Westney Consulting Group
2200 West Loop South
Suite 500
Houston, TX 77027
Phone: 713-861-0800
Toll Free: 800-648-3475
Email: info@westney.com

Risk Analysis

Understanding the true risk exposure in a capital project is essential to balancing risk and reward. 

Conventional project risk management typically focuses on "known - unknowns." These are the risks that project teams can control and which are usually covered by contingency. Of course, the "trainwrecks" many major projects experience are seldom caused by these known - unknowns. An improved approach must recognize the strategic risks that require management attention and are the most frequent cause of failed projects.

 
 

Westney’s Risk Resolution® methodology is the foundation for the company’s suite of services in project risk management.  Working as an independent expert, and using proprietary analytical methods for probabilistic analysis of cost, schedule and NPV, Risk Resolution® provides a complete and unbiased view of all major risks to a successful outcome, including the drivers of risk exposure and strategies for mitigation.

 

Project risk analysis usually begins by addressing financial stakeholders’ concerns about capital cost, and for good reason.  Research into the reasons for cost overruns generally identifies optimistic cost estimates as the primary cause.  So a realistic, unbiased assessment of all project risks, and the true level of risk exposure they create, is the only way to overcome the systemic causes of optimism and overconfidence. Westney’s Risk Resolution® methodology defines risk exposure as a probabilistic range of cost and time outcomes that reflect all areas of risk and uncertainty.

The Risk Resolution® process develops a probabilistic view of Cost- and Time-Risk Exposure and includes the four steps outlined below.

While cost overruns can result in significant funding issues, schedule delays often have a greater impact on project economics.  The Westney Risk Resolution® methodology includes a special technique for Time-Risk Modeling that uses a purpose-built risk model.  Based on hard-logic dependencies, the Time-Risk Model overcomes the deficiencies associated with conventional methods.  It integrates the key tasks and milestones from the commercial, financial, technical, and execution functions in order to develop a clear picture of time-risk exposure based on all sources of risk.

Owner/operators often rely on cost estimates from engineering contractors as the basis for funding.  These usually exclude provisions for owner-driven and external risks.  Westney’s teams use Risk Resolution® techniques combined with deep knowledge of cost estimating to translate the contractor’s estimate into an owner/operator’s budget that provides for all owner costs and risks.

 

Proxy Net Present Value (NPV) Modeling

When all things are considered, what decision makers require most is a risk-informed view of profitability.   The size, complexity, number of interfaces and level of uncertainty surrounding major projects today mean that decisions that used to be straightforward can no longer be properly addressed based on intuition and/or analysis of a single variable such as cost.  In fact, there is only one metric where the interaction of all project variables (including costs, revenues, and timing) comes together and that is profitability as measured by NPV. 

Westney Risk Resolution® provides the capability to develop a probabilistic view of NPV, one that reflects the uncertainties in all the variables that drive profitability.  By developing the probabilistic NPV for each strategic alternative, value-based comparisons and decisions can be made.  Examples include selecting among alternative projects that are competing for a fixed pool of funds, evaluating the risk and reward of a proposed investment, and setting the parameters of a development strategy.

 

Sanction Readiness Reviews

When a project is brought forward for the final investment decision, decision-makers must judge if it is truly ready to proceed.  This question not only occurs at the Final Investment Decision, but also much earlier, at the “de-facto sanction” prior to funding Front-End Engineering Design (FEED).  In both cases, readiness is the key, and it depends, not only on the amount of scope and design definition work done, but also on the completeness and confidence of the full range of value drivers.  The diagram below shows the 5 key focus areas that determine readiness for sanction. Westney’s Sanction Readiness Review is an independent expert assessment across all drivers of economic value, and provides a numerical metric that is specific and actionable.