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Cost Benefit Analysis Business Zone document sample
Document Sample
DNV Software
CCPS Orlando 2006
Process Business Risk - A methodology for assessing
and mitigating the financial impact of process plant accidents
Nic Cavanagh and Jeremy Linn
26.04.2006
Contents
Background and Introduction
The Financial Risk Concept
Methodology and Model
Example study
Conclusions
Questions
Slide 2
Background
During the 1980’s many oil, gas and chemical companies were cash-
rich and extremely proactive over safety issues
Internal standards were often set at more onerous levels than
legislation of the time demanded
Today’s environment is far more competitive
“Good safety means good business!” Demonstrating this is not always
straightforward
By combining techniques from QRA and RBI, Financial Risk Analysis
can be used to demonstrate the financial risks inherent in an operation
The “Q” of QRA need not be fatalities, but could equally be cost
Slide 3
Background
We have developed a methodology which can be used to calculate the
risks associated with process plant operation in financial terms
This has been implemented as an extension to SAFETI, SAFETI
Financial
Looking at a range of operational scenarios and cost mitigation
methods we can demonstrate how financial risks can be reduced
The methodology is described and an example is presented
This is used to demonstrate situations where risk to life may be low
but there are significant financial risks
Slide 4
Introduction – Managing Financial Risks
Over the last 30 years management of risks to life from major accident
hazard facilities has improved steadily
Driven by a number of major accidents - Flixborough (1974), Bhopal
(1984), Piper-Alpha (1988) and, more recently, Enschede (2000),
Toulouse (2001), Fluxys (2004) and Texas City (2005)
These have resulted in significant fatalities and injuries
-The 3 most recent caused in excess of 60 fatalities and 3000 injuries
-These kind of tragedies have driven legislation like RMP and Seveso
Legislation has focused on reducing the risk of fatalities and injuries,
so the industry is in good shape from the point of view of safety
There have been many high profile accidents causing few fatalities
but large losses like Seveso and Esso Longford (both estimated at
>$1billion)
Single incidents have caused large financial losses often with no
fatalities; so from the safety standpoint they’re “off the radar!”
Slide 5
Introduction – Recent Focus
Focus has moved from improved safety and compliance with
legislation to better financial performance
But, “Good safety means good business”
The business risk concept provides a method for demonstrating this
Traditional QRA can be extended to assess the financial
consequences of accidents and associated financial risk exposure
In today’s competitive business environment key drivers are improved
financial performance, maximised up-time, reduced insurance costs or
reduced risk of interruption to business resulting from an accident
Slide 9
The Financial Risk Concept - QRA
Traditional QRA provides a technique for
quantifying the risks associated with the
production and processing of chemicals and
petrochemicals
To quantify risks it is necessary to identify all
possible risk situations, quantify them in
terms of event consequence and
likelihood and compare them
with acceptance criteria
The questions to be answered
-What can go wrong
-What are the effects if it does go wrong
-How often is it likely to go wrong
-What risks am I exposed to
Slide 11
The Financial Risk Concept - QRA
Typical output from
a QRA
SAFETI
-Risk contours for
individual risk
-FN curves for
societal risk
PHAST
-Various flammable
and toxic effects
(Toxic Dose,
radiation ellipse,
flame envelope,
overpressure radii)
Slide 12
Financial Risk Concept - SAFETI Financial
Risk to life is only one of the risks inherent in the operation of a
process plant
Others include risk to the environment, risk to assets and
equipment and risk to financial performance generally
All these “risks” have a cost associated with them
This can be calculated in the same way as fatality risk provided
appropriate cost parameters are available
By integrating some additional data and extending the
methodology, the SAFETI approach to QRA can be extended to
FRA (Financial Risk Analysis)
SAFETI Financial is an extension to SAFETI enabling FRA to be
performed
Slide 13
Financial Risk Concept - SAFETI Financial
The questions to be
Plant
answered by Financial Risk Data
Analysis may be
Hazard
-What can go wrong Analysis
-What will it cost if it Derive
Generic
does go wrong Failure Rate
Data
Failure
Cases
-How likely is
it to happen Historical
Failure Rate
Calculate
Calculate
Consequences/
Frequencies
Data Costs
-What is the
maximum loss I Safety
can incur as a result Management
Factor
of an accident
MET Data
-What is my overall Asset Data
Calculate
financial risk exposure Financial Risks Environmental Data
Equipment Data
-How can I reduce it Population Data
Ignition Data
Cost Benefit
-And others….. Analysis
Slide 14
Financial Risk Model
For the model under consideration here, the key elements are:-
A geographical model of the facility and surroundings including
population, ignition sources and asset and equipment data
A complete set of major accident hazard scenario failure cases for the
facility
A set of representative weather conditions and their directional
probabilities
Estimation of the likelihood of each failure case
Modelling of the range of potential consequences for each failure case
Assessment of the impact of each of these on the plant, surrounding
assets and population
Calculation and assessment of the financial risks associated with
these impacts
Slide 15
Financial Risk Model - Contributors
Typical contributors to overall financial losses resulting from an accident
may include:-
Impact on people in terms of fatalities and injuries
Property damage including capital costs to repair or replace damaged
equipment and damage to other assets
Business interruption and lost production
Cost of lost inventory from sources and other damaged equipment
Environmental damage, including clean-up costs, fines, impact on
animal and plant life
Plus many other outcomes with financial impact
-legal costs, fines, loss of reputation, brand damage, compensation,
reduction of share prices and so on
Slide 16
Financial Risk Model - Output
Typical output from a financial consequence analysis may be
-Cost of a single failure case
-Cost per outcome or per cost category, or both
-Cost ranking per scenario
This is of use in assessing areas where a single event may result
in unacceptable losses
For financial risk, typical output includes
-Frequency-Cost curves (analogous with FN curves from
traditional QRA)
-Estimated Annual Average Loss (EAAL) and Estimated
Maximum Loss (EML)
This is of use in assessing the overall financial risk associated
with your operation
Slide 17
Financial Risk Model– Business Benefits
Aiding the decision making process with risk reduction
recommendations supported by cost benefit analysis techniques
Reducing exposure to financial risk by assessing the relative benefits
of different risk mitigation strategies
Comparison of financial risk exposure for a range of process and
operating conditions
Financial risk trends with time
Direct assessment of financial risks from major process plant hazards
Better understanding of appropriate levels of insurance in terms of
both maximum insured losses and deductible levels
Slide 18
Financial Risk Model - Calculations
The total financial risk is the integration of the total risk due to impacts
on people, equipment and other assets in terms of damage and
replacement cost, business interruption, cost of environmental impact
and other outcomes such as legal costs, fines, brand damage, etc.
The methodology used in this model considers financial risk in terms
of the following asset types
-Population
-Original Source Equipment
-Other Specific Equipment
-Other Assets (buildings, non specific plant, infrastructure, etc.)
Cost contributors within each of these asset groups may include
equipment damage, lost inventory, business interruption and
environmental clean-up
Slide 20
Financial Risk Model - Calculations
The Damage Level and Vulnerability Factor Concept
The simplest method for assessing the impact of each consequence
on a receptor
-Define a threshold value for each outcome type above which an
asset suffers 100% damage and below which it suffers no damage
This can be extended to a range of threshold damage levels with
associated vulnerability factors – we typically use 2
In simple terms we are saying – At “Damage LeveI” of this effect
“Vulnerability Factor” proportion of asset is lost
For example, radiation
-Damage Level ≥ 37.5 kW/m2 ,Vulnerability factor =1
-Damage Level ≥ 12.5 kW/m2 ,Vulnerability factor =0.5
-Damage Level < 12.5 kW/m2 ,Vulnerability factor =0
Slide 23
Financial Risk Model - Calculations
Damage Level and Vulnerability Factor Concept
For explosions, jet-fires and pool fires, upper and lower damage levels
(overpressure and radiation respectively) are defined with a
vulnerability factor between zero and 1 associated with each level
For flash fires a fraction of LFL is defined below which no damage
occurs, above which maximum damage occurs, as defined by the
appropriate vulnerability factor
For toxic releases, a concentration is provided below which no
damage occurs and above which maximum damage occurs, again
based on the relevant vulnerability factor
-Toxic damage is intended primarily for use with assets where damage will
result in some kind of pollution which has an environmental clean up cost
associated with it
Slide 24
Financial Risk Model – Hazard Zones
The figure below illustrates 2 hazard zones, one for each damage
level, superimposed on a GIS map
Also shown
is an
example of
each
receptor type
available in
the model
Slide 25
Financial Risk Model – Damage Level Concept
The bold inner and outer footprints represent typical upper and lower
threshold damage levels
Any receptor outside the lower threshold value will be undamaged
Any receptor between
the inner and outer
boundaries will be
damaged to the degree
indicated by the lower
vulnerability factor
Any receptor within the
inner threshold
boundary will be
damaged to the degree
indicated by the upper
vulnerability factor
Slide 26
Financial Risk Model – Source Costs
Each source will have a cost Equipment Type Outage Time (day) Repair/Replace Cost ($)
associated with it whether it Large Pipes 7 50,000
impacts other assets or not Medium Pipes 4 20,000
Small Pipes 2 5,000
Each source is defined as a Compressors 14 250,000
particular equipment type, Exchangers 5 50,000
which will have its own Vessels 7 40,000
Filters 1 10,000
unique outage time and
Reactors 14 80,000
repair cost Tanks 7 80,000
Pumps 0 5,000
The model also allows user
Heater 5 60,000
defined equipment types to Column 21 10,000
be added with their own Other / General 7 20,000
outage time and repair costs Mobile Buildings 5 25,000
Brick Buildings 15 100,000
The same look-up Asset Zones 5 1/m2
information is available for None 0 0
equipment
Slide 27
Financial Risk Model – Population & Equipment
Population Zones
Population information can be entered directly through the GIS
For financial risk calculations based on population the following
additional data is required
-Cost of a Solitary Fatality
-Number of Injuries Per Fatality
-Cost of a Single Fatality Among Many Fatalities
-Cost of One Injury
Equipment Items
An equipment item acts as a point receptor to a hazard zone
Typical examples of assets you may wish to include as specific items
of equipment are
-Large capital value items of plant which do not represent a hazard
-Storage facilities for non-hazardous material of high capital value
Slide 29
Financial Risk Model – Asset Zone
An asset zone is a generic receptor type which will result in a cost
being incurred if it is impacted by a hazard zone with a large enough
damage level
It is treated in the same way as an equipment item in terms of
financial risk, but with no contribution from environmental costs
Typical examples of assets may be
-On-site buildings like control rooms and offices
-Off site buildings and infrastructure including, for example, houses,
commercial buildings, factories, warehouses, etc
-Areas of a plant which do not contribute directly to risk as possible sources
of hazardous releases but have intrinsic value which will be compromised if
damaged
Slide 30
Financial Risk Model – Parameters
Much of the data described above is available as a set of default
parameters within the model
These may be modified on a case by case basis for each receptor
and cost category type
Data available as defaults includes
-Damage levels and vulnerability factors for each outcome type, cost
category and receptor type
-Cost of lost production per day, environmental clean-up per kg,
environmental costs for other effects per kg and value of lost inventory
-Outage time and repair cost for each equipment type with ability to add
new types
-Financial information relating to fatalities and injuries including cost of a
solitary fatality, cost of single fatality amongst many, cost of an injury and
number of injuries per fatality
Slide 31
Example Study – The Model
Example
model
populated with
a number of
sources and
receptors
This is the
basis for a
simple
Financial Risk
Analysis study
for a facility
illustrating
some of the
benefits
Slide 37
Example Study – FN Curves
Slide 38
Example Study – Risk Contours
Slide 39
Example Study – Frequency/Cost Curves
Slide 40
Example Study – Frequency/Cost Curves
Slide 41
Example Study – Financial Risk Ranking
Slide 42
Example Study – EAL Report
Slide 43
Example Study – Maximum Cost Report
Slide 44
Conclusions
Traditionally QRA has been used to ensure safe operation, usually from a
compliance perspective
Methodologies like QRA can be extended to evaluate a broader range of
business risks and assess their financial impact
A model has been described which enables the estimation of the overall
financial risks associated with process plant operations
This is an extension of the well known SAFETI QRA model
The same principles could be used with any fatality risk model to extend
applicability to financial risk as described above
Key benefits of using this kind of model are
-Allows identification of key contributors to financial risk
-Assess benefits of different financial risk reduction strategies
-Provide a cost-effective method for assessing appropriate insurance levels
-Method of demonstrating benefits of financial risk analysis to senior management and
illustrating how the operational risks can be reduced
Slide 45
Questions
Slide 46
2006 DNV Software
