Summary

This case study describes risk assessment activities to support a large capital project, first to assist in selecting a technology option and later as an input to the Board’s decision on granting formal project sanction and Notice to Proceed.

It demonstrates the value of comparative risk assessment, a staged approach to setting priorities for addressing uncertainty, and the role of risk management in supporting project decisions.

Introduction

Background

An international mining company was developing a new mineral resource in a location in which it had not operated before. The mining activity would be relatively straightforward, but processing the ore required a significant investment in advanced technology.

The mine was in a developing country, with only a small pool of skilled labour.

Broadleaf was engaged to assist the company, in two stages:

• Stage 1 concerned the selection of a preferred technology option for ore processing
• Stage 2 focussed on significant residual risks that had to be addressed and resolved before the Board would issue a formal Notice to Proceed and release funds for the project.

Stage 1: Comparative assessment

Objectives and scope

The objectives of the risk assessment for Stage 1 were to:

• Identify and rank the risks associated with each technology option
• Isolate the most significant risks overall
• Isolate the risks that differentiate between the options
• Agree what further information would be required to enable a decision to be made on the choice between the options.

The risk assessment considered all the activity from the date of the workshop through to the proposed plant entering service and then its life in routine operation. Longer-term strategic issues arising from the technology selection were also addressed.

Approach

The risk assessment used the company’s standard risk management framework, with minor modifications to adapt it for this specific project. It was aligned with ISO 31000.

Establishing the context was addressed prior to the workshop and reviewed briefly in the workshop.

Risks were assessed for the two technology options. Each risk was assessed for each option to identify where the options offered different risk profiles and to assist in comparing them. Opportunities that could flow from the selection of one technology or the other were also noted.

Technology options

The two leading international technology vendors were considered. Initial proposals had been received from each supplier, but there were many ways in which project delivery could be packaged, from simple lump sum turn key procurement through to commissioning an engineering design to feed into an established procurement and construction management contractor. Similarly, the offerings could be taken as currently presented or subjected to value engineering to optimise the application of capital. There were several contractors who might be engaged to implement the plant delivery.

For the purposes of the workshop, recognising that the implications of such options were being considered elsewhere and could be used to revise the risk assessment later, the two simplest options were considered:

• Option 1: Vendor 1 delivering a lump sum turn key package, using the vendor’s technology with the mining company’s control systems
• Option 2: Vendor 2 delivering the technology package they proposed under the management of the mining company’s preferred EPCM contractor.

Key elements

The key elements used to structure the risk assessment are shown in Table 1.

Risk assessment

The risk assessment focused on high level risks that were closely linked to the technology selection. The initial purpose was solely to inform a choice between the two options and the assessment was not considered a substitute for a full project risk assessment. A full project risk assessment was to be conducted later. There were detailed issues behind some of the identified risks that would have to be addressed as the project progressed and there were areas of the project that were common to both options and were not considered at all in this assessment.

Risks were identified in general terms within each key element. The controls and the detailed analysis were specific to each option (Figure 1). For each risk, the analysis consisted of three steps, carried out twice, once for each option:

• Note any existing controls related to the supplier and the technology
• Taking account of the controls, rate the consequences of the risk and the likelihood of those consequences arising, using the company’s risk management framework
• Assign a risk priority, using the company’s risk management framework.

Risk assessment outcomes

The risk profiles for the 35 risks that were assessed are shown in Figure 2. There were no risks in the element ‘Commissioning and ramp up’ that had not been raised elsewhere.

There are far more serious risks in taking Option 1 forward than with Option 2. As noted earlier, each option may be refined, and this was under active consideration elsewhere, but the differences between the options are stark.

The Vendor 1 lump sum turn key option was significantly more risky than the Vendor 2 option in every respect apart from:

• The ability to deliver a productive construction workforce cost-effectively in the developing-country location, where both options faced similar difficulties with the availability of skilled labour
• Exposure to foreign exchange rate movements, where the USD-denominated turn key offer from Vendor 1 would be less risky than the multi-currency alternative from Vendor 2.

Stage 1 technology-selection decision

The risks associated with Option 1 could have been addressed and brought to a tolerable level, but it was not clear how long this would take and how much it might cost.

Option 2 was selected, with technology supplied by Vendor 2 and delivery under an EPCM services contract with a major international firm.

Stage 2: Notice to Proceed

Purpose and scope

The objectives of the risk workshop were to:

• Identify and rank the risks associated with the project, going beyond the scope of the comparative assessment carried out in Stage 1
• Agree the most significant risks overall
• Agree responsibilities for addressing the most significant risks.

There was a particular focus on those risks that might influence Board approval and Notice to Proceed.

Key elements

A more extensive set of key elements was used in this stage than in the earlier workshop as the focus was broader than just the processing technology – the assessment was to cover the entire project (Figure 3).

Elements 7 to 17 were considered in outline only, as these areas of work and related projects would be subject to further risk assessments later in the project. They were included to ensure there was a comprehensive structure that would not need to be adjusted later.

Risk assessment

Risk identification started with an initial risk register developed from:

• Earlier risk assessments for this project, including the one prepared during Stage 1 noted above
• Risk assessments conducted by the company for similar projects in developing countries
• Inputs from the EPCM contractor, based on their experiences with similar projects and locations.

The risk assessment process is outlined in Figure 4. It followed the company’s risk management framework, adjusted slightly for this project.

Risk assessment outcomes

Figure 5 and Figure 6 summarise the 88 risks that were identified in the risk assessment. These provided only a limited guide to the project’s overall risk profile, however, as they reflected the specific focus of the assessment on risks that were particularly relevant for the Notice to Proceed decision.

The 44 Extreme and High risks fell into 9 groups, illustrated in Figure 7. Of these groups the first five were the most important at this point in the project. There were no fatal flaws for the project in the other four groups:

1. Government agreements: The project required an investment agreement and associated approvals to be agreed and signed between the company and the overseas government. These were necessary conditions before the project could be promoted to the Board for Notice to Proceed. A task force was actively pursuing government approvals.
2. Permits: A wide range of licenses and permits was required before the project could be sanctioned. Activities to identify the necessary permits and the information to be presented with the relevant applications were in progress. There were also risks associated with the capacity of government agencies to deal with the large volume of permits.
3. Location: The location of the project generated a range of risks associated with the political environment, community relations, and the capacity of the local workforce and business community to support the project.
4. Related projects: The success of the project depended critically on several other significant projects and activities being completed on time, particularly development of supporting infrastructure. The risks were higher because many of these activities were outside the direct control of the company.
5. Resources: Like all large minerals and related projects, this project would be subject to constraints on resources. The effects would be felt across most personnel and support areas, as well as in equipment and materials.

Lessons

Technology selection

A comparative risk assessment was conducted in Stage 1. It was based on the company’s risk management framework, but tailored for the specific project and application. It was conducted at an appropriately high level to facilitate a meaningful comparison of the options.

The risk profiles of the options showed marked differences. Even allowing for further risk-reduction activities, the outcomes were sufficient to provide clear support for the technology-selection decision.

Staged risk assessments

As well as supporting a clear technology choice, the Stage 1 assessment identified many important uncertainties. These were used to set work priorities for the project team as the project advanced.

As we have found in many other projects, starting risk assessment at an early stage provides a sound basis for planning subsequent project activities. The underlying focus of most of the work undertaken by a project team prior to Notice to Proceed (and even after that) is reducing uncertainty, and risk assessment is the most appropriate tool for guiding this.

Information to support decisions

The early risk assessment, together with information from related projects – from both the company and its EPCM consultant – formed the basis for the assessment at Stage 2. Risk assessments should always use the best and most relevant information that is available.

The value of the information gathered for the risk assessment is not confined to completing the risk assessment itself. A deep understanding of the project, its context and the business needs it is intended to meet is essential if risk management activities are to enable senior managers to optimise the project to deliver the best value it can.

Simplistic implementations of risk management are unfortunately not uncommon, often consisting of little more than rote exercises to ‘tick a box’ in a procurement procedure. This assessment demonstrated how a straightforward well designed process with expert facilitation can support senior management and enable them to achieve outcomes that deliver even greater value for their business than they would have otherwise.