One of the reasons? He – or his company – or perhaps his whole industry – doesn’t seem to understand a simple equation which most project managers know by heart.
RF = P * I
Risk Factor is the product of Probability andImpact.
In any uncertain situation, you should be able to determine how much effort is required to spend in responding to a risk (a threat in this case) by understanding the Risk Factor (some call it Risk Score).
In this case, the probability may be very, very low. But the impact is so astronomically high, that the product – the Risk Factor demands a huge risk treatment or response.
The impact in this case is a combination of very tangible things, like a $20B escrow fund, some mildly tangible things, like the health of one of the world’s most delicate ecosystems and the livelihood of hundreds of thousands of people, and the intangibles, such as the reputation of a multinational corporation which has just spent oodles (our own very technical financial word) of dollars to make their image a very green and friendly one. How’s that working out for you, BP?
So – in that equation, I think we can all agree that no matter how low “P” is, “I” is very, very, high. So the Risk Factor is going to be worth considering.
And yet.
And yet…
Just before the explosion of the Deepwater Horizon rig, BP sent home a crew from Schlumberger who was going to do a cement bond log. What is that, you ask? It’s a “representation of the integrity of the cement job, especially whether the cement is adhering solidly to the outside of the casing. The log is typically obtained from one of a variety of sonic-type tools. The newer versions, called cement evaluation logs, along with their processing software, can give detailed, 360-degree representations of the integrity of the cement job.” Seems like a good thing to do – and good assurance that your bond will hold. Right? The cost of this would have been $128,000. This is only one of five decisions being raised at what can only be called the grilling of Tony Hayward. The questions, coming from Republicans and Democrats, from oil states, and states that grow corn, all seem to be going after the companies acknowledgment of the Risk Factor equation above.
There is one point in the dialogue where Hayward seems to recognize the equation – however fleetingly:
“It gets to that point, though, that you have to question every assumption, especially when your entire company and its solvency are on the line.”
…and that equation leaves out the 11 dead, the ecological damage and the fact that the Gulf provides a livelihood for so many people as well as food for the world.
So what’s our point?
Keep the equation handy. Keep it in mind.
Don’t be so fast to save $128,000 when on the other side of the equation there is a tangible $20B, and an even greater list of intangible damages to consider. Your numbers may be lower (hopefully on both sides of the equation) but you will face this same choice. Think of that picture above. Do you want to have to wear that expression?
As instructors in PM we are often asked to help students distinguish between Secondary and Residual Risk.
Let’s learn a little from the (ongoing) Deepwater Horizon oil situation.
As you know, the current efforts (risk responses or treatments) are all about surrounding the oil slick, attempting to shut off, or capture the flow of oil, and to disperse the oil with chemicals called dispersants. This is to break up the oil into smaller globules and to give it the freedom to spread not only out, but down as well. As it turns out, however, the chemicals used to do this may be at least as dangerous as the oil itself.
Welcome back. You did read it, right? If not, we’ll give you one more chance.
OK…really now, welcome back!
The treatment or response to the risk has caused a new risk. This a textbook example of secondary risk.
It’s different from residual risk. Residual risk would be the oil (or residue) that remains even after treatment. Actually it’s a pretty good mnemonic . Residue–> Residual.
Our sister site has blogged on this subject as well, in a posting which uses – of all things – falling out of an airplane – as an analogy. It’s called “oh chute!”. Check that out, too.
You’d think that the environmental protection or “Climate Bill” might be shored up (excuse the terrible pun) by the Deepwater Horizon oil spill, which will likely overtake the Exxon Valdez as the USA’s worst oil spill. In fact, the latest news from the spill involves the shutdown of all fishing in the entire Gulf area (see this story from the Houston Chronicle).
“More than 6,800 square miles of federal fishing areas, from the mouth of the Mississippi to Florida’s Pensacola Bay were closed for at least 10 days on Sunday by the National Oceanic and Atmospheric Administration. NOAA Administrator Jane Lubchenco says government scientists are taking samples from the waters near the spill to determine whether there is any danger.”
So…all of this should help pass the Climate Bill, right? After all, the Climate Bill is about alternative energy, right? And after all, the Climate Bill is about protecting the environment, right?
Think again.
As it turns out – and this is politics, folks – the bill calls for new offshore drilling; this was one of the concessions made to help build consensus for the bill. Project managers know that a hybrid of compromise and collaboration often are what’s needed to get things done – and that’s what happened here.
But in this case, the inclusion of new offshore drilling in the light of this catastrophe will probably end up killing the bill, which is already stalled, puttering, and nearly dead anyway.
May 14, 2010 – news story broken by NPR – see full story here.
The amount of oil spilling into the Gulf of Mexico is far greater than official estimates suggest, according to an exclusive NPR analysis.
At NPR’s request, experts analyzed video that BP released Wednesday. Their findings suggest the BP spill is already far larger than the 1989 Exxon Valdez accident in Alaska, which spilled at least 250,000 barrels of oil.
[Editor's comment: this means the Gulf oil spill is like one Exxon Valdez every four days]
Steven Wereley, an associate professor of mechanical engineering at Purdue University, analyzed videotape of the seafloor gusher using a technique called particle image velocimetry.
A computer program simply tracks particles and calculates how fast they are moving. Wereley put the BP video of the gusher into his computer. He made a few simple calculations and came up with an astonishing value for the rate of the oil spill: 70,000 barrels a day — much higher than the official estimate of 5,000 barrels a day.
The method is accurate to a degree of plus or minus 20 percent.
UPDATE 21-MAY:
The update above still was too conservative; the estimates are much larger. BP has been forced to admit that the 5,000 gallon-per-day rate was far off, because they are siphoning 5,000 gallons per day and the camera still shows huge plumes billowing out.
There is now a “SpillCam” on the US Government DOE site:
However, it’s been down almost since inception because of bandwidth problems (seems like a lot of people have an interest in this!) You can still get a view of what’s going on down there from Senator Bill Nelson’s site, which captured some of the video and put it up on his site.
We’ve written about Cape Wind in our blog many times, (as well as on sister site ScopeCrepe)- from an environmental perspective and a project management perspective. Many, many lessons learned here. Textbook examples of stakeholder management (and mismanagement). Stakeholder interaction. And from a green PM perspective – the effect of environmental projects on the economy. 1,000 construction jobs, and an unspecified number of new PM jobs are expected to be added by this $1B, 130-turbine project. 75% of Cape Cod’s electrical power needs are expected to be served by Cape Wind’s contribution to the grid.
On April 28, the project received Federal approval. See the story published in today’s Boston Globe here. There are already almost 100 moderated comments on the story. UPDATE: The Globe has a good video here as well.
Cape Wind Receives Federal Approval for First Offshore Wind Farm
Secretary of the Interior Ken Salazar on Wednesday approved the Cape Wind offshore wind farm, completing the last regulatory step for the project which was first propsed for Nantucket Sound about eight years ago.
The project has been delayed throughout the permitting process by opposition from coastal residents who fear the wind turbines, which will be erected five miles from shore, will devalue coastal properties and affect tourism.
Salzar said the developer of the $1 billion wind farm must agree to additional measures to minimize the potential adverse impacts of construction and operation of the facility.
“After careful consideration of all the concerns expressed during the lengthy review and consultation process and thorough analyses of the many factors involved, I find that the public benefits weigh in favor of approving the Cape Wind project at the Horseshoe Shoal location,” Salazar said in an announcement at the State House in Boston. “With this decision we are beginning a new direction in our Nation’s energy future, ushering in America’s first offshore wind energy facility and opening a new chapter in the history of this region.”
The Cape Wind project is expected to be the first wind farm on the U.S. Outer Continental Shelf, generating enough power to meet 75% of the electricity demand for Cape Cod, Martha’s Vineyard and Nantucket Island combined.
A number of similar projects have been proposed for other northeast coastal states, positioning the region to tap 1 million megawatts of offshore Atlantic wind energy potential, which could create thousands of wind jobs in manufacturing, construction and operations and displace older, inefficient fossil-fueled generating plants.
Is everyone happy with this?
Um, no.
From the “Save Our Sound” web page:
Coalition of Stakeholder Groups Announce Cape Wind Lawsuits
Native American Tribes, Commercial Fishermen, Environmental Groups, Towns and Others Will File Suit to Bar Industrial Wind Project from Nantucket Sound
Hyannis, MA – A wide ranging coalition of stakeholder groups will immediately file suit in response to Secretary Salazar’s ruling to approve the Cape Wind project.
“While the Obama Administration today dealt a blow to all of us who care deeply about preserving our most precious natural treasures – this fight is not over,” said Audra Parker, president and CEO of the Alliance to Protect Nantucket Sound. “Litigation remains the option of last resort. However, when the federal government is intent on trampling the rights of Native Americans and the people of Cape Cod, we must act. We will not stand by and allow our treasured public lands to be marred forever by a corporate giveaway to private industrial energy developers.”
Lawsuits will be filed on behalf of a coalition of environmental groups – including the Alliance to Protect Nantucket Sound, Three Bays Preservation, Animal Welfare Institute, Industrial Wind Action Group, Californians for Renewable Energy, Oceans Public Trust Initiative (a project of the International Marine Mammal Project of the Earth Land Institute), Lower Laguna Madre Foundation – against the federal Fish and Wildlife Service and Minerals Management Service for violations of the Endangered Species Act.
The Alliance to Protect Nantucket Sound, along with the Duke’s County/Martha’s Vineyard Fishermen Association, will also file suit against the federal Minerals Management Service for violations under the Outer Continental Shelf Lands Act. The Town of Barnstable has filed a notice of intent to file a lawsuit on the same grounds. And the Wampanoag tribe is preparing to mount a legal challenge to the project for violations of tribal rights. Additional legal issues include violation of the National Environmental Policy Act, the Migratory Bird Treaty Act, the Rivers and Harbors Act, the Clean Water Act, and the Outer Continental Shelf Lands Act.
Secretary Salazar’s decision ignores the recent positions taken against the project by the Advisory Council on Historic Preservation, the National Trust for Historic Preservation, the Massachusetts Historical Commission and the National Park Service, which ruled recently that Nantucket Sound was eligible for listing on the National Register of Historic Places which, like our national parklands, would provide it a higher level of protection from industrial development.
The Advisory Council on Historic Preservation (ACHP) recommended that Secretary Salazar deny or relocate the proposed Cape Wind project because its effects would be “pervasive, destructive, and, in the instance of seabed construction, permanent.”
The ACHP called on Secretary Salazar to either deny the project or relocate it to a nearby alternative such as the compromise location outside of Nantucket Sound approximately ten miles south of the proposed site. The compromise location, South of Tuckernuck Island, has gained the support of every stakeholder involved, including Native American tribal leaders, state and federal historic preservation agencies, environmental groups, cities and towns, elected officials, airports, ferry lines, chambers of commerce and many others.
“It is a shame that the Obama Administration chose political expediency over developing a project in an environmentally responsible place that can actually be built,” said Parker. “The compromise location would have avoided years of litigation and allowed this project to move forward.”
Secretary Salazar left unaddressed the growing concerns in Massachusetts over the project’s energy costs to ratepayers and its overall cost to taxpayers.
Earlier this month Rhode Island rejected a deal between National Grid and an offshore wind project that would have set a rate that was nearly triple the current cost for electricity. The electric utility tapped to buy power from Cape Wind, National Grid, has failed to reach a similar agreement on the cost to ratepayers of Cape Wind’s energy.
Most estimates have put the cost of Cape Wind energy at two to three times the current rate for conventional power. This comes on top of the $10 billion ISO New England recently announced would be necessary to upgrade the region’s electrical grid and transmission facilities as a result of Cape Wind and other wind projects.
Massachusetts Secretary of Energy and Environmental Affairs Ian Bowles recently expressed concern over the project’s energy costs as did the state’s largest business group, the Associated Industries of Massachusetts.
Consumer anger is also palpable. In a recent survey conducted by the University of Massachusetts, a majority of consumers said they would not pay more for electricity produced by wind turbines. Much of the support for wind energy was based on the false assumption that offshore wind will lower electric bills. At the projected Cape Wind power rate, nearly 80 percent of respondents registered opposition to the project.
What do YOU think?
You can certainly familiarize yourself with the opposite ends of this spectrum by going to the two sites Save Our Sound and Cape Wind.
We suggest that you go either to the Boston Globe article or the Cape Cod Times and comment directly to the most local coverage. And of course, you’re welcome and encouraged to comment here.
Drilling turns to grilling
You see that man? That’s Tony Hayward, CEO of BP.
Does he look happy? No, he’s not happy.
Does he look comfortable? I don’t think so.
He’s being grilled by the US Congress.
One of the reasons? He – or his company – or perhaps his whole industry – doesn’t seem to understand a simple equation which most project managers know by heart.
RF = P * I
Risk Factor is the product of Probability and Impact.
In any uncertain situation, you should be able to determine how much effort is required to spend in responding to a risk (a threat in this case) by understanding the Risk Factor (some call it Risk Score).
In this case, the probability may be very, very low. But the impact is so astronomically high, that the product – the Risk Factor demands a huge risk treatment or response.
The impact in this case is a combination of very tangible things, like a $20B escrow fund, some mildly tangible things, like the health of one of the world’s most delicate ecosystems and the livelihood of hundreds of thousands of people, and the intangibles, such as the reputation of a multinational corporation which has just spent oodles (our own very technical financial word) of dollars to make their image a very green and friendly one. How’s that working out for you, BP?
So – in that equation, I think we can all agree that no matter how low “P” is, “I” is very, very, high. So the Risk Factor is going to be worth considering.
And yet.
And yet…
Just before the explosion of the Deepwater Horizon rig, BP sent home a crew from Schlumberger who was going to do a cement bond log. What is that, you ask? It’s a “representation of the integrity of the cement job, especially whether the cement is adhering solidly to the outside of the casing. The log is typically obtained from one of a variety of sonic-type tools. The newer versions, called cement evaluation logs, along with their processing software, can give detailed, 360-degree representations of the integrity of the cement job.” Seems like a good thing to do – and good assurance that your bond will hold. Right? The cost of this would have been $128,000. This is only one of five decisions being raised at what can only be called the grilling of Tony Hayward. The questions, coming from Republicans and Democrats, from oil states, and states that grow corn, all seem to be going after the companies acknowledgment of the Risk Factor equation above.
There is one point in the dialogue where Hayward seems to recognize the equation – however fleetingly:
“It gets to that point, though, that you have to question every assumption, especially when your entire company and its solvency are on the line.”
…and that equation leaves out the 11 dead, the ecological damage and the fact that the Gulf provides a livelihood for so many people as well as food for the world.
So what’s our point?
Keep the equation handy. Keep it in mind.
Don’t be so fast to save $128,000 when on the other side of the equation there is a tangible $20B, and an even greater list of intangible damages to consider. Your numbers may be lower (hopefully on both sides of the equation) but you will face this same choice. Think of that picture above. Do you want to have to wear that expression?
You can track the actual questioning here.