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Cogeneration plant risk analysis

Introduction

A sugar refinery had initiated a project to increase the throughput at one of its plants. This involved upgrading equipment in the mill, refurbishing other plant at the site and installing a cogeneration plant to produce steam for use in the refinery and electricity for sale to the grid. The cogeneration plant was to be fired by the waste from the refinery (bagasse). There were several contractors involved, including a procurement, management and construction (PMC) contractor, an engineer, services suppliers and turnkey systems suppliers for major equipment items like the boilers and the generator.

An initial capital cost estimate had been subject to a critical review to identify savings and early engineering work had been developed to allow for a more accurate estimate.

The owners asked Broadleaf to conduct a risk assessment, with several purposes:

  • Assist in identifying the threats and opportunities remaining in the project
  • Expose and assist in reconciling issues arising between the suppliers of services and turnkey systems
  • Evaluate the uncertainty in the estimate
  • Establish a realistic capital contingency level for the project.

Qualitative risk assessment

The qualitative risk assessment followed the company’s enterprise risk management process, itself aligned with ISO 31000, Risk management – Principles and guidance.

Context

The risk assessment was to consider the tasks required to bring the upgrade project and the power plant into operation. The time horizon for the analysis extended into operation for the purposes of capturing risks that might undermine the business case for the investment, as these would be almost certain to turn into cost and schedule impacts if they came to light during design and construction. However, the emphasis was on the cost and time required to bring the project to a state where it achieved the required operational performance.

It was important to understand the individuals or organisations that could influence the success of the upgrade. The main stakeholders expected to have a bearing on the project included:

  • The company Board and shareholders
  • Plant management
  • The plant workforce
  • The project team
  • The construction workforce
  • Contractor and equipment supply organisations
  • The local community
  • The local electricity company
  • Environmental and energy regulators.

Criteria for assessing the consequences of risks were linked to the company’s objectives, summarised in Table 1.

Table 1: Consequence criteria

Criterion

Notes

Budget

Capital requirement for the upgrade and power plant

Schedule

Completion deadlines, particularly in relation to the sugar cane crushing season

Operations

Effects on routine operation of the plant

Environmental

Environmental effects and incidents

Workplace health and safety

Health and safety of personnel, contractors and the community

Image and reputation

Publicity involving the company as a result of the project

Business sustainability

Long-term impacts on the economic value of the business

A simple key element structure was used to guide risk identification in the risk assessment workshop:

  1. Design
  2. Procurement
  3. Construction
  4. Commissioning
  5. Initial operations – mill
  6. Initial operations – power plant
  7. Long term operations.

Risk assessment workshop

The risk assessment workshop involved more than twenty key people from the owners, professional services providers and turnkey systems suppliers. It lasted a full day. It was facilitated by Broadleaf, with a recorder transcribing threats and opportunities into a prepared template. This produced an agreed list of risks ranked in priority order.

Workshop outcomes

Ninety-four risk statements were generated in the workshop. The spread of risks across the range of likelihood and consequence scores is shown in Table 2.

Table 2: Summary of risk ratings

The overall number of risks associated with the project is not unusual. However, the two Extreme risks (in the red area in Table 2) and the one with potentially Catastrophic consequences (in the right-hand column) were a cause for concern. These were:

  • Stringency of the requirements for the de-aerator may lead to delay and increases in the fabrication cost
  • Shortage of engineering resources may lead to rework, delay and additional cost
  • Long-lead items may be uncovered in detailed design, and in particular items that are normally off-the-shelf may become long-lead, generating delays.

Quantitative risk analysis

A short while later, over the course of two days, major work package cost estimates were reviewed with the lead engineer for each package. In these reviews, optimistic, likely and pessimistic outcome scenarios for each package were examined and estimates of cost for each scenario were developed. At the conclusion of the work package reviews, a management team review examined the effect on the estimate of overall project risks such as industrial relations and inclement weather.

The estimates from the reviews were incorporated into an @Risk model, with correlation included where appropriate. The model was used to examine the major sources of uncertainty and determine what funding allocation and contingency holding should be assigned to the project.

The quantitative analysis was characterised by a large number of small to medium sized issues, denominated in tens or hundreds of thousands of dollars, apart from the uncertainty in the engineering costs that was substantial in its own right. The large number of independent issues at work meant that the range of outcomes that could be expected was not very large in relation to the baseline cost of the project. This appeared to be a true reflection of the nature of the cost uncertainty in the project.

A sensitivity analysis on the sources of the uncertainty in the capital cost showed that the dominant uncertainties were associated with the risks to the upgrade of Boiler 2.

Figure 1: Capital cost variation

Overall outcomes and lessons

Several contentious issues arose during the initial workshop and in the review of work package cost estimates. However, the clear focus on risk to the project and exposing and addressing the underlying drivers of uncertainty, without questioning the competence of individuals, allowed these matters to be explored more calmly than might have been the case otherwise.

The project manager noted that, in addition to addressing risk directly, the exercise had brought about an extremely effective review of the status of engineering development across the project. It had highlighted for him several important areas requiring his attention.

The project team went forward with a clear view of where risk treatment plans were required. Responsibilities for these were allocated to relevant people in the owner’s team, the engineer, the PMC contractor and major subcontractors.

The company’s senior management team was able to form a view of the risk it was willing to take (its risk appetite) in allocating funds for the project, against the background of the company’s general financial position and business priorities. The budget and the cost contingency established for the project were fixed with greater confidence than they would have been otherwise, because they were seen to be based on a thorough examination of the true sources of uncertainty in the plans and estimates.