Managing Non Technical Risks in Major Capital Projects

Transcription

1 Managing Non Technical Risks in Major Capital Projects Alessandro Sestagalli (Partner ERM) Copyright 2017 by ERM Worldwide Group Limited and/or its affiliates ( ERM ). All Rights Reserved. No part of this work may be reproduced or transmitted in any form or by any means, without prior written permission of ERM.

2 Why is Social Licence to Operate Important? Social License to Operate is Critical to Business Performance Recognition of the growing influence of communities to stop or slow projects, no matter how exemplary a company s track record is with social engagement Business Risks facing Mining & Metals (source: E&Y) Ernst and Young cite Social Licence to Operate as one of the top three under the radar business risks for mining and metals Community Conflict Costs Money Research shows that community conflicts over environmental and social concerns can incur costs up to US$20m a week in lost value for large-scale operating mines. Cost of Company-Community Conflict in the Extractives, Harvard Kennedy School, 2014 Managing Conflict takes Time For one company, the working assumption is that 5% of an asset manager s time should be spent managing social risk; yet it is in fact 10 15%, and in one Asia Pacific country it is 35 50%. senior management were estimating that assets worth 10% or less of the company s income were demanding more than 80% of senior management time, including in one case, of the Chief Executive Officer s. The costs of conflict with local communities in the extractive industry R. Davis, D Franks for International Seminar on Social Responsibility in Mining

3 Are these Social Impacts and Benefits Familiar? Employment Enhanced Local Supplier Capability Increased incidence of communicable diseases Reduced availability of natural resources Stakeholder expectations Reduced Community Security Physical and economic displacement Increased Traffic and Deteriorating Roads In-migration Pressure on infrastructure and services Changes to Community Networks Community conflict 3 All these social impacts and benefits have potential to strengthen or undermine a company s social licence to operate

4 Delayed extractive projects with CAPEX greater than $500m Length of delay (months) Oil and Gas Mining 4 Source: ERM Analysis

5 Almost half of projects are delayed Mining project delays ( ) Causes of delay* Delayed 46% Lack of social acceptance Environmental concerns 35% 42% No delay reported, project in progress 24% Permitting issues Land Access Health & Safety Adverse Extreme weather Commercial issues 6% 6% 3% 23% 35% Non technical causes Delivered on schedule 30% Revenue sharing Technical challenges No details available 6% 3% 6% Other causes 0% 50% *Does not sum to 100% due to multiple causes of delays 81% of delayed projects had one or more non-technical cause 5 Source: ERM Analysis

6 4 Steps to valuing Non Technical Risks Step 1: Understand the project context Step 2: Generate options and future scenarios Step 3: Quantify value at stake Step 4: Select and communicate preferred option(s) Identify key project decisions Identify value drivers, risks and opportunities Generate options for key project decisions Define future scenarios by option Define assumptions to quantify value by option Calculate NPV excluding and including value at stake by option Compare option NPV and analyse total value at stake Select option(s) of least regret Communicate value at stake to key decision makers 6

7 How do decisions impact project value? Concept Pre-Feasibility Feasibility Execution Operation Closure & Maintenance Project options are analysed. Tendency to opt for options producing the highest NPV Economic model estimates are refined Companies assume the best case scenario when it comes to NPV excluding NPV Project value established based on production characteristics and benchmark costs Projects face a number of key decisions Option 1 Which water source should we use? What Option construction 2 method should we use? Where should we place waste facilities? Option 3 and value seeking studies optimise design Delays in obtaining permits and/or social acceptance can erode substantial value Events (e.g. weather, protests) can disrupt production eroding value NPV including Changing regulations can increase the costs of end-oflife Option 4

8 Selecting the preferred option Concept Pre-Feasibility Feasibility Execution Operation Closure & Maintenance Project teams may consider more sustainable options NPV excluding Option 1 NPV Option 2 Option 3 Selecting an option with lower NPV but less risk can prevent delays protecting value Designing projects with potential disruption events in mind can minimise impact More sustainable designs can reduce end-of-life liabilities Option 4 NPV including

9 Key questions to consider How well are stakeholders understood and how do they perceive the project? Is there a compelling external value proposition for key stakeholders? Are the financial and other consequences of these risks well understood by all? 9