RISK MANAGEMENT IN OIL AND GAS CONSTRUCTION PROJECTS IN NIGERIA

DARLINGTON CHUKWUDI JIDEOFO

A dissertation su !itted in "artia# $u#$i##!ent o$ t%e re&uire!ents $or t%e de'ree o$ Master o$ S(ien(e )Ms(* in Constru(tion Mana'e!ent )Pro+e(t Mana'e!ent*

T%e S(%oo# o$ t%e ,ui#t En-iron!ent. Heriot/Watt Uni-ersit0

Se"te! er. 1223

I, Darlington Chukwudi Jideofo, confirm that this work submitted for assessment is my own and is expressed in my own words. Any uses made within it of the works of other authors in any form (e.g. ideas, e uations, figures, texts, tables, programmes! are properly acknowledged at the point of their use. A full list of the references employed has been included. "igned# $$$$$$$$$$$$$$$$$$ Date# $$$$$$$$$$$$$$$$$$

Ta #e o$ Contents

&ist of figures
'igure %()# Distribution of oil and gas fields and related infrastructure in *iger Delta area of *igeria$$$$$$$$$$$$$$$$$$$$$$ 'igure )(%# +epresentation of risk management process. $$$$$$$$$$$.. 'igure %(,# 'ramework for risk management tools 'igure -()# Distribution of respondents. /ob position 'igure -(%# Distribution of respondents. years of working experience 'igure -(,# Distribution of respondents. age group 'igure -(-# Distribution of pro/ect types executed by respondents 'igure -(0# Distribution of pro/ect ser1ices rendered by respondents 'igure -(2# Distribution of respondents. organi3ations years of experience 'igure -(4# Distribution of respondents. organi3ation.s employee si3e

&ist of 5ables
5able -()# Distribution of sur1ey responses 5able -(%# +esults of respondents. /ob position 5able -(,# +esults of respondents. years of working experience 5able -(-# +esults of respondents. age group 5able -(0# +esults of pro/ect types executed by respondents 5able -(2# +esults of pro/ect ser1ices rendered by respondents 5able -(4# +esults of respondents. organi3ations years of experience 5able -(6# +esults of respondents. organi3ation.s employee si3e 5able -(7# +isk ranking for *igerian oil and gas construction pro/ects 5able -()8# 5op ten risks statistics for *igerian oil and gas construction pro/ects

A(4no5#ed'e!ents All thanks goes to 9od Almighty who by his infinite power has made it possible to complete the research dissertation successfully. I attest to your steadfast protection and guidance in my life. 5o my lo1ing wife, :aka and my son ;melie for perse1ering, suffering and supporting me during the process of studying for this degree and in writing the research dissertation. 5o my dad and mum, Daniel and 'lorence, thank you for bringing me up to this stage of my life. <ncle <che, Aunt Chioma, my brother ;meka and my best man, Chi/ioke, without you guys I would not ha1e made it this far to reach this point of my life. 5hank you all for being a wonderful family. I acknowledge the close contact moti1ation, assistance and guidance gi1en to me by my dissertation super1isor, Dr. 9raeme =owles. All thanks to the entire faculty staff in the "chool of the =uilt ;n1ironment that has assisted me during my stay at >eriot(watt <ni1ersity. I gi1e special thanks to all who has contributed as respondents to the research dissertation. I hope that this research adds 1alue to your risk management practices in your 1arious pro/ects and organi3ations. &astly, I recogni3e all my friends and well wishers in *igeria and <nited :ingdom who has been a second family to me. I thank you for all your kindness and lo1e.

A stra(t +isk management is a 1ital decision making process that is useful for the successful deli1ery of pro/ects carried out by 1arious organi3ations. >owe1er, the practice is still not often carried out during the implementation of pro/ects in de1eloping countries? which includes *igeria. 5he purpose of the research dissertation is to identify the ma/or risks affecting oil and gas construction pro/ects in *igeria and to determine suitable risk response strategies to mitigate the ma/or risks. A uestionnaire sur1ey was carried out on employees and executi1es working in *igerian oil and gas construction organi3ations so as to identify the ma/or risks that emanate on oil and gas pro/ects 1ia statistical analysis. Informal in(depth inter1iews conducted with top managers? were also used to deri1e strategies so as to mitigate the identified risks. +esults of the research found that security threats from neighboring residents? incompetence of pro/ect team members? poor designs? late internal appro1als from clients? and poor and inade uate tendering, were the top(fi1e ma/or risks that emanate in oil and gas pro/ects in *igeria. 5he pro/ect executi1es proposed amending compulsory land use act and paying compensation fees to owners of ac uired oil and gas fields? enforcing corporate social responsibility (C"+!, enforcing laws on waste disposal, staff training, partnering, ade uate contractor selection, using concurrent engineering and total uality management practices on pro/ects, and reduction in gas flaring? as suitable strategies to mitigate the ma/or pro/ect risks in *igerian oil and gas pro/ects. 5here ha1e been 1arious risk management researches on the management of pro/ects in de1eloping countries. >owe1er, the research into the risk management practices in oil and gas construction pro/ects in *igeria is 1ery significant considering that the sector is the 0

most important contributor to the total re1enue of the *igerian economy? the 1olatile nature of products? and characteristics of the pro/ect en1ironment where the operation and processes are carried out, in a constantly changing dynamic en1ironment which is exposed to enormous risks.

C%a"ter 67 Introdu(tion
6868 Resear(% a(4'round7

9lobally, in the contemporary economy, oil and gas are 1ery 1ital elements that determine economic forecasting and performance. Crude oil plus other refined petroleum products are the largest single article in international trade either measured by 1alue or 1olume ("te1ens, %880! @il and gas is the most important energy source and it has -8A share in worldwide energy consumption and 74A in the transport sector. @il and gas infrastructures both indirectly or directly? pro1ide employment to a lot of people? and contribute a ma/or part of the world 9ross Domestic Broduct (9DB!. (=a/pai and 9upta, %884! 5herefore, it could be argued that the world economy depends on oil and gas. *igeria is the most significant oil producer in Cest Africa. 5he @il and 9as Journal (@9J!, in %882, estimated *igeria as the largest owner of natural gas reser1es in Africa and the se1enth largest worldwide (@9J, %882 cited in 9albraith, %886!? with an estimated crude oil reser1es totaling ,,.7 billion barrels. In %880, there was an a1erage oil production of %.2 million barrels per day (bblDd!. *igeria declared in @ctober %88-, a record of natural gas 2

reser1es to be as high as 228 trillions cubic feet (tcf!. Eost of the natural gas is found in crude oil as free gas and because *igeria lacks the expertise and infrastructure to produce the constituents of natural gas, the gases are flared. 5hus, *igeria flares -, percent of the total annual natural gas produced, thus, possessing the record as the country that flares the most natural gas than any other country of the world (9albraith, %886! In *igeria, the oil and gas sector has a ma/or influence in shaping the nations economy because it plays a ma/or role as the prominent re1enue earner and contributes o1er 68A of the nations 9ross Domestic Broduct. (Adewusi, )776? DB+, %880! 5he ratio of oil re1enue to total go1ernment re1enue has increased from %2., per cent to -4.0 per cent from )748 to %888 respecti1ely, with some percentage increases and decreases in between the years. (Ibrahim, %886! 5oday, the *igerian oil and gas industry has a strong growth rate and this has increased the demands for the construction of new oil and gas structures and facilities which are capital intensi1e. 5herefore, ad1anced strategies need to be de1eloped for the successful implementation of these pro/ects which ha1e huge capital in1estment, tight schedules, large stakeholder in1ol1ement, complex technology usage, and high social and en1ironmental impact. All these characteri3e the risks that oil and gas construction pro/ects are exposed to. (5huyet, et al, %884! +isks are always present on pro/ects because of the continuous exposure to both internal risks (construction, design, contractual, financial, personal, stakeholders and operational risks! and external risks (en1ironmental, social, political, economical, logistical, public and legal risks! 5he schedule, cost and uality of, pro/ects can be influenced negati1ely by these risks. (Charoenngam and Feh, )777! Chen harmful effects emanate from risk e1ents on oil and pro/ects due to unforeseen circumstances, the pro/ects aims and ob/ecti1es are diminished or halted. +isk management endea1ors to carry out a detailed study of all the aspects in pro/ect management so as to de1elop an action or a mitigation strategy or plan for all the controllable and uncontrollable risk e1ents. (Ahmed, et al., %884! 5hus, making risk management essential to the successful deli1ery of pro/ects. 4

(5huyet, et al, %884! argues that in the construction industry, risks usually cause cost and time o1erruns on pro/ects because of the inability of pro/ect managers in managing pro/ect risks effecti1ely, thus, delaying the planned schedule or exceeding the planned budget of pro/ects. >owe1er, it has been re1ealed that the oil and gas industry has greater risk management experience when compared with the construction sector because e1idence has shown that risk management is routine within the oil and gas industry while only few companies employ it in the construction industry. (&ock, )77% cited in =aker, et al, )777! 5he benefits and opportunities risk management offer to stakeholders of oil and gas construction pro/ects are enormous? although, there are some challenges encountered during the processes and practices which could hinder the reali3ation of the pro/ects ob/ecti1es. 5herefore, the central focus of the research dissertation is to use risk management practices to explore the ma/or sources of risks that emanate while construction acti1ities are carried out on oil and gas construction pro/ects in *igeria.s oil and gas sector. 6818 Ai!s and o +e(ti-es o$ resear(%7

5he research aims at identifying the risk factors that affect oil and gas construction pro/ects and deri1e suitable risk responses for them with a focus on the *igerian oil and gas sector. 5he research ob/ecti1es set out for reali3ing the aim of the study are as follows# %.) 5o determine the ma/or sources of risks affecting oil and gas construction pro/ects in *igeria %.% 5o in1estigate the fre uency of occurrence and the degree of impacts of the identified risks in oil and gas construction pro/ects in *igeria. %., 5o in1estigate if most oil and gas organi3ations carry out risk management practices in their 1arious oil and gas construction pro/ects in *igeria. %.- 5o determine effecti1e risk management strategies to efficiently mitigate the identified ma/or risks so as to pro1ide suitable recommendations for enhancing risk management practices in *igeria.s oil and gas construction pro/ects. 6898 Re#e-an(e o$ t%e resear(%7 6

5he research into the risk management practices in *igeria.s oil and gas construction pro/ects will be 1aluable to upstream and downstream oil and gas construction stakeholders (clients, contractors, researchers and all interested in1estors in the sector! as follows# ). "takeholders will be pro1ided with necessary information for enhancing risk management practices. %. Construction industry and oil and gas industry stakeholders will gain knowledge from each others experiences and lessons learnt ,. It will pro1ide in1estors with an insight of contemporary risk management practices and appropriate risk response strategies to adopt for future pro/ects. -. +esearchers will be pro1ided with a body of knowledge for carrying out future studies.

68:8

Stru(ture o$ dissertation7

Chapters %# 5he chapter will consist of a re1iew of literature which will pro1ide useful knowledge with the help of past research publications into the nature of pro/ects? oil and gas pro/ects? and a background o1er1iew of the features and characteristics of the *igerian oil and gas industry with emphasis on both the upstream and downstream sector. 5he risk concept, types and sources of risks that originate in oil and gas construction pro/ects will be in1estigated while critically analy3ing the fre uency and impact of these risks. 5he concept of risk management as practiced in oil and gas construction and the tools and techni ues that are commonly used will be in1estigated. 5he secondary data for the research literature will be sourced from newspapers, /ournals, books, and electronic media. Chapters ,# 5he chapter will explain the systematic processes which will be used for carrying out the research sur1ey so as to determine the ma/or risks that affect oil and gas construction pro/ects in *igeria. 5he general methodology will 1alidate the chosen research instruments, methods, population sample and the techni ues used for analy3ing data in the research. 5he section will also discuss the research delimitations and ethical issues. Chapters -# 5he chapter will in1ol1e analy3ing and discussing the findings from the research sur1ey that was carried out on the stakeholders of *igeria oil and gas industry in 7

1iew of determining the ma/or risks that affect oil and gas construction pro/ects? and effecti1e strategies will be pro1ided to effecti1ely mitigate the risks. Chapters 0# 5he chapter will briefly re1iew the aims and ob/ecti1es of the research as compared to the findings in the research carried out on the stakeholders of *igeria oil and gas industry. =eneficial and useful strategies to mitigate the ma/or risks will be recommended for effecti1e risk management practices in *igerian oil and gas construction pro/ects. Also, opportunities for future research and research limitations will be acknowledged.

C%a"ter 17 Literature re-ie5

186 Pro+e(ts. ris4s and ris4 !ana'e!ent in Ni'erian Oi# and Gas Industr07

5he main purpose of the chapter is to gi1e an o1er1iew of oil and gas pro/ects, *igeria oil and gas industry, the types and sources of risks that emanate on oil and gas construction pro/ects in *igeria with emphasis on both the upstream and downstream sector. Also, the sub/ect risk management as practiced, and the techni ues used in carrying out risk management processes in oil and gas construction pro/ects will be discussed. 181 ,a(4'round7

BEI (%88-! defines a pro/ect, as a temporary undertaking for creating a uni ue product or ser1ice. 5hese uni ue ser1ices are created when clients, contractors and all stakeholders collaborate to deli1er construction acti1ities both in construction industry pro/ects and in oil and gas sector construction pro/ects. Bro/ects are embarked on by companies and corporations in order to achie1e a strategic ob/ecti1e or a business need. Bro/ects are relati1ely complex, usually ha1e short time span, a start and finish date, defined cost, time and uality (performance! ob/ecti1es and in1ol1es

)8

the collaboration of multidisciplinary teams working together as one team. (+oberts, et al, %88,! 5here are many factors that cause delays to the successful deli1ery of construction pro/ects as re1iews and careful appraisals by lots of scientific reports and /ournals show it. &uu, et al (%886! re1eals that the delay factors are grouped into nine categories which are? owner, contractor, consultant, design, material, workforce, e uipment, en1ironment and pro/ect related factors. 5hese are caused by to mention a few by? clients, contractors, consultantsDdesigners, materials, workforce, e uipment, go1ernment regulations and laws, and pro/ect deli1ery system respecti1ely. All these are potential sources of risks which oil and gas construction pro/ects are exposed to. About 68A of *igeria.s capital and recurrent expenditure and 78A of the country.s earnings from foreign exchange all come from petroleum (Adewusi, )776! 5his came as a result of the first exploration of crude oil in )702, at @lobiri and from then onwards, crude oil sales has risen from 8.)6- billion barrel of oil and %.%28 billion cubic feet of gas in )706 to %0.7, billion barrels of oil, ,.68 billion barrels of condensate and )06 trillion cubic feet of gas, as at December, %888 (**BC, %886!. 5hus, making the oil and gas industry the strength of the *igerian economy. @il and gas construction pro/ects in *igeria are usually implemented through /oint 1enture partnerships which in1ol1e multinational companies like ;xxon Eobil, Che1ron, 5otalfina;lf, "hell, Agip, "chlumberger, >alliburton, etc? teaming up with indigenous companies like **BC, DB+, *;5C@, Conoil, AB, etc. 5he multinational partners supply high technologies and large capital needed for carrying out construction pro/ects which the *igerian partners still lack. 5he presence of the foreign partners, expose the pro/ects to risks like financial risks, political, policy and legal risks, differences in practices between foreign and indigenous partners, etc. (5huyet, et al, %884! *igeria.s national currency (*aira! is relati1ely weak internationally? while the inflation rate is uite high. In this 1iew, oil and gas construction pro/ects in *igeria pose 1arious risks which can cause ad1erse effects on the nation.s economy, if there are lapses with respect to good strategic and operational pro/ect implementation techni ues. ))

5he construction processes adopted in the oil and gas sector in1ol1es se1eral stages which are as follows# ClientDowner inception stage? 'easibility stage? @utline design stage? Detailed design stage? Contracts and Brocurement stage? 'abrication and Construction (onshore! stage? >ook(up (@ffshore! stage? Commissioning stage? @peration stage? 'inally, assembling of a decommissioning document stage. *igeria is internationally recogni3ed for its oil and gas exploration and production acti1ities. 5he oil and gas industry comprise of two uni ue sectors? the downstream and the upstream sector which are all in the *iger Delta region. @il and gas construction pro/ect.s acti1ities are carried out in both sectors. 5he distribution of oil and gas fields and the related infrastructure in the *iger Delta region is shown in figure %() as follows# Fi' 1/67 Distri ution o$ oi# and 'as $ie#ds and re#ated in$rastru(ture in Ni'er De#ta area o$ Ni'eria8 Sour(e )A4or and I'%o. 1221*

)%

5he upstream acti1ities are usually primary and range from exploratoryDdrilling sur1eys, field de1elopment, down to the decommissioning stage of oil and gas construction pro/ects. All these re uire huge technological and financial input. 5he downstream acti1ities are usually secondary and in1ol1e more of manufacturing processes where crude petroleum and its related gases are transformed into final products such as heating oil, gasoline, wax, lubricants and natural gas. Also, intermediate products like industrial fuel, a1iation fuel, asphalt, bitumen, petrochemicals, cooking gas and li uefied natural gas are gotten during this stage. All these are 1alue adding processes that expose oil and gas pro/ects to enormous risks. (Ibrahim, %886!

),

189

T%e U"strea! Se(tor7

<pstream sector acti1ities in1ol1es, the search for prospecti1e exploratory and drilling wells, oil and gas fields which may be underwater or underground. @peration of the oil well follows the former so as to reco1er and con1ey the constituent raw natural gas or crude oil to the ground surface. 5he upstream sector is further broken down into offshore and onshore oil and gas fields. A typical offshore installation or platform is built with pile foundations? consists of a substructure and mostly fabricated with steel so as to support the topsides which are made up of one or more deck le1els. 5he topsides comprise? compact process plants, with a steel framing which protects the process plants? wellhead areas from which pipelines carrying crude oil or hydrocarbon fluids from reser1oirs terminate? production separators (for separation of the hydrocarbon fluids!? compressors (where gases coming from the separators are compressed, purified, dried and organi3ed for export? and lastly, a li1ing uarters building for accommodation of the platform operators. (&ouca and Eohammed Ali, %884! All these facilities and operations make the offshore platforms, a 1ery 1olatile and hostile en1ironment which is sub/ect to health and safety risks of hydrocarbon gas explosions which e1entually, causes a fire outbreak or inhalation of poisonous gases by operators due to pipe leakages. Eany of the offshore industry designs originate from the typical 9ulf of Eexico designs and de1elopment where )88(year storm e1ents are used with significant energy generating wa1e periods of ),()2 seconds. ("immons and Duhaney, %886! 5he Cest African case is different? because the offshore oil fields owned by *igeria go1ernment are all in the 9ulf of 9uinea and the sea conditions in the offshore production area, are usually relati1ely mild compared with many other offshore production areas. 5his factor enhances the use of large 'loating, Broduction, "torage and @ffloading ('B"@! unit for carrying out offshore operations? and the fixed platforms can be lighter as compared with other oil and gas fields like the *orth "ea and the 9ulf of Eexico. (9albraith, %886! 5he upstream sector has se1eral established in1estment opportunities that abound in the petroleum industry which attract foreign multinationals to tender for future pro/ects. 5hey are as follows# )-

I. Ci1il works Gconstruction of mud pits, concrete works at rig sites II. "ur1eying G tropical and planimetric? and sea bottom sur1ey III. "eismic data collection and interpretation IH. Crude oil storage and transportation H. Bipelining HI. Drilling operations HII. ;xploration and production of oil and gas products HIII. ;xploration for the de1elopment of local substitutes for substances such as pumps, medium pressure 1al1es, drilling mud, shallow drilling e uipment, bits drilling cement, fittings, etc. II. Eanufacturing of consumable materials in exploration such as explosi1es, detonators, steel casting, magnetic tapes, etc. (**BC, %886! 18: T%e Do5nstrea! Se(tor7

5he downstream sector of the *igerian oil and gas industry.s acti1ities in1ol1es? refining and distribution in addition to marketing of all petroleum products. 5he refining of crude oil is regulated and operated by the *igerian go1ernment under the directi1es of the *igerian *ational Betroleum Corporation (**BC!. During the refining process, crude oil is con1erted into end user products like dual purpose kerosene (DB:!, automoti1e gas oil (A9@!, base oils, premium motor spirit (BE"!, and bitumen. 5he marketing and distribution of petroleum products comprises the transfer of petroleum products from storage depots and refineries and the sales to the end users at storage tanks, ser1ice stations and offshore users. 5hese are done by either pri1ate or public companies. (**BC, %886! 5he downstream oil and gas sector of *igeria initially, was regulated )88A by the go1ernment, with the go1ernment owning the controlling stake in almost all downstream industry businesses. 5he go1ernment controlled and fixed the retail and whole sale prices of these petroleum products. 5he reduced competition and low le1el in1estment generated abnormalities which were potential sources of risks. 5hey are as follows# (BBB+A, %886!# ). Eonopolistic practices in the supply system %. Betroleum products smuggling )0

,. Boor maintenance of facilities and infrastructures -. ;xistence of subsidy from the go1ernment 0. Irregularities in distribution and supply of products which generated scarcity of petroleum products, long ueues at filling, etc. In search of a lasting solution to the abo1e setbacks, the *igerian go1ernment carried out a phased deregulation of the downstream sector which in1ol1ed? pri1ati3ation or commerciali3ation and liberali3ation of the industry. 5he pri1ati3ation was carried out by the go1ernment transferring )88A of all go1ernment owned enterprises and facilities to pri1ate indi1iduals on shareholding grounds. 5he liberali3ation was carried out by the go1ernment in1ol1ing pri1ate company participation in downstream acti1ities by promotion of increased competition? eradicating monopoly? fair pricing and a1ailability of products to end users? and efficiency and re1i1al of the refineries. 5he downstream sector has se1eral established in1estment opportunities that abound in the petroleum industry which attract foreign multinationals to tender for future pro/ects. 5hey are as follows (**BC, %886!# ). Broduction and Earketing of &i uefied *atural 9as (&*9! for domestic use %. Eanufacturing of &B9 cylinders for domestic use, installation of filling plants, regulators and 1al1es, retail de1elopment and distribution of simple, flexible and less expensi1e gas to burners so as to encourage the use of gas instead of wood. ,. ;stablishment of processing plants and industries for the production of# +efined mineral oil, grease and petroleum /elly. =ituminous based waterDdamp proof building materials e.g. floor tiles, roofing sheets, tarpaulin, =uilding of asphalt storage, blending and packing for exportation

-. ;stablishment of chemical industries e.g. distillation units for the production of *aphtha and other special boiling point sol1ents used in food processing. 0. Carbon =lack, &inear Alkyl =en3ene and Bolypropylene producing industries. )2

2. De1elopment of Bhase II (Bhase III to commence later! in *igeria.s Betrochemical Brogramme. 4. 5he *&*9 Bro/ects. 6. "mall(scale production of chemicals and sol1ents e.g. chlorinated methane, 'ormaldehyde, Acetylene etc. from natural gas. 7. Crude oil refining with efficient export facilities. )8. Companies with the ade uate technology to undertake turn around maintenance of the refineries. 5here is a tremendous scope for small(scale /oint 1enture manufacturing concerns with foreign technical partners. )). Broducts marketing and transportation associated with marketing and distribution of products? which is a chain of maintenance and manufacturing businesses e.g. &B9 bottles and accessories, lubricating oil reprocessing, oil cans reconditioning, etc. 5he petroleum facilities in the downstream sector are classified into three categories. 5hey are as follows (BBB+A, %886b!# ). Ea/or Earketers which are six (2! in number %. Independent Earketers which are se1en thousand, nine hundred and forty two in number (47-%! ,. **BC Eega "tations which comprises of fourteen ()-! retail outlets nationwide In *igerian downstream sector, the disruptions which ha1e emanated ha1e more immediate and emergent political and domestic implications to the *igerian economy and to the citi3ens as a whole than those that occur in the upstream sector (:han, )77-! 5he Department of Betroleum +esources (DB+! is the regulatory go1ernment body in *igeria oil and gas sector? that inspects and ensures that operators comply with the oil and gas industry regulations both in the upstream and downstream sector. (D++, %882! A typical example is? when an unsafe or unauthori3ed construction works, or construction works done that do not comply with the oil and gas industry standards are carried out by oil companies. 5his could lead to DB+ imposing fines on them or can also lead to closing down the facility which will affect the company.s corporate image as well as their financial position. )4

A clear understanding and knowledge of risks, the types and the 1arious forms in which they take in *igeria.s oil and gas pro/ects is 1ery essential and important for the successful management and deli1ery of pro/ects. 5hus, an urgent demand is re uired for effecti1e risk management in oil and gas construction pro/ect management in both the upstream and downstream sectors of *igerian oil and gas industry. 18; O-er-ie5 o$ Ris47

+isks are usually ine1itable and inherent parts of indi1iduals. public and business life. 5here is always a probability that things will go contrary to laid down plans. Eany tragedies, incidents and disasters occur on pro/ects because people did not know about? underestimated or ne1er knew how to respond to the risk e1ents and uncertainties surrounding the /ob functions they carry out. +isks are prominent in all aspects and at all le1els of a pro/ect.s or organi3ation.s acti1ities. (5chanko1a, %88%! A typical risk example is to imagine an offshore platform operator smoking in the production process area or non smoking area in an offshore platform. *e1ertheless, imagine a situation whereby the un uenched cigarette mistakenly falls down and lands on the highly combustible petroleum process plantJ Definitely, an unpleasant result will emanate out of the incident. 5he pre1ious example buttresses on the fact that the existence of risks are often underestimated because people usually are indifferent towards risks. @n the contrary, in recent times, people can now work with uncertainty because risks can now be managed rationally. 'lanagan and *orman, ()77,! re1eals that the construction industry is sub/ected to more uncertainty and risk as compared to many other industries because the processes by which pro/ects take from the initial capital in1estment appraisal stage up to the completion stage and operational stage are 1ery complex? in1ol1es a lot of time consuming design and production processes, a lot of skilled labour force with different cultures and interests which demands effecti1e co(ordination of a wide range of 1arying but yet, interrelated acti1ities. ('lanagan and *orman, )77,! 5hese complex acti1ities expose pro/ects to both external and internal risks which may be controllable or uncontrollable. 5hus, the management of these risks is the key factor that makes risk management concept, essential to the successful deli1ery of pro/ects.

)6

;1en though systematic research with respect to risks and risk management can be said to be a new approach to the business and academic world, there still seems to exist enormous literature which ha1e been written on the topics for the past two decades because a lot of academic research papers, go1ernment publications, textbooks, /ournals and dissertations refer to the sub/ect risk and risk management. 18< Ris4 De$inition7

(Cer1one, %882! defines risk, as a problem which has not yet happened. 5his simple definition some how really gets to the foundation of the issues which pro/ect managers face while performing their functions on pro/ects. 5hey deliberate on these issues and try to de1elop methods or techni ues on how they can a1oid them. ;1en bearing in mind the critical nature of risks and the probability of their occurrence on pro/ects, pro/ect managers do not really gi1e issues related to risks the attention it re uires, they rather than often perform superficial assessments of the risk issues and then add a margin for the risk. (:iel, et al, )776 as cited in Cer1one, %882! proposes that the common risks that occur fre uently on most pro/ects are# ). &ack of stakeholders commitment %. &ow le1el top management commitment ,. &ack of understanding of technical re uirements by stakeholders -. Inade uate stakeholders in1ol1ement on the pro/ect 0. Inade uate management of end users expectations 5he abo1e listed risk classification is more generic, the next section will further break the risks down into more detailed categories with respect to the way they occur and their sources on most pro/ects.

18=

T0"es and Sour(es o$ Ris4s in Ni'erian Oi# and Gas Pro+e(ts7

5he total number of potential sources and combinations of risk sources is way beyond classification. Eoreo1er, there ha1e been different typologies by different writers on risk )7

classification and types. Cilliams, ()776!, classifies risk sources by the nature of the en1ironment where they originate as follows# social en1ironment? physical en1ironment? cogniti1e en1ironment? operational en1ironment? political en1ironment? legal en1ironment? and economic en1ironment. In oil and gas pro/ects, social en1ironment risk sources come in the form of peoples. attitudes and 1alues? physical en1ironment risk sources are floods, high winds and storms, land slides, etc? cogniti1e en1ironment risk sources in1ol1es how the pro/ect team members percei1e risks and uncertainties? operational en1ironment risk sources can be damages or failures in installation processes, poor designs, etc? political en1ironment risk sources are policy changes which may generate high taxation, land ac uisition, etc.? legal en1ironment risk sources may be disparity of present and new laws which affect pro/ects ob/ecti1es? and economic en1ironment risk sources can come in the form of market increases in the prices construction materials thereby, leading to cost o1erruns on pro/ects. (5chanko1a, %88%! 5he research dissertation will focus on the classification of risk types by +oberts, et al, (%88,!? because of the explicit way by which risks were categori3ed with respect to the nature of risks and the origin of risks on pro/ects. 5he risks will be critically analy3ed to throw light into how they emanate on oil and gas pro/ects in *igeria +oberts, et al, (%88,!, proposes that risks should be classified in two basic ways# ). =y differentiating the risk with respect to the Krisk le1elL within a pro/ect or an organi3ation which it impacts on. %. =y the exact nature of the risk, the characteristics of the risks, the origin of the risks and finally, by the extent of dependency or linkage of the risk to other risks.

5he risk classification with respect to the risk le1el is further broken down as listed below# ). strategic +isks? %8

%. change risks? ,. operational risks? -. unforeseeable risks 5he risk classification with respect to the nature, characteristics, origin and dependency of the risk to others is further broken down as listed below# ). knowledge and financial risks %. external and internal risks ,. speculati1e and static risks -. risk interdependency 5he 1arious risks mentioned abo1e will now be discussed consecuti1ely in the following sections to highlight where they emanate on pro/ects. 18=86 Strate'i( ris4s7

5his is the type of risk that e1ol1es at the corporate le1el of an organi3ation or management le1el of a pro/ect and affects the de1elopment of a pro/ect.s strategy. =royd, (%88)! re1eals that the construction industry has de1eloped both flexibility and good skills in problem sol1ing but lacks the capability of Mplanning for the future.. (D5I, %88), p. -! In *igerian oil and gas construction pro/ects, the risks due to poor strategic planning are related to the long term performance of the pro/ect e.g. risks relating to the de1elopment of a poor pro/ect brief or strategic pro/ect plan at the on set of any pro/ect will lead to pro/ect team members not understanding the ob/ecti1es of the pro/ect. 5his generates conflicts, poor uality designs and construction works, etc, during the implementation stage of the pro/ect, because the strategic ob/ecti1e or decisions was not effecti1ely communicated to the pro/ect team members and stakeholders at the briefing stage of the pro/ect. Also, risks due to poor forecasting or assessment of the market conditions or economic characteristics of the country or the countries in which an oil company will carryout its operations is a 1ital strategic risk which should be gi1en due consideration 1ia feasibility studies of prices of materials, economic policies and stakeholders (business partners, local communities and suppliers!

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C%an'e ris4s7

5hese are the types of risks that relates to imposed or planned changes which occur on pro/ects. A planned change arises when new strategies are formed while an imposed change arises due to external and internal forces. A typical example is? during the design process for oil and gas structures in *igeria, any shortcomings with respect to materials, product geometry, functional specifications, etc, expose pro/ects to change risks which results to excesses of materials being used? extra incurred costs due to pro/ect delays? resource reallocations, additional operations and rework. (Ahmed, et al., %884! 5hese internal changes generate operational risks which are contrary to the strategic plan of a pro/ect. Also, external factors like flooding and landslides can cause change risks by leading to losses on a pro/ect thereby, adding extra cost for rectifying the damages. 18=89 O"erationa# ris4s7

@perational risks are the risks coming from failed or inade uate internal production processes, systems and people as well as coming from external factors or e1ents. 5hese are the types of risks that relates to the production processes in1ol1ed on a pro/ect and in1ol1es the working techni ues used by pro/ect team members? the asset base of the pro/ect? the stakeholder relationships (human resources and staff de1elopment! within the pro/ect team and legal risks (contractual issues, statutory obligations and liability (internal processes!. &ee, et al., (%88-! re1eals the most fre uent causes of accidents are due to human errors. (&ee, et al., %88- cited in Dastous, et al., %886! Also, the effect of external e1ents on the internal processes of a pro/ect (e.g. local communities, militants and terrorist actions! all make up operational risks because they cause disruption of pro/ect acti1ities and ob/ecti1es which causes delays on pro/ects? thereby, leading to time and cost o1erruns. 18=8: Un$oreseea #e ris4s7

<nforeseeable risks are the risks that occur because they cannot be accurately forecasted before they occur because no matter how great a pro/ect.s planning processes could be, there is always something that goes wrong somewhere. "ince the products of the *igerian oil and gas industry are highly inflammable? it is necessary that a high degree of safety is ensured in both the upstream and downstream sector. 5here ha1e been se1eral accidents due to ground conditions, fire outbreaks and air pollution. All these ha1e been linked to poor construction works by contractors and faulty e uipment installation. (+afiu, %880! %%

5herefore, companies cater for this by building in contingencies for these risks into the o1erall strategic plan with respect to time, cost and uality ob/ecti1es for their pro/ects. In cases where the company cannot contain the impacts, like cases of flood, fire or any natural disaster? companies pay 1ery high premiums to insurance companies so as to transfer liability for such e1ents to the insurance companies because of the ha3ardous nature of the oil and gas operations. Hariation in interest rates for bank loans, inflation and increases in go1ernment taxes are so common in *igeria. 18=8; Kno5#ed'e and Finan(ia# ris4s7

:nowledge risks are the risks coming from a pro/ect.s information that is stored using information technology (I5!, software and hardware, information management, knowledge management and planning. Jones ()77-! re1eals that most pro/ects that in1ol1e the use of information technology are usually sub/ected to the risks of? slow user re uirements? excess schedule pressure? low uality of work? cost o1erruns and inade uate configuration control. (Jones, )77- cited in Cer1one, %882! Eost modern companies like *ational ;ngineering and 5echnical Company &td, (*;5C@!, a subsidiary of **BC, (**BC, %886! which is responsible for carrying out engineering designs for oil and gas pro/ects? carry out and store most of their pro/ect.s engineering designs using computer de1ices (both hardware and softwares!. 5hey are exposed to I5(based threats that may come from incessant power failures which is 1ery rampant in *igeria presently? (Chido3ie, %886! hackers? malicious interference? and employee sabotage. All these intrusions can hinders the progress of pro/ects by limiting or stopping access to crucial pro/ect information thereby, not leading to the successful deli1ery of a pro/ect with respect to time, cost and performance ob/ecti1es. :nowledge risks can also emanate on a pro/ect when one of the key personnel lea1es the pro/ect without a substitute to co1er up for the important role heDshe plays on the pro/ect. Bro/ect personnel usually lea1e pro/ects because of? resentment, lack or loss of authority or power, lack of moti1ation or commitment, inability to adapt to pro/ect structure or techni ues, lack of expectation, etc. @n the other hand, financial risks are the risks coming from the capital structure, credit structure, market structure and cost reporting structure of a pro/ect. Eore than 08A of

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pro/ects usually double the estimate cost that was forecasted for them at the on set. (Chittaker, )77) cited in Nafra(Cabe3a, et al., %886! Bri1ate and public sector operators usually are affected by power pressures in the appointment of contractors, sub(contractors and suppliers? in carrying out their operations in *igerian oil and gas pro/ects? not on merit but based on whom they know. (@gunsemi and A/e, %882! 5herefore, more costs are incurred on pro/ects during design, construction and operation of facilities as a result of initial? poor uality materials, poor designs, poor construction works, etc. Also, high inflation rates, increases in taxation and 1ariation in interest rates for bank loans obtained by these contractors, inhibit the contractors meeting up with pro/ect demands with regards to finance. In *igeria, the introduction of KDue BrocessL has made pre ualification of contractors to gain popularity recently with respect to contract award. 5he Due process system was formed to reinstate and uphold a transparent, open, and competiti1e federal procurement system that is dri1en with integrity, sustains spending within pro/ect budgets and to ensure that the implementation of pro/ects are done within time schedule, so as to achie1e 1alue for money outcomes without sacrificing uality and standards (=udget Eonitoring and Brice Intelligence <nit, %88- cited in @gunsemi and A/e, %882!. 18=8< E>terna# and Interna# ris4s7

;xternal risks are those risks that originate from a pro/ect.s surrounding en1ironment. 5hey can to some extent be calculable but they are usually beyond the control of a pro/ect (uncontrollable!. ;xternal risks take se1eral forms and can be broken down further as follows# .) Interest rate risk# 5his is a form of financial risk that occurs because changes in interest rates affect the 1alue of assets and liabilities on pro/ects. (+oberts, et al, (%88,! In *igeria, due to the high inflation rate and the irregularities in the banking sector, oil and gas pro/ects experience irregular interest rate increases for, loans and bonds recei1ed. 5his generates increases in costs of machineries and e uipments for construction and production processes midway the duration of pro/ects and may e1entually, lead to budget o1erruns on pro/ects. Also interest rates may rise. %-

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5ime(dependent risks# 5hese are risks relating to items that ha1e a fixed time limit on them. In *igeria, most oil and gas pro/ects especially? offshore pro/ects, are usually fast track pro/ects. Design works usually start immediately after the supply contracts between buyers and operators ha1e been confirmed? with the duration of the pro/ect fixed within a stipulated time. (Eohammed Ali and &ouca, %88-! Eore so, when claims are not made within the timescale before the expiry of insurance policies for premiums paid for insurance co1ers on pro/ects, there is e1ery possibility that there will be a net profit loss on the pro/ect. A typical example is the Che1ron Corporation subsidiary, Che1ron *igeria &td. (C*&!, which completed a Mfloat(o1er installation. at Ee/i 9as 9athering and Compression platform (99CB! on the ;scra1os 9as pro/ect Bhase ,. It was the first of its kind, type of platform being constructed in the region because of the schedule ad1antages compared to installing the usual pre(commissioned, integrated and single piece topsides due to the tight schedule deadline of the pro/ect. ("immons and Duhaney, %886!

., Competitor risks# 5hese risks relate to changes with respect to the competition base. It could be minor or ma/or changes which impact on companiesDpro/ects. &ack of Mdue processes. in contract award thereby, making the same company to be winning most /obs. *;5C@, a subsidiary of **BC? (**BC, %886! due to their strong go1ernment ties wins most of the oil and gas design contracts. 5his can make established competitors to decline suddenly thereby, seriously affecting the successful implementation and deli1ery of their pro/ects. .- ;xposure risks# 5hese are risks associated with cases where oil companies or oil and gas pro/ects depend on few 1ariables or on only a single 1ariable for their sur1i1al. @il and gas pro/ects are usually exposed to financial (mortgages, insurance premiums!? physical (machines and e uipment failures! and human (in/uries, ill health and death of staff! exposure risks. (5chanko1a, %88%! 5his is because of the ha3ardous nature of the oil and gas products as well as the 1olatile nature of the working en1ironment where oil and gas pro/ects are carried out.

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.0 "hareholder risks# 5hese are risks associated with cases where a company depends on shareholders e uity for the operations. In *igeria, organi3ed corruption from politicians and soldiers who ha1e looted go1ernment funds to make fortunes ha1e enabled their owning most of the pri1ate indigenous oil and gas companies especially in the downstream sector. (;1uleocha, %880! If a ma/or shareholder or a considerable amount of shareholders confidence declines in any of these companies, and heDshe withdraws there shares, there will be a 1ery significant and ad1erse effect on the company.s pro/ects. It may e1en lead to closing down most of the pro/ects. .2 Bolitical risks# 9o1ernment of a country or of rele1ant neighboring country.s fiscal policies can be a 1ery huge source of risk on pro/ects. Eultinational oil companies in *igeria usually face the risk of changes in interest rates and high taxation which may arise due to changes in go1ernment policies. 5hese risks are usually managed by multinational oil companies 1ia strategic alliances, insurance and partnering. (=erlin, et al., %88,! 5hey are also minimi3ed by maintaining good relationships with the go1ernment, utili3ing local personnel and suppliers as much as possible and e1ading from geographical concentration. 5his enhances a good economic relationship with the host country and increases the company.s chances of anticipating political and economic future changes. .4 &egislati1e risk# 5hese are risks which pro/ects are exposed to because of the fact that, go1ernment constantly changes old statutes and introduces new statues due to e1er changing legislati1e decisions. 5he new statutes may not be fa1orable on a particular pro/ect with respect to the pro/ect.s en1ironment. According to the *igerian constitution, all oil, gas and minerals belong to the federal go1ernment. (;1uleocha, %880! "tatutory re uirements like en1ironmental legislation, health and safety legislations, local content legislation, impose direct charges on oil companies for making use of landfill waste sites, consuming energy, disposing refuse, flaring gases, oil spillage, etc? e1en though the oil companies claim that there pro/ect acti1ities and operations are carried out with high en1ironmental standards. (Corld bank, )770! re1eals that the *igerian en1ironmental laws are not strictly enforced when compared to other international e ui1alent laws. %2

.6 "ecurity risks# 5hese are risks which oil and gas pro/ects are exposed to because of disruption of the pro/ect.s operations. @il and gas amenities, in1ol1ing natural gas and crude oil fields, transportation (railways, trucks, pipelines, and ships!, refineries and distribution systems are good targets for criminals and terrorists. (=a/pai and 9upta, %884!. 5his is because petroleum products are highly 1olatile, highly flammable, and 1ery toxic and contains a lot of energy. In *igeria, security risks on oil and gas facilities are eminent in the *iger Delta region, due to disturbances coming from local communities, militants, community clashes or wars, etc. +ecently, there ha1e also been regular cases of Kkidnapping and releaseL (;we/e, %884, pp. %%6! of expatriate oil and gas workers on a week basis both onshore and offshore due to political reasons. 5his has generated international attention which seems to ha1e no solution yet. Eohammed Ali, +.E., (%88-! re1eals that the intrinsic risk in offshore installations in the upstream sector of oil and gas pro/ects? are conditions relating to explosions and the effects of their occurrence. 5his is because an attack which is successful on an oil and gas facility or its transportation system usually results in interruption of gas and oil supply, se1ere economic impact, in/ury to staff or public, fatal outcome and shut down of operations. All these ha1e serious economic impact. 5hus, the risks accruing to the intentional acts by these militants to oil and gas facilities needs to be accessed, and appropriate emergency responses and countermeasures need to be put in place. (=a/pai and 9upta, %884! @n the other hand, internal risks are those risks that originate within a pro/ect.s en1ironment. Internal risks are usually calculable and the pro/ect team has some degree of control o1er them. Internal risks can be further broken down as follows# ). @perational process risks# 5hese are risks which pro/ects are exposed to because of staff una1ailability, lack of human resources, production capacity limit being reached on a pro/ect, and human errors. In *igeria, there has not been a ma/or or se1ere flare incident in any oil field. A flare stack is a long pipe which pro/ects into the air with an ignition system, a flaring arrow or an oily rag which is hoisted up the stack on a pulley and cable system. 'lares are primarily used in oilfields %4

for 1enting excess gas and pressure build up coming from oil wells which can cause ha3ardous uncertainties and risks. ("haluf, %886! John Nink Company, (%880! states that, the fi1e common cause of flare incidents are# li uid carry o1er? internal explosion? system obstructions? ignition loss and faulty maintenance procedures. (John Nink Company, %880 cited in "haluf, %886! 9albraith, (%886! also re1eals that, *igeria is the country that flares the most gas amongst any other country of the world. Cith this record, effecti1e risk management processes and practices is 1ital so as to ensure that the operational process risks which could be generated by staff (poor maintenance, system obstructions!, and en1ironmental factors (internal explosion due to air pressure! are put in check on oil and gas fields. %. &egal risks# 5hese are risks arising from errors in insurance policies and contracts which pro1ide le1els of protection and liability which are not the same as the percei1ed le1els e.g. a sudden change in statute. A typical example is the Alien 5ort Claims Act (A5CA! which gi1es <" district courts /urisdiction for ci1il actions which are committed in 1iolation of <" laws and treaties when 1iolations occur in nations outside <"A. (:ieserman, )777! 5his act was used when a group of *igerian citi3ens charged Che1ron to a federal court in "an 'rancisco, California for the deaths of two protesters by military troops and police on Che1ron. s Barabe oil platform, nine miles offshore of *igeria on Eay %0, )776. 5hey claimed that Che1ron being only interested the profits they make? damages the li1es and the en1ironment of the local inhabitants. (@lsen, %88%! ,. "upply chain risks# 5hese are risks that arise from the acti1ities of the entire supply chain (contractors, subcontractors, suppliers, etc! on oil and gas pro/ects. 5oor and @gunlana, (%882! re1eal that contractor inexperience is among the top ten causes of delays in construction pro/ects especially with traditional type contracts. (5oor and @gunlana, %886 citing @deh and =attaneih, %88%!. 5his disco1ery aligns with the results from a sur1ey by (&ong, et al., %88-! where the incompetence of contractors ranked the most rampant problem in the industry. 5he more effecti1e the supply chain is, the more the pro/ect depends on them. 5he risk of poor uality products being deli1ered and the risk of a break in the %6

supplier.s production are usually experienced in oil and gas pro/ects in *igeria due to incessant power failures and una1ailability of genuine construction materials and e uipments. -. Competence risks# 5hese are risks due to poor management and employee competency on pro/ects. Inefficient communication can lead to misunderstandings and errors while poor leadership leads to production losses and reduces staff confidence. In *igeria, contracts are won by indigenous unskilled companies either because the company owners ha1e (ethnic, family, religion, group, etc! ties with the person awarding the contract e.g. minister, because Mdue process. (@kpala, )77)! is neglected? to the detriment of competent multi(national companies with high technical skill and financial patronage. 5hese results to poor uality /obs being done on pro/ects, time and budget o1erruns. 0. Complexity risks# 5hese are risks that arise due to the complex nature of pro/ects. Dastrous, et al., ()77)! re1eals that increases in complexity of e uipments, systems, processes and procedures used in carrying out pro/ects, will probably lead to risks of technological failure which could lead to accidents. De1elopment of complex designs for engineering pro/ects can make buildability 1ery difficult because useful time is usually wasted in trying to understand the design concept? that is why in *igeria, most offshore platform designs are made as simple as possible. &ouca and Eohammed Ali, (%886! acknowledges that, due to the hostile en1ironment which offshore installations are operated on, designs should be kept 1ery simple and at the same time the safety and protection of assets and personnel must be considered. 2. Information technology (I5! and technology risk# Chittaker, ()77)! re1eals that one third of most software related pro/ects were terminated before their nominal completion time. (Chittaker, )77) cited in Nafra(Cabe3a, et al., %886! 5hese are risks that arise due to the internal risks that new technologies and information

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