Energy OIL S WILD RIDE DRIVING COST EFFICIENT OPERATIONAL RISK MANAGEMENT AUTHORS Keric Morris, Partner Susie Scott, Principal Damian West, Principal
BALANCING COST-CUTTING AND SAFETY The recent steep decline in oil prices is putting pressure on oil companies to cut costs without compromising risk management or safety. During the latest boom, the industry increased focus on technological innovations around automation and controls. This helped to push the boundaries of what is possible, particularly in areas such as deep water and unconventionals, but it came with new risk, with both incidents and near misses still very much part of day-to-day delivery. In the coming months, the ever-present drive to improve processes, maximise asset availability, and reduce costs will become a core mantra of delivery. Managing those pressures without compromising risk exposure and safety means blending various agendas, from cost management to maintenance delivery to safety, and utilising the insights from a wide variety of data streams. Effective management of these elements not only provides an insurance policy against major failings, but offers a rigorous analytical approach to targeted cost reduction by removing redundancy and streamlining processes. In reviewing major incidents over the last decade, while many of the core drivers were different, themes of leadership, behaviours and culture have been common to all of them. While the technical lessons from these incidents have been learned and applied, avoiding significant incidents while driving for efficiency, will be critical. Getting the balance right between the cost down message, while still effectively managing risks in an ever more complex environment will require technical expertise to know when lines are being crossed and leadership making a clear stand on driving business transformation in a thoughtful risk adjusted way. 2
THE OLIVER WYMAN APPROACH Any business with significant upstream exposure has already signaled, through portfolio shifts and cost reduction programmes, the depth of change that is coming. The effects of this are being felt across the entire value chain creating price pressures and the need to drive operational change. This will create constraints on what can be achieved with the emphasis on significant reductions and a nimble approach to market delivery. In order to deliver across the various departments and systems, a hypothesis-led data mining approach is needed that gets around big process and system implementation. The focus is on targeting major risks or changes that can add significant value to the business. Exhibit 1: Creating an integrated approach to business delivery MAINTENANCE AND RELIABILITY HSE AND RISK MANAGEMENT Reliability-centered maintenance (RCM) process Reliability-centered maintenance (RCM) process Asset function Functional failure Failure modes Failure effect Incident identification Hazard and risk analysis Failure modes Controls identified Maintenance cost benefit analysis Controls cost benefit analysis 1 Integrated critical equipment list Plans reviewed against each other for synergies and priorities Reliability-centered maintnance plan Controls implementation and assurance plan Risk register Availability data Oliver Wyman Reliability Analytics Engine (RAE) 2 Safety incident database Mechanical incident database Reliability data 1. Oliver Wyman Risk management control effectiveness 2. Proven approach that aggregates data to drive decision-making 3
The process starts by working with business leaders to define the areas of focus. Once those have been defined, through working with front line staff and systems, data is extracted and then mined in a customised analytical (systems agnostic) engine to create unique insights. From this a number of short- and long-term solutions are developed. The elements explored in this approach can include: Correlation of core data across assets (maintenance execution data captured on outages or failures, work order management, inspection, infrastructure investment, etc.) to match activity to resources or capabilities to streamline delivery and remove redundancy. Analysis of data from maintenance, safety, and inspections to drive better operating condition and capital-investment-based decisions. Review of core risks, barriers or means of containment, and their actual efficacy (based on output data) in order to streamline processes for maintenance and safety delivery (see Exhibit 2 below). Exhibit 2: Process and Barrier effectiveness analysis SAFETY AND OPERATIONAL PROFILE DEVELOPMENT REVIEW PROCESS CLARITY AND EFFICACY THROUGH DATA ANALYTICS FOCUS ON KEY PROCESSES AND CONTROLS, REMOVE REDUNDANCY Review current risk management and reliability approaches Overlay onto the bow ties to highlight barriers and controls to understand current management approach Invest and develop focus on the key controls that mitigate the relevant and critical safety and operational risks Provide assurance that the identified key controls are being measured and improved Reduce or remove the most ineffective controls while keeping the risk profile the same Enable reprioritisation of resources to controls that can be made more effective against the critical risks An integrated process for identifying and managing the (process) safety and the reliability risks to improve their management and reduce duplication of effort. Correlating core data using incident root cause analysis, process delivery, maintenance data, etc., across assets to improve standardised work instructions. Review of core reliability drivers the main drivers of outages in order to improve asset availability. 4
This approach can review and refine the new areas of improvement (risk and cost management) and proposed changes to core processes through broader operational cost-cutting programmes. The benefits to the business of this approach are considerable, spanning capital expenditures, operating expenditures, risk management, and broader cultural change. The approach is focused primarily on simplification of effort and cost reduction, while driving better levels of risk management. It also focuses on driving decision making to the front line, but through a better understanding of risks and the provision of stronger processes and standards to support those decisions. While this gives short-term benefits that will support the broader drive to reduce costs, the analytical engine approach can then be used as both a long-term issue resolution and a monitoring tool to track the effectiveness of delivery. Exhibit 3: Driving value through more effective cost and risk management CURRENT OPERATING 0% BUDGET (OPEX) 100% Reducing costs while driving performance through targeted interventions REDUCING OPEX REQUIREMENTS/ FOCUSED CAPITAL SPENDING Uses reliability and safety analytics to target capital spending in areas where replacement or redesign will deliver the greatest benefit (removing unnecessary maintenance from the Opex budget) Supports the reduction of capital budgets through more targeted spending based on operational analytics RISK-BASED OPERATIONAL HSE DELIVERY Drives barrier effectiveness by focusing on and managing key risks. Uses analytic engine to correlate safety and reliability data. Removes unnecessary/ ineffective safety barriers (focusing investment) Drives improvements in overall HSE performance by focusing on key issues and pushing ownership toward the front line Acts as an insurance policy that focuses cost-cutting without impacting risk management RELIABILITY-CENTERED MAINTENANCE Integrates the safety and reliability worlds to improve maintenance and safety efforts and move toward a predictive reliability state. Focuses on core drivers of asset availability and reliability Has the additional benefit of pulling together operations, maintenance, and safety/risk teams to streamline activity 5
The overall dynamics in oil and gas are changing to a more market-led approach, and while the drop in oil prices is only a short-term phenomenon, the return to oil prices at mid-2014 levels is some way off. Developing a risk-based methodology to support short-term structural change will drive value and support robust decision-making, ensuring that the cuts made are not significantly increasing risk. However, developing the approach for the long-term is a key enabler for deeper understanding of the business and balancing of risk and reliability in an ever more complex world. 6
This article is part of a series that explores the impact of the 2015 market disruption on the global oil and gas industry. MARSH & MCLENNAN COMPANIES APPROACH TO MANAGING THROUGH THE DOWNTURN PMI in the downturn Using M&A in the downturn to reposition the business Optimising JVs Creating more flexible joint-venture approaches Innovative Supply Chains Redesigning and cutting risk in supply chains OIL S WILD RIDE REDESIGNING THE OPERATING MODEL Managing Risk, Driving Efficiency Blending operational excellence and risk management to drive value The Talent Continuum Using a data approach to drive strategic human resources delivery Process Standardisation Driving for repeatable, low-cost processes Regulatory Change Influencing regulators to reflect market changes Right-Sizing IT Driving performance from existing investments 7
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