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Study and Analysis of Refinery Project Risk with Composite Factor Method

Conference Paper · October 2016

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Study and Analysis of Refinery Project Risk with Composite Factor
Method
P. M. Deshpande1, R. Singh2

Abstract
In refinery projects, the scope involves the number of packages as plants and machinery. The
refinery process plant is outcome of execution of process and plant design, through different
phases of project. This involves a number of activities to complete the project. Risk is inherently
associated with these activities and a few risks are repetitive; occurring in different phases. This
paper discusses a method of measurement of project risk, based on the composite factors for
estimating the expected value of risk. Primarily, it comprises cost and schedule risks associated
with each activity of the project network. The major risks are identified and quantified in terms
of likelihood and impact in construction, which is related to civil and mechanical work. The risk
contributing factors are evaluated by the response from the experts associated with refinery
project. The risk analysis for determination of risk cost, risk time, probable cost and probable
time of the project has been carried out. In this method, the Base Time Estimate (BTE) and Base
Cost Estimate (BCE) of major activities of the project and their work packages are considered
for evaluation of risk. The corresponding Corrective Time (CT) and risk time for specific activity
and its Corrective Cost (CC) and risk cost is considered. To evaluate the risk the likelihood and
impact of ‘Cost Risk’ and ‘Time Risk’ is estimated along with its weightage. The weightages are
such that the summation of weightages of all the activities of a particular work package is equal
to 1. The Composite Likelihood Factors (CLF) and Composite Impact Factors (CIF) are
estimated by considering the above parameters and its association with individual activity or
work package of the project scope. The different risks of project shall be analysed by this
methodology.

Keywords: Risk Assessment, Composite Factor, Risk Analysis, Probable Cost, Probable Time

1
Senior Associate Professor, National Institute of Construction Management and Research, Pune. Email:
pdeshpande@nicmar.ac.in,
2
Assistant Professor, National Institute of Construction Management and Research, Pune.
1. Introduction
Refinery projects are long duration projects and involve complex engineering. For project
management, such complex deliverables require to implement different management techniques
to ensure deliverables in time. The refinery projects involve complex engineering, and project
management environment; it is usually delayed and results in time and cost overrun. The risk
management principles and techniques can predict and assess such situations. The qualitative
assessment of project environment leads to indentifying risk occurring situation. For effective
implementation of project, there is a need to quantify the risk. The technique of composite factor
for quantifying risk, leads to analysis facilitating risk management decision. The method is
discussed in subsequent sections. In refinery projects, Engineering-Procurement-Construction
(EPC) contractors, process equipment suppliers and service provides are major stakeholders; in
such an environment, risk management decision can be carried out effectively by investigating
and identifying the sources of risks associated with each activity of the project along with its
phase of occurrence. Risks are assessed in terms of the likelihood and impact of the risk, if it
occurs. Implementing risk management process in project environment results in increased
predictability, openness about project control and resolves uncertain issues; hence risk
management approach results in vital contribution to the proficiency of project management of
refinery projects.

2. Literature Review
The review of the literature indicates that risk management principles and methods ensure
proficiency and control of engineering project environment; following is the review of relevant
techniques.

Dey (2001) proposed integrated project management model considering risk as one of the factors
for Indian petroleum industry projects. The risk analysis exercise is carried out for respective
work packages considering local percentage (LP) basis and the summation of the likelihoods of
all the concerned work packages to be equal to one on global percentage (GP) basis.

Jannadi and Almishari (2003) elaborated different risks in refinery projects contributing to
project planning. These risks pertain to uncertainties of the technical, schedule and cost
outcomes. They developed a risk assessor model (RAM) for assessing the risk associated with a
particular activity and tried to find out a justification factor for the proposed remedial measure
for risk mitigation. Peterson et al. (2005) worked on risk analysis based on decision tree analysis
as risk for complex project, and quantified the same, along with responsibilities for owning and
handling the risk for project management. Diekmann and Featherman (1998) developed a project
cost uncertainty assessing model based on influence diagramming and Monte Carlo simulation
where as John (2003) proposed Cumulative Likelihood Factor (CLF) for risk analysis. Dey
(2002) and Ogunlana et al. (2002) suggested that conventional project management techniques
are insufficient to ensure time, cost and quality achievement of a large scale construction project.
They proposed risk management technique considering the projects ‘life cycle’. Dey (2002)
developed a tool for risk analysis, with the analytic hierarchy process (AHP) model which is a
multiple attribute decision making technique.

Rahman and Kumaraswamy (2002) proposed joint risk management (JRM) concept, they
generally preferred to assign reduced risks from either one or both contrasting parties to JRM,
rather than shifting more risks to the other party. This is indicative of the fact that more
collaborative effort and team based work can reduce the risk component of a project.

The method proposed in this present paper develops a comprehensive method for risk
quantification, drawing upon the work packages’ and activities’ description as detailed in the
Work Breakdown Structure (WBS). The paper combines these descriptions derived from the
WBS with the composite factor methods for not only the likelihoods, but also the impacts of the
risks involved. Thus the method is more comprehensive in its coverage, as compared to the
earlier methods like Dey (2001), who only took the summation of likelihoods, ignoring the
impacts and not utilizing a composite-factor based synthesis; and John (2003), who applied the
composite-factor method only to the likelihoods and not the impacts of the risks.

The present paper takes into account the uncertainties associated with both the cost estimates and
the time estimates of each activity; and integrates them with the Composite Likelihood Factors
(CLF) and Composite Impact Factors (CIF) to estimate the composite risk at each work package
level and finally at the overall project level. The technique has been illustrated by taking a
sample work package in a refinery construction project. This method is based on assessment and
analysis of work packages and does not consider the float.

3. Refinery Construction Project Risk

The refinery is a continuous process plant; the major stakeholders are the process licensees, and
EPC contractors along with the work packages vendors and subcontractors, who are providing
the expertise and services along with supplies. The technical detailing of the project is process
engineering oriented, and leads to different risks in project management and operations. Various
risks exist depending on phase of the project, the same are indicated below in Table 1. For
refinery construction project the following model is adapted as indicated below in Figure 1.

Table 1: Typical Construction Risk Categorization

Technical Construction
Legal Natural
Logistics Social
Economic Financial
Commercial political

Figure 1: Project Management Process Flow Diagram

The contributors to the project construction are EPC contractor, technology providers and work
packages suppliers. The integration of supplies for continuous process is a major factor for
operation of refinery project to get the desired capacity. Hence risk assessment helps in
integrating the engineering and project management. Figure1 indicates the project management
process. The different risks associated with the project and its phases are indicated in Table 2, as
generic risks of refinery projects.
Table 2: Construction Phases and Risks
Development Pre- Construction Operational Transfer
construction Risk Termination
Phase Phase phase
Phase

Legal Risk Bidding Risk Operational Risk Start up Risk Financial risk

Market Risk Legal risk Legal Risk Market Risk Legal Risk

Finance Risk Technology Risk Delay Risk Management Political Risk

Risk

Force Majeure Risk Force Majeure Risk Performance

Risk

Political Risk Technology Risk Legal Risk

Resource Management Risk Performance

Mobilization Risk Risk
Environment risk

Safety risk Financial Risk

4. Methodology
This paper uses two correlated mechanisms for risk assessment. The first mechanism uses
estimation of risk time and risk cost to determine the probable cost and probable time of all the
activities in the critical path. This can be used to estimate the total probable cost and probable
time for the overall project. The second mechanism is used for estimating the CLF and CIF for
all the risks involved in the project. This is then used for estimating the risk severity factors for
all the project risks. The details of these two methodologies are given in the following sub-
sections.
4.1 Probable Cost and Probable Time Estimation
A project is composed of several work packages. In each work package, there are several
activities. For each activity, the Base Cost Estimate (BCE) and the Base Time Estimate
(BTE)can be obtained from the work package specifications, project drawings and expert inputs.

Suppose there are ‘p’ work packages in a project, and ‘a’ activities in each work package. The jth
activity has a base cost estimate of BCj and a base time estimate of BTj. The expected failure cost
or Corrective Cost (CC), and the expected failure time or the Corrective Time (CT) can be
estimated from historical data as well as from expert opinion. The corrective cost for the j th
activity is CCj, and the corrective time for the jth activity is CTj. The corrective cost and the
corrective time are measures of the impact of the risk associated with an activity. The likelihood
of occurrence of a negative risk event associated with the jth activity is Lj.

From the basic principle of risk it is known that the quantum of risk associated with an activity is
given by the product of the likelihood of occurrence of the risk event and the impact of the risk
event. The quantum of risk associated with the jth activity can be measured in terms of Risk Cost
(RCj) and Risk Time (RTj), given by Eqs. (1) – (2).

The two factors, RCj and RTj, sum up the quantum of risk associated with the cost and time
estimates of the jth activity. Along with these direct effects of risk, there might also be some
Opportunity Cost (OCj) arising due to the occurrence of the risk event. These factors can be
combined together with the BC and BT estimates to find the Probable Cost (PCj) and the
Probable Time (PTj) of the jth activity. These are given in Eqs. (3) – (4).

The total PC and PT for a work package is the summation of the PC and PT of all the activities
in that work package. Similarly, the PC and PT for the overall project is the summation of the PC
and PT estimates of all the work packages in the project. Thus, Eqs. (5) – (6) give the total PC
and PT for the project.

4.2 Composite Factor-Based Risk Assessment

The second approach discussed in this paper defines composite likelihood and impact factors for
risk assessment of a project. This method breaks down the total project risk into risk related to
the different work packages. The risk assessment is carried out at two different levels – first, at
the work package level, where the risks associated with the individual activities is considered;
and, second, at the overall project level, where the results from the work package level are used
to come up with the overall risk rating of the project.

4.2.1 Work-package Composite Factor Assessment

All the activities in a work package are assigned weights, wj, in order of their importance, or
criticality, as per experts’ opinion. These weights are also known as local priority (local, because
it corresponds to the priority of the activities in a work package). The summation of the weights
assigned to all the activities in a work package, ∑wj, should be equal to one. Similarly, the
likelihood of risk associated with each activity is also assigned as Lj; and the impact of that risk
is assigned as Ij. Each of these wj, Lj and Ij have a value between zero and one. A value of wj
close to zero indicates that the activity is least important, and a value close to one indicates that
the activity is very highly important. Similarly, the closer the value of Lj to zero, the less likely is
the occurrence of the risk event associated with the jth activity, and vice versa. The same is true
with the values of Ij as well – the closer the value of Ij to zero, the less severe is the impact of the
risk event associated with the jth activity, and vice versa. These values can be determined from
the experts’ opinion, as well as from historical data for similar projects.
Based on these values, the overall risk likelihood and risk impact for the work package
containing ‘a’ activities is determined by the CLF and the CIF as given in Eqs. (7) – (8).

The total risk associated with the given work package can be quantified as the product of the
CLF and CIF of the work package, as shown in Eq. (9).

4.2.2 Project-level Risk Assessment by Composite Factors

As stated before, the overall risk likelihood and risk impact for the complete project is
determined from the CLF and CIF values of the individual work packages. For this purpose, each
work package is assigned a weight, Wj, proportional to its importance, or criticality. This is
known as global priority. The summation of all these weights ∑Wj should also be equal to one.
Thus, for a project containing ‘p’ work packages, the overall risk is determined as shown in Eq.
(10).

5. Case – Refinery Construction Project

The aforementioned methodology has been applied to the assessment and analysis of risk of
refinery construction project as case study. The scope of the refinery area construction project
under consideration includes:
i) Construction of Civil & Structural Works for Pipe rack,
ii) 1x20 MW Captive Co-Generation Plant & Day Tank Project

The details of the scope are as follows:

1) Civil & Structural Works: Civil & Structural Works in Utilities and Offsite for Pipe rack,
SWS area, Air Compressor, Euro IV Tank Farm and other Miscellaneous Civil Works for Cable
trench, Road crossing and Sleepers.
2) Civil & Structural Works for 1x20 MW Captive Co-Generation Plant:
1x20 MW Captive Co-Generation Plant including Switch Gear Building (G+3), Common
Control Building (G+2), Gas Turbine Generator Hall, Duct Bank, Pull Pit, Pipe Enclosure, Pipe
Sleeves, Equipment Foundation, Auxiliary Transformer Yard, Diesel Generator Hall, Cable
Trench, Pipe Rack 1, 2 & 3, Chimney, Grade Slab, Road Work, etc.
3) Civil & Structural works in utilities & offsite at Refinery -I & II Areas for Pipe racks, GTG
Day Tank form area and other miscellaneous works for cable trench, Road Crossings, sleepers
and Pipe supports.
As a demonstrative example, the work package of Piles installation (Execution phase) of the
project has been considered. The corresponding network diagram is presented in Fig. 2.

Figure. 2: Network Diagram for Piles Installation for Refinery Area Construction

The Critical Path for Refinery Area construction is A – B – C – D – E – G – J – K – L – M –N

and duration is 530 days. The details of the activities in the critical path are as follows:
A – Traffic Diversion
B – Utility diversion (Electrical / Cables)
C – Utility diversion (Sewer / Water Line)
D – Pile point marking by surveyors
E – Trial Pit Excavation
F – Procurement of Steel and Pile fabrication
 G – Driving of temporary casting & Boring Operation by Hydraulic Rig
H – Lowering of Steel section into bored pile
I – Inspection and testing of Fabrication pile
J – Testing for Pile depth and Bentonite Properties
K – Flushing for obtaining desired Bentonite Properties
L – Concreting of footing
M – Back Filling with cement bentonite mix and 20mm Aggregate / Fine sand
N – Removal of temporary casting

6. Assessment And Analysis

The above scope and work packages are assessed for associated risk using “probable cost and
probable time estimation” method as explained earlier. The above method is coupled with
composite factor assessment of construction work and work packages for risk assessment. For
this assessment and analysis, the data is collected by questionnaire and personal interaction with
professionals working in refinery projects. The details are as under.

6.1 Probable Cost and Probable Time estimation of Piles Installation Work Package
The PC and PT estimation methodology described in Section 4.1 has been applied to the pile
installation. The results of the analysis are given in Table 3.

Table 3: Risk Cost and Risk Time Analysis for Piles Installation Works
Base Correct
Base Cost Likelih Risk
Time ive Corrective Weigh Risk Cost
Estimate ood of time
Activity Estimate Time Cost (CC) tage (RC)
(BCE) failure (RT)
(BTE) (CT) (Rs.) (Wi) (Rs.)
(Rs.) (Li) (Days)
(Days) (Days)
A 60 9500000 50 4275000 0.1 0.04 427500 5

B 30 9000000 23 4050000 0.3 0.06 1215000 6.9

C 90 16000000 75 8000000 0.15 0.085 1200000 11.25

D 30 7000000 25 2800000 0.25 0.015 700000 6.25

E 35 3000000 26 1000000 0.05 0.005 50000 1.3

 F 125 104000000 65 46800000 0.3 0.143 14040000 19.5

G 75 8500000 57 3825000 0.4 0.205 1530000 22.8

H 20 5100000 15 2040000 0.4 0.021 816000 6.0

I 25 17000000 20 6800000 0.15 0.03 1020000 3.0

J 60 8500000 45 3825000 0.65 0.018 2486250 29.25

K 60 3400000 60 1700000 0.4 0.15 680000 24.0

L 40 9000000 35 3600000 0.35 0.118 1260000 12.25

M 40 18232500 30 9116250 0.1 0.035 911625 3

N 10 1767500 10 530250 0.05 0.075 26512.5 0.5

530 220000000 1.00 26362888 122.5

Thus the PC for the work package is found to be Rs. 246362888, which is 11.98% higher than
the base cost estimate. The PT for the above work package has been found to be 652.5 days,
which is 23.11% higher than the base time estimate.

6.2 Risk Severity Analysis using Concept of CLF and CIF

To estimate the risk, following different risk factors are considered; to estimate composite
likelihood factor and composite impact factor
 FPR : Feasibility Project Risk
 PEPR 1: Pre execution Project Risk – Design Risks
 PEPR 2: Pre execution Project Risk – Technology Risks
 EPR 1: Execution Project Risk – Risks in traffic diversion works
 EPR 2: Risks in utility diversion works
 EPR 3: Risks in survey works
 EPR 4: Risks in piling works.
 EPR 5: Risks in Shoring works.
 EPR 6: Risks in soil excavation works
 EPR 7: Risks in Dismantling works
 EPR 8: Risks in construction of Pile cap
 EPR 9: Risks construction of Pedestal
 EPR 10: Risks in installation of anchor Bolt
 EPR 11: Risks in Fabrication of Structural Steel Works
 EPR 12: Risks in Erection of Structural Steel Works
 EPR 13: Risks in Painting of Structural Steel Works
 EPR 14: Risks in Fabrication of Piping Works
 EPR 15: Risks in Erection of Piping Works
 EPR 16: Risks in Painting of Piping Works
 EPR 17: Risks in permanent structure works
 EPR 18: Risks in backfilling and restoration works

Each risk category has been further broken down into individual risk elements. The different
elements are identified, which are contributing the risk and assessed for likelihood, impact and
weightage.

From the individual risk likelihood, risk impact and risk weightage values, the aggregate values
of risk likelihood and risk impact have been estimated for each of the risk categories described
before. This has been done as per the Composite Factor method described in Section 4.2. The
risk likelihood and risk impact are respectively represented by the CLF and CIF. The results have
been detailed in Table 4.

Table 4: Risk Severity Analysis of Total Project using the Concept of Composite Likelihood
Factor (CLF) and Composite Impact Factor (CIF)
Composite
Composite Severity
Likelihood Simulated
Project Risk Weightage Impact Quantitative
Factor Weightage
Factor (CIF) CLF x CIF
(CLF)
FPR 0.348 0.030 0.026 0.875 0.305

PEPR 1 0.356 0.035 0.034 0.775 0.276

PEPR 2 0.270 0.055 0.042 0.829 0.224

 EPR 1 0.319 0.030 0.028 0.784 0.250

EPR 2 0.262 0.050 0.044 0.809 0.212

EPR 3 0.186 0.035 0.048 0.832 0.155

EPR 4 0.280 0.055 0.052 0.787 0.220

EPR 5 0.252 0.030 0.036 0.818 0.206

EPR 6 0.377 0.060 0.042 0.863 0.325

EPR 7 0.419 0.065 0.072 0.816 0.342

EPR 8 0.398 0.045 0.042 0.842 0.335

EPR 9 0.367 0.075 0.08 0.828 0.303

EPR 10 0.345 0.045 0.05 0.860 0.298

EPR 11 0.343 0.045 0.042 0.827 0.284

EPR 12 0.306 0.040 0.064 0.806 0.247

EPR 13 0.384 0.050 0.050 0.861 0.330

EPR 14 0.278 0.055 0.058 0.872 0.242

EPR 15 0.227 0.045 0.040 0.837 0.190

EPR 16 0.223 0.065 0.076 0.811 0.181

EPR 17 0.398 0.050 0.040 0.845 0.336

EPR 18 0.354 0.040 0.034 0.824 0.292

7. Conclusion
The risk assessment and analysis suggest that probable cost overrun and probable time overrun
can be estimated by above method. In case of pile foundation, the probable cost is estimated as
11.98% higher than the base cost estimate. The probable time for the above work package has
been found to be 23.11% higher than the base time estimate. The composite factor method can be
used to analyze the risks and prioritize different risks. In this case, EPR 7 (Risks in Dismantling
works) has been found to be the highest risk, followed by EPR17 (Risks in permanent structure
works) and EPR 8 (Risks in construction of Pile cap) respectively.
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