1206-1370794 Reducing Asset Risk Thought Leadership

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Reducing your asset riskIn the early evening of 9 September 2010, when many residents of the San Francisco subur

of San Bruno were arriving home from work or sitting down to dinner, a natural gas pipeline

that served the community ruptured and burst into ames.

The explosion and re ripped through the Crestmoor subdivision, destroying 38 homes and

damaging many more. Eight people were killed.

For the people of San Bruno, the experience was a life-altering tragedy, one that will never be

forgotten.

For the company that operated the pipeline, the explosion was a catastrophic nancial event

one expected to wipe out an estimated 15 to 20 years of earnings. Approximately

70 separate lawsuits were led in the case, representing more than 100 plaintiffs. In addition

to expected payouts to those impacted, the company continues to suffer from negative

impacts to its stock price, corporate reputation and relations with regulatory agencies.

The section of pipe that failed in San Bruno had much in common with many other pipelines

buried underground in major cities and towns across the United States. Aging infrastructure

much of it installed from the 1930s to the 1960s under different manufacturing and

construction processes and without consistent regulatory oversight, is a looming issue for

many companies in the utility and energy industries.

For example, cast iron mains and service lines, which were prevalent from the 1830s until

after World War II, are prone to failure due to graphitization or brittleness. Many major urban

areas such as Philadelphia, Boston, Detroit, Washington, DC, and more still have cast iron pip

under ground.

Plastic pipe, too, can fail prematurely due to cracking. Even steel pipelines and connectors c

break or rupture due to corrosion, stress, settlement or cyclic fatigue. Regardless of materialused, aging and the effects of soil and water on pipelines take their toll.

According to the Pipeline and Hazardous Materials Safety Administration, only timely repair,

rehabilitation and replacement of high-risk pipeline infrastructure can prevent the types

of tragedies suffered in San Bruno. Yet distribution lines rarely receive the same level of

inspection and maintenance that major interstate pipelines do, despite the fact that they face

the same corrosive conditions. Some of this is due to technological reasons — unlike major

interstate transmission pipelines, many older distribution lines, especially those that service

A split-second failure of

equipment or facilities can lead

to years of enormous expense,

loss of reputation and difcult

relations with stakeholders.

Using Critical Asset Risk andInvestment Planning (CARIP)

can help your company better

understand — and mitigate —

risks related to energy assets.

Oil & GasCritical Asset Risk and

Investment Planning

July 2012



2 Reducing your asset risk

numerous homes and businesses, cannot be “pigged,” or inspected by

remote devices. In addition, interstate lines typically have well-marked

right-of-ways that can be visually inspected by air or by crews on the

ground. Those types of right-of-ways and inspections are impossible

inside the city gate.

It is just common sense that aging assets are more likely to break

down or cause problems. So why is there delay in replacing old

infrastructure? For companies in the regulated utility industry, one

reason has been the reluctance of ratemakers to grant cost relief

for capital-intensive replacement plans, especially during economic

downturns. Another is simply the shortage of available, skilled

resources to administer such a large program. For unregulated

oil and gas companies, it may be as simple as not having a good

understanding of the organization’s totality of assets and their age

and relative level of risk. This is often tied to a lack of asset-oriented

focus in their enterprise risk programs. And some companies simply

choose to take comfort in the low probability of such an event.

For energy companies that operate in or near populated areas, these

delays or oversights are a recipe for disaster. It only takes one small

failure to create a major public tragedy that can impact the companyfor years to come. To minimize the possibility of failure, managing

asset risk is critical, and increasingly, regulators are asking companies

to develop formal programs for understanding — and mitigating

— catastrophic risk. It is only a matter of time before insurance

companies, state and federal ofcials and the investment community

begin asking the same oil and gas companies.

Understanding critical asset riskAt Ernst & Young, we use a process called Critical Asset Risk and

Investment Planning (CARIP) to help energy companies identify,

account for and mitigate the risks involved with deployed assets, both

above and below ground.

This fully informed and comprehensive approach is centered on

helping companies mitigate the risks inherent with assets where

regulatory compliance or cost recovery are deemed inadequate

to ensure safe, reliable operations. Through this process, we help

companies shift their investment and recovery strategy from one

driven by regulatory mandates — the traditional approach — to one

that is underpinned by a quantied impact assessment of high-

risk, mission-critical assets. The objective of CARIP is to provide

senior management with the data needed to understand the level

of risk facing the company and to quantify the actual value of asset

replacement, enhanced maintenance or inspection programs, and

other risk management measures.

Put simply, CARIP can inform the executive team which assets are

most likely to fail next, what it will cost the company when they do

fail, and where the company should invest its money and staff’s time

to help ensure that the failure never happens.

CARIP provides a “portfolio-level view” of signicant asset risks facin

the company, as well as an accurate accounting of the potential cost

of those risks. CARIP gives senior managers the tools they need to

understand the signicance of risk the company faces each day and

to measure the changes in the company’s risk prole over time.

How CARIP worksObviously, predicting the exact failure date of an asset — such as

a section of pipe or an offshore drilling rig — is impossible. Energy

companies with aging assets must be guided by what can be knownor reasonably estimated. CARIP uses proprietary predictive modelin

tools to identify critical assets with a potential for failure, and

categorizes that risk so that companies can prioritize their response

For energy companies, regulatory strategy can then be formulated

to isolate the highest priority assets and make the case for risk

mitigation recovery or settlements. Or in the unregulated world,

signicantly improve their asset risk mitigation plans by enhancing

maintenance programs or capital planning activities.

Here is how a typical CARIP process works:

First, the company’s full range of critical assets are identied anddivided into three categories. The rst category includes all assets in

the traditional compliance management system. Investment plannin

for all assets must remain adequate to maintain full compliance with

federal and state regulations.

The second category is populated by all critical assets in high

consequence areas. These assets are then analyzed, using a relative

likelihood of failure study, to determine their risk prole. Any assets

with a risk prole outside the company’s corporate threshold are

placed in a third group.



Reducing your asset risk

The assets in this third grouping undergo a rigorous risk mitigation

analysis to determine the costs of failure, mitigation and replacement.

This third category can then be positioned with regulators or other

decision-makers as “high-risk, high consequence” assets that require

priority replacement or other risk mitigation activities beyond

mandated compliance.

The investment planning for each category will vary. The rst

category of assets, which contains all critical assets, will continue to

be maintained to the highest level of compliance. Assets in the high

consequence category will be monitored and maintained for future

risk mitigation activities and to help ensure that the level of risk does

not increase.

Assets in the high-risk, high consequence category become the

highest priority and should be managed accordingly. Mitigation

costs will likely affect many operations and maintenance and shared

services cost centers across the company, and the CARIP program

is designed to identify, document and incorporate these costs for

recovery in each category of assets.

The CARIP process is carried out in four phases.

Phase 1: Frame — In this phase, the context, scope and objectives of

the CARIP program are set, the criteria for evaluating alternative risk

management strategies are agreed upon and all relevant stakeholders

are identied.

Phase 2: Gather — Next, critical information about potential risk

events is consolidated and assessed, and current mitigation efforts

are evaluated.

Phase 3: Evaluate — Using qualitative assessment data related to

event probability, impact and correlation, the company’s residual

risk is quantied and risk events are modeled. In addition, potentialalternative risk mitigation strategies are identied and evaluated.

Phase 4: Recommend — In the nal CARIP phase, the company gains

a better understanding of its residual risk and evaluates potential

alternative risk mitigation strategies. Monitoring mechanisms are

designed, action plans are developed and plan approval is received.

Who can benet from CARIP?

The modeling and methodology that Ernst & Young uses in its

CARIP processes can be applied to a wide range of assets. Today,

the commercial airline industry and the nuclear power industry are

excellent examples of businesses that are beneting from similar

methodology to fully understand their asset base and to take

proactive measures to mitigate high consequence risks. The airline

industry, for example, frequently replaces compliant airframes with

new models to manage its catastrophic risk.

Today, energy delivery companies are beginning to recognize the

predictive modeling benets of CARIP, especially as it relates to

helping companies plan and execute well-designed pipe replacemen

programs. But across the energy space, many other types of

companies are also asset-intensive, and face tremendous risks every

day in operations around the globe. Understanding the inherent ris

in their full range of infrastructure assets, including rigs, pipelines,

gathering facilities, storage facilities, reneries and more, is a

necessity in today’s world.

Ultimately, a CARIP approach to asset management mitigates the rito shareholders by producing data — through detailed modeling and

simulations — that accelerates replacement of aging assets and othe

risk mitigation actions. That information can help companies plan

investments in maintenance, testing and replacement; improve the

alignment of staff with critical risks; and justify capital improvement

programs.

Companies using CARIP can take a giant step toward ensuring that

they are never faced with the tragic consequences of an event like th

one in San Bruno.

Understanding the inherent risk in the full range o

infrastructure assets, including rigs, pipeline

gathering facilities, storage facilities, renerie

and more, is a necessity in today’s world



Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in

assurance, tax, transaction and advisory

services. Worldwide, our 152,000 people

are united by our shared values and an

unwavering commitment to quality.

We make a difference by helping our people,

our clients and our wider communities

achieve their potential.

Ernst & Young refers to the global

organization of member firms of Ernst &

Young Global Limited, each of which is a

separate legal entity.

Ernst & Young Global Limited, a UK

company limited by guarantee, does

not provide services to clients. For more

information about our organization, please

visit www.ey.com.

How Ernst & Young’s Global Oil & Gas

Center can help your business

The oil and gas industry is constantly

changing. Increasingly uncertain energy

policies, geopolitical complexities, cost

management and climate change all

present significant challenges. Ernst &

Young’s Global Oil & Gas Center supports

a global practice of over 9,000 oil and gas

professionals with technical experience in

providing assurance, tax, transaction and

advisory services across the upstream,

midstream, downstream and oilfield service

sub-sectors. The Center works to anticipate

market trends, execute the mobility of our

global resources and articulate points of

view on relevant key industry issues. With

our deep industry focus, we can help your

organization drive down costs and compete

more effectively to achieve its potential.

© 2012 EYGM Limited.

All Rights Reserved.

EYG no. DW0174

WR no. 1206-1370794

This publication contains information in summary form

and is therefore intended for general guidance only. It is

not intended to be a substitute for detailed research or the

exercise of professional judgment. Neither EYGM Limited nor

any other member of the global Ernst & Young organization

can accept any responsibility for loss occasioned to any

person acting or refraining from action as a result of any

material in this publication. On any specific matter, reference

should be made to the appropriate advisor.

www.ey.com

Our Risk Advisory ServicesMany organizations have invested heavily in personnel, processes and

technology to better manage their risk. But these investments often

do not address the more strategic business risk areas. To successfully

turn risk into results, companies need to become more effective at

managing scarce resources, making better decisions and reducing the

organization’s exposure to negative events.

Whether we’re helping a business with internal audit, internal

controls, information security or an enterprise-wide issue, we start by

helping organizations answer some key questions, such as:

• What are your key risks and how are they being managed?

• Do you have overlapping risk functions or gaps in coverage?

• Have you optimized the use of technology?

We can then work with companies to drive better business

performance by helping to:

• Enhance the risk strategy

• Embed risk management

• Optimize risk management functions

• Improve controls and processes

• Enhance communications to achieve stakeholder condence

Other key areas of focusUnderpinning our performance improvement capabilities are our

strengths and skills in day-to-day operations, management and

strategic decision-making. These skills are concentrated in the four

supporting areas of:

• Strategic direction

• Performance technology

• People and organizational change

• Program management

Learn moreTo learn more about our experience advising global, national and local

oil and gas companies, contact one of the following Ernst & Young

professionals.

Roy Ellis

Phone: +1 919 981 2939 Email: [email protected]

Matt Chambers

Phone: +1 713 750 5944

Email: [email protected]

1206-1370794 Reducing Asset Risk Thought Leadership

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