary support in time, data and budget. And finally, outside expertise can be of enormous value. n
Robb Knock is the regional director of SimuTech Group Inc. in Calgary, and he can be reached at RKnock@simutechgroup.ca. For more information, visit www.simutechgroup.com.