OFFENSIVE PROJECT RISK STRATEGIES

1. Project owner Engineering contractor General contractor Project functional units/ Sub-suppliers Contractual governance OFFENSIVE PROJECT RISK STRATEGIES Per Willy Hetland Statoil Project Academy

2. ADAPTING TO NEW REALITIES • The new wave in project management • New realities for managing projects • New leadership principles • New project challenges • New competencies • Shift in mindsets • Change of behaviour • Excerpts from Statoil Project Executive Programme

3. Maturity Enhancing Business Value Execution Excellence Time 1950 2000 THE NEW WAVE IN PROJECT MANAGEMENT

4. Corporate Business Strategies New Competencies Project Business Value Change of Behaviour New Project Challenges Leadership Principles Shift in Mindset NEW REALITIES FOR MANAGING PROJECTS

5. NEW LEADERSHIP PRINCIPLES • Stimulating new ideas and creativity • Chasing business opportunities • Challenging accepted truths • Entering unfamiliar territory • Setting ambitious targets That increase uncertainties and risk simultaneously sharpen personal accountabilities to deliver as promised

6. NEW PROJECT CHALLENGES • Increasing variety and complexity • New technology • New business practices • Unfamiliar locations • Turbulent geopolitical contexts That require new and enhanced project competencies

7. NEW COMPETENCIES Craft and apply project execution strategies that: • Enhance business value • Over the complete project life cycle • Considering uncertainties, risks and opportunities • By applying the new leadership principles The new world for project managers requires a step change from the past practices where focus was on delivering projects as specified on time and within budget to deliver project business value

8. THE PAST Deliver as specified on time and within budget Comply with prescriptive project execution proceedures Business Strategy Concept Development Quality (Performance) Cost Time Project Execution Planning

9. THE PRESENT Stage gated approach to reduce risks Align project execution to project strategy Concept Development Business Strategy Strategy Project Execution Planning Quality (Performance) Execution Cost Time

10. THE FUTURE Leadership driven project value enhancement Drive project business value and master risks 3 4 1 2 • New Project Challenge (1) • Shift in Mindset (2) • Added Knowledge (3) • Change of Behaviour (4)

11. Context Context CHANGE OF BEHAVIOR ME M0 PE Alumni M1 M4 Skills Skills Turning Business Opportunities into Project Strategies Driving Execution Excellence New Knowledge Explorative Behavior Delivery-oriented Behavior M3 M2 Skills Skills Adaptive Behavior Adapting to geo-political context Context Context

12. THEORETICAL FRAMEWORK • Project strategies • Project environments • The project supply chain • Project eco-systems • Project contract archetypes • Conventional pricing • Conventional dilemmas • Alignment of interests • Incentive contracts

13. Business opportunity Development planning Production start-up Value potential Value creation Value delivery Abandon Hand over Sanction Implementation Development Project Execution Sanction Hand over PROJECT STRATEGIES The project owner perspective

14. External environment Supplier’s internal project environment Supplier’s external project environment PROJECT ENVIRONMENTS

15. Vendor information CV Materials NV Material Take Off IC EC Services MS Drawings FC Modules THE PROJECT SUPPLY CHAIN Horizontal ties

16. Project owner O 1st tier suppliers V IC FC 2nd tier suppliers THE PROJECT SUPPLY CHAIN Vertical ties

17. Project owner Engineering contractor General contractor Project functional units/ Sub-suppliers Contractual governance PROJECT ECO-SYSTEMS The General Contractor Structure

18. Commercial Aspects Incentivised Concepts Conventional Pricing Legal Aspects Aspects of Trust Market Contracts Relational Contracts Partnering Contracts PROJECT CONTRACT ARCHETYPES

19. Probability Motivational effect - + Cost EV(P) EV(0) EVC Competition Moral hazard Cost Based Contract Price Based Contract Risk premium HR LR - + Client net benefit CONVENTIONAL DILEMMAS

20. Supplier interests (fixed price contracts) Conventional pricing formats Incentivised contracts Supplier interests (reimbursable contracts) Owner interests ALIGNMENT ON INTERESTS

21. Contractor’s Profit margin Estimated Contract costs Risk free “bid” Gain sharing Fixed price bid Calculated Risk premium Calculated Profit margin Contractor’s Costs Risk Cap Client incentive Risk transferred to customer Contractor incentive INCENTIVISED CONTRACT

22. OFFENSIVE RISK STRATEGIES • Vive la difference! • Projects are different • Strategies are different – effectiveness or efficiency • Strategies are different - determinism or dynamism • Strategies are different - implications for project risks

23. VIVE LA DIFFERENCE !!! • Projects are different • Project environments are different • Project strategies are different Robustness Resilience DEFENSIVE ADAPTIVE Agile Versatile Malleable OFFENSIVE

24. More of the same (status quo) Radical change Closed Open Don’t know what to do But can’t stay here (quo vadis) Incremental improvement PROJECTS ARE DIFFERENT

25. Customize Increasing effectiveness Reuse Innovate Increasing efficiency Standardize STRATEGIES ARE DIFFERENT I

26. PROJECT OBJECTIVES Stretched targets Functional specifications Guidelines Fuzzy specifications Value engineering Defensive concepts Re-engineering DEFINITIVECONCEPTS Adaptive concepts Offensive concepts OPTIONVALUE PROJECT DYNAMICS STRATEGIES ARE DIFFERENT II PROJECT PROCESSES

27. Definitive concepts Detailed specifications Defensive concepts Fuzzy specifications Increasing execution risks Project sanction Functional specifications Adaptive concepts Stretched targets Offensive concepts Moving targets STRATEGIES ARE DIFFERENT III

28. PROJECT RISK FACTORS • Project internal decisions • Project external decisions • One-directional state variables • Two-directional state variables

29. PROJECT INTERNAL DECISIONS + Doing the right things Doing things right Random variations Opportunity management IMPACT ON CAPEX, LCP, NPW FREEDOM TO ACT Risk management Doing things wrong Doing the wrong things _

30. PROJECT EXTERNAL DECISIONS IMPACT ON CAPEX (-), LCP, NPW + Opportunity management Proactive involvement INTENTIONAL DISRUPTIVE Constructive dialogue INTENTIONAL SUPPORTIVE Reactive critique Incompetence Interference Attack _ Risk management

31. ONE DIMENTIONAL STATE VARIABLES IMPACT ON CAPEX (-), LCP, NPW + Planned for FORCE OF VARIABLE Cost of Risk buffer Worse case scenario Cost of resilience measure if activated _

32. TWO DIMENTIONAL STATE VARIABLES IMPACT ON CAPEX (-), LCP, NPW + Sales prices Planned for FORCE OF VARIABLE Decrease Increase Break even Factor prices Loss Bancroft _

33. IMPACT OF OFFENSIVE MEASURES • Offensive management of uncertainties • Contractor influence on CAPEX • Influence on Life Cycle Profit, LCP • Influence on Net Present Worth, NPW

34. OFFENSIVE MANAGEMENT OF UNCERTAINTY p CE EV DEFENSIVE STRATEGIES p EV CE NPW Cost of risk p OFFENSIVE STRATEGIES NPW Cost of risk Increase opportunities Reduce risks NPW Cost of risk

35. CONTRACTOR INFLUENCE ON CAPEX CAPEX Influence • Potential risks in • Decision variables • Owner’s decisions • Contractor decisions • Effects of sunk cost Sanction Contract award Give away value potential In lump sum contracts TIME

36. INFLUENCE ON LIFE CYCLE PROFIT 1 Start production 4 Planned downtime 2 Production built-up 5 Unplanned downtime 3 Plateau production 6 Start tail production 7 Abandoning LCP Added value 3 6 2 Project sanction 7 1 4 5 TIME

37. INFLUENCE ON NET PRESENT WORTH NPW Option value: Investments in future extensions Corporate risk exposure: Portfolio relevant risks Corporate strategy risk Reputation risk TIME Sanction Hand over

38. ADAPTING TO NEW REALITIES • Clients don’t buy project deliveries anymore • They buy project business value