INNOVATION January-February 2016

i ns igh t

CAPITAL PROJECT RISK A Contractor’s Perspective

Dr. Andrew Gillam, P.Geo., CMC

B enjamin Franklin, writing to French scientist Jean-Baptiste Le Roy in 1789, is said to have coined the phrase, “In this world nothing can be said to be certain, except death and taxes.” Yet, even death and taxes include uncertainty. When will death occur? Howmuch personal or business tax will be payable next year? When dealing with future events, the experience of uncertainty is more likely to occur than certainty is. Risk is a fact of life for individuals and organisations. Organisations of all sizes and complexities deal with factors and influences—both internal and external—that create uncertainty about whether corporate performance objectives will be achieved. All corporate activities, including implementation of major capital projects, involve risk. This article presents a contractor’s perspective on managing risk for large capital projects and, as an example, describes how Amec Foster Wheeler is applying risk management in its role as project management consultant (PMC) for the engineering, procurement and construction (EPC) activities for the largest refinery being built in the Persian Gulf Region, the Kuwait National PetroleumCompany’s US$15-billion, 615,000-barrels/day Al-Zour Refinery. Some recent lessons learned from the Al-Zour Refinery project are also discussed. Background Kuwait Kuwait is a small, oil-rich country on the Persian Gulf, between Saudi Arabia to the south and Iraq to the north and west. With an area of 17,800 square kilometres, it is approximately half the size of Vancouver Island. The population is approximately four million (January 2015), about one-third of whom are Kuwaiti nationals. Kuwait’s oil reserves are estimated to comprise approximately 104 billion barrels, the sixth-largest reserve in the world. Kuwait’s oil production—approximately 2.8 million barrels/day in 2014—ranks it in the top 10 oil producing countries in the world. The country’s National Development Plan (2015–2020) calls for an increase in oil production to 4 million barrels/day and development of additional internal capacity for crude-oil refining and petrochemical production. Al-Zour Refinery Project The Kuwait National Petroleum Company (KNPC) is constructing a new greenfield refinery at Mina Al-Zour, about 90 kilometres south of Kuwait City. The refinery will occupy an area of almost 1,700 hectares and is designed to produce low-sulphur fuel oils for domestic consumption in Kuwait and for international markets— primarily in Asia. Estimated capital costs for the refinery are in the range of 4 billion Kuwaiti Dinar (about US$15 billion). The legacy AMEC Group (now Amec Foster Wheeler) was retained by KNPC as the PMC in December 2012. Contracts for the main EPC packages for the construction of the project were issued in October 2015.

P hoto : © H unny A lrohaif , via CC BY 2.0

As PMC, Amec Foster Wheeler’s primary risk management responsibilities include: • Managing the overall project-execution risk, • Developing, implementing and maintaining the project risk management plan and supporting guidance documents, • Maintaining the project risk register, • Integrating inputs from the individual risk registers for the EPC contractors into the overall project risk register, and • Providing assurance for the project risk management function at the overall project level and at the individual contractor level. Project Risk Management Process Risk is considered an effect arising from the occurrence of an event. ISO 31000 @ 2.1 defines risk as “the effect of uncertainty on objectives.” An effect is a deviation from the expected, either positive or negative. Positive deviations include opportunities to enhance the achievement of an objective. Negative deviations include threats that impair the achievement of an objective ( ISO 31000 @ 2.1, NOTE 1 ).

Establishing the Context

Risk Assessment

Risk Identification

Comunication and Consultation

Monitoring and Review

Risk Analysis

Risk Evaluation

Risk Treatment

2 9

J AN UA R Y/ F E B R UA R Y 2 016

i n n o v a t i o n