Non-technical risks (NTR) refer to all risks and opportunities that arise from the interactions of a business with its broad range of external stakeholders. This includes interactions with regulatory, public, socio-economic, governmental and environmental organizations, for the management of related aspects of a project’s operations.
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| Communities' resistance is one of the key Non-technical risks |
Management of Risk in Oil and Gas Companies
Oil and Gas companies pride themselves on managing risks, putting into place effective mitigation to ensure both the technical and financial aspects of any large project are identified and managed, to deliver on time and on budget.
Because oil and gas projects are major engineering undertakings, there is the tendency to apply ‘engineering’ sense to addressing the NTRs or to underestimate its impact on project delivery and value.
Non-technical risk does not lend itself to the logic of risk management and quantification of the way the extractive industry has traditionally managed the technical risk. Traditional risk management where engineering solutions are applied to problems will not eliminate NTRs. It might be possible through the use of technology to reduce the environmental footprint of a project but that does not completely eliminate the social impact.
However, the impact of non-technical risks on project delivery is not easy to quantify. There are numerous cases where the project manager has failed to recognise the significance of non-technical risk, or the project team and the company have a wrong understanding of what non-technical risk are, and hence, unable to figure out how best to deal with it.
The tendency is then to focus on the technical challenges which are in the ‘comfort zone’ of the engineering expert leading the project. The non-technical issues are then left to the less capable hands within the team. They are treated as an “add-on” and not as an integral part of the project.
What is the Impact of Underestimating Non-technical risks?
Historical data informs us that non-technical risks are the most common cause of project delays ( up to 70 per cent of major capital projects are subject to significant delays or cost overruns as a result of non-technical risk (NTR)), and have the potential to cause significant erosion of project value when they manifest at project level and in extreme cases significant portfolio value erosion, when they manifest at corporate or industry level.
According to Breemer and Mckeeman (2012), NTRs of this nature account for up to 70 -75% of cost and schedule failures in projects in the form of schedule delays and cost overruns, local deal opportunities, and a host of stakeholder related issues.
In its study of the cost of company-community conflict in the extractive industry, Davis and Franks (2014) discovered that companies incur substantial cost and value erosion from community disruption. The study identified the most frequent costs as those arising from lost productivity due to temporary shutdowns or delay, while the greatest costs were the costs in terms of the lost value linked to future projects, expansion plans, or sales that did not go ahead. The costs most often overlooked by companies were indirect costs resulting from staff time being diverted to managing conflict – particularly senior management time, including in some cases that of the CEO.
In the paper, ‘Managing human rights impact in a world of converging expectation’, John Ruggie (2011) illustrated how a failure to develop a cross-functional strategic response to non- technical risks related to social impact can have a devastating effect. A company in the extractive industry suffered $6.5 billion value erosion over 24 months due to non-technical risk, including community opposition and delays in regulatory approval.
Failure to manage community relations well could result in prolonged community opposition which in turn leads to denial of planning permit by a regulatory agency. All these will result in significant project delays with associated cost overruns. Late submission of application for a regulatory permit could mean the permit is not available when project activity should commence.
Data shows over 124 major North American Energy Projects were delayed between 2008-2014. Of those projects, 33% were delayed for purely non-technical reasons while a large majority included non-technical reasons. The total estimated cost for these non-technical delays is estimated at $118 billion USD. This is because non-technical delays take the longest to address and are the most expensive to resolve.
Understandably, senior executives across the energy industry commonly view non-technical risk as one of their top three current concerns.
How to Maximise Value and Mitigate NTR Impacts
Recognising that there were opportunities to improve the cycle of project development, significantly improve project value as well as enhance the company’s access to new opportunities, a major oil and gas company developed a company-wide best practice process for the identification and early management of NTRs at the project level.
As the project lead, I was tasked with identifying NTR best practices and successes in projects that had enabled project delivery and use this data to develop a tool-kit to be shared with, and implemented in, the organisation. By identifying best practice, which had demonstrated success, rather than focussing on lessons to be learned, this was a unique approach.
Basic factual data, together with quantitative and qualitative information was obtained through a series of structured interviews with key project personnel who had demonstrated success in project delivery. Using more than one member of the project team in the interview process, enabled the triangulation of the facts and ensured the data was verified.
Semi-structured interviews were set up which followed a format of initial broad open-ended questions, encouraging the interviewee to tell a story and then using funneling techniques to gain more specific information on critical areas identified. The role of the semi-structured interviews was to collect facts, views and opinions from key Project personnel.
The interviews were designed to be loosely structured, the focus being on exploring the interviewees’ perspectives with the emphasis on allowing and facilitating the interviewee (s) to express ideas and thoughts on the subject being explored.
Based on open-ended questions, followed by further probing and investigation to elaborate or illustrate the answer with examples, the structure of the interviews allowed for the production of rich and complex data.
Each interview was recorded and transcribed word for word. These data were analysed to identify themes, patterns and categories that enabled the delivery of a final report that demonstrated how effective management of NTR had made these projects successful.
The Report that was developed, identified 6 key themes which were considered essential in ensuring robust NTR management. The Themes were:
- True Understanding of Stakeholder Needs
- Drive Front End Loading
- Get One Team Fully Resourced
- Work the Stakeholder Matrix
- Ask for Help Early
- A Real TECOP Integrated Schedule
The next articles in this series will explain each of the 6 Themes and detail the building blocks, steps and processes involved in the road-map to meet each objective and include what success looks like.
ABOUT THE AUTHOR
Phil Dyer. Recognized as someone who supports change, drives and changes behaviors, and creates a supportive environment, while encouraging risk-taking and supporting a reward culture. Phil had a key role in advising Directors on issues and stakeholder management and developed key relationships with senior management. Working at both local/national/regional and group level and managing diverse teams, both virtual and actual, he established good networking skills with functions and business at all levels in the organisation from Directors to operational level.
The article was written specially for Think Tank AlterContacts.