Risk Based Decision Making

The Use of Risk Analysis inThe Use of Risk Analysis inDecisionDecision--MakingMaking

Lyondell/Equistar 2003 Worldwide Reliability Forum19 February 2003

Bob Sims, Becht Engineering Co., Inc., Liberty Corner, NJPhone (908) 580-1119, e-mail: [email protected]

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IntroductionIntroduction

The outcome of many, if not most, decisions is uncertain. This particularly true for inspection and maintenance planning, and for reliability improvement initiatives in general.The best way to deal with uncertainty is risk analysis.

Determining or estimating the probability of various outcomes gives a more complete picture than focusing only on the most likely (or the desired) outcome.The cost of resources allocated can be compared to the benefits to inform decisions.Risk analysis results should not be the only basis for decision-making.

Results of root cause failure analyses are important sources of information for risk analyses.

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Current Applications of Risk Current Applications of Risk AnalysisAnalysis

Risk analysis is widely used to inform decisions in areas where failures of equipment or systems can have significant consequences. Some examples are:

Inspection and maintenance planning for:Nuclear and fossil fuel power plantsRefineries and chemical plantsOther process facilities

Regulatory actions by the FAA and other government agenciesManagement of gas and liquids transmission pipelines.

However, with a few notable exceptions, risk analysis is not widely accepted by regulators, legislators or the general public for informing public policy decisions.

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Why Use Risk Analysis in DecisionWhy Use Risk Analysis in Decision--Making?Making?

Many decisions that are made involve the allocation of resources.

Available resources, whether natural or human, are finite.Therefore, resource allocation involves trade-offs.

The outcome of many, if not most, decisions is uncertain.Risk analysis is an excellent tool for comparing the cost and benefits of various courses of action to optimize the allocation of resources.ASME has prepared a proposal for developing a standardized approach to risk analysis for use by the Department of Homeland Security.

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OverviewOverview

This presentation will summarize approaches for the use of risk analysis in decision-making.The methods are broadly applicable.Among many other applications, risk analysis can be used to:

Screen ideas and proposals for R&D initiatives.Evaluate turnaround, maintenance and inspection plans.Determine the optimum configuration for existing and new facilities (e.g. optimize installed and warehouse spares).Provide justification for expenditures, policies and programs.Adjust programs as more information becomes available.

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IntroductionIntroduction

For the purpose of this discussion, risk is considered to be the product of:

The probability that an adverse event or series of events (scenario) will occur.The cost of the consequences associated with the adverse event scenario.

Note that a single event can have several consequence scenarios – both direct and indirect.

Risk analysis is a tool for determining risk.The results can be used to help in making decisions on alternative courses of action where the outcome is uncertain.

The results of a risk analysis should not be the only basis for a decision.

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Risk Matrix ApproachRisk Matrix Approach

This approach is used for preliminary screening when it is difficult to quantify probability and/or consequence.Approaches using a risk matrix have been used extensively for screening of risk.

These qualitative approaches may be used alone or as a first step in a quantitative analysis

In this approach, risk is characterized by plotting probability and consequence on the two axes of a matrix (risk matrix).It must be recognized that regardless of the approach used, risk analysis should be a dynamic (living) process. Actions or inactions in one area affect risk in another, so continuous updating is necessary.

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Risk MatrixRisk MatrixProbability

Category

A L M M H H H

B L L M M H H

C L L L M M H

D L L L L M M

E L L L L L M

FL L L L L L

VI V IV III II I

Consequence Category

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Example of S/H/EExample of S/H/E11 Consequence Consequence Categories for the Risk MatrixCategories for the Risk Matrix

Note 1: S/H/E = Safety, Health and Environmental

Category Description Examples

I Catastrophic Large number of fatalities; major long term environmental impact.

II Major Fatalities; major short term environmental impact

III Serious Serious injuries; significant environmental impact

IV Significant Minor injuries; short term environmental impact

V Minor First aid injuries only; minimal environmental impact

VI None No significant consequence

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Example of Probability Categories Example of Probability Categories for the Risk Matrixfor the Risk Matrix

Category Description Annual Probability Range

A Very Likely > 0.1 (1 in 10)

B Possible > 0.01 (1 in 100) but < 0.1

C Unlikely > 0.001 (1 in 1,000) but < 0.01

D Highly Unlikely > 0.0001 (1 in 10,000) but < 0.001

E Not Credible > 0.00001 (1 in 100,000) but < 0.0001

F Practically Impossible < 0.00001 (1 in 100,000)


Example of Economic Consequence Example of Economic Consequence Categories for the Risk MatrixCategories for the Risk Matrix

These categories should be adjusted depending on the purpose of the analysis.

The values shown above are typical for a small process facility. They are three orders of magnitude lower than those being considered by DHS. A large process facility would be somewhere in between.

Category Description Cost Impact

I Catastrophic > $10,000,000

II Major > $1,000,000 but < $10,000,000III Serious > $100,000 but < $1,000,000IV Significant > $10,000 but < $100,000V Minor > $1,000 but < $10,000VI Insignificant < $1,000


Numerical ApproachNumerical Approach

Although the risk matrix is useful for preliminary screening, it is much more useful for decision-making to express consequences in monetary units (dollars) and to determine numerical values for probability.In this case, the risk, which is the product of probability and consequence, is expressed in dollars.

For cases where the threat extends over many years, the probability is annual (e.g. events per year) and the risk is calculated on a net present value basis.

Preliminary risk ranking for decision making can be done by assigning numerical values to risk matrix categories as described previously.


Determining ProbabilityDetermining Probability

For frequent events, such as motor vehicle accidents, historical data can be used to determine probabilities.For low probability, high consequence events, data are too sparse to be the only basis for determining probabilities. Examples are:

major industrial accidentsnuclear power plant core damagelarge scale terrorist attacks

In these cases, modeling and expert elicitation are used to estimate the probability.

Good maintenance and inspection histories are essential.Understanding prior failures through root cause failure analysisis also very important.


Determining ConsequenceDetermining Consequence

The consequences of an event are determined by constructing credible consequence scenarios.

Each of the credible consequence scenarios that could result from a single initiating event has an associated probability. The sum of these probabilities is 1.0.

The cost of each scenario can be estimated.Both short and long term costs should be considered.It is desirable to assign monetary values to all consequences, including potential loss of life, in order to have a basis for comparing alternative courses of action. In addition, an upper bound should be placed on the probability of loss of life.“Quality of life” issues (e.g. extra waiting time in airports) should also be quantified.


Determining ConsequenceDetermining Consequence(continued)(continued)

The following references contain guidance on the assignment of economic values to consequences:

Federal Aviation Administration, The Economic Value for Evaluation of Federal Aviation Administration Investment and Regulatory Programs, U.S. Department of Transportation, FAA-APO-98-8, June 1998.Federal Aviation Administration, Economic Analysis of Investment and Regulatory Decisions – Revised Guide, U.S. Department of Transportation, FAA-APO-98-4, January 1998.


Determining Risk and its use in Determining Risk and its use in DecisionDecision--MakingMaking

Risk is the product of probability and consequence.Where there are several credible consequence scenarios, the risks associated with each can be summed to get the total risk.

If the risk is not acceptable, mitigation actions should be considered to reduce it. Justification for these actions can be developed as follows:

The benefit of the mitigation is:Benefit = unmitigated risk – mitigated risk

The benefit minus the cost of mitigation can be used to justify the allocation of resources.The benefit/cost ratio may also be helpful in decision-making.


Simplified Homeland Security Simplified Homeland Security ExampleExample

Assume that a risk analysis has determined that:There is a 1/100 probability of an attack on a facility containing hazardous material during the next year.If the attack occurs, there is a 1/100 probability of a serious release to the public with a total consequence of $200B.The total consequence of an unsuccessful attack is negligible.The unmitigated risk is: (1/100)x(1/100)x($200B) = $20MIf armed guards are deployed at each facility, the probability of attack will be reduced to 1/1000 and the probability of serious release if an attack occurs will be reduced to 1/1000.The cost of the guards for all plants will be $200M per year.The mitigated risk is: (1/1000)x(1/1000)x($200B) = $0.2MThe benefit is: $20M - $0.2M or ~ $20M, and the benefit/cost ratio is only 0.1, so the $200M cost is difficult to justify.

A more effective mitigation strategy should be developed.


Maintenance DecisionMaintenance Decision--Making Making ExampleExample

Assume that a pump in a critical unit has failed on a Friday afternoon. The installed spare is operating well. A decision must be made to either fix the pump on overtime or wait until Monday to work on straight time.

Repair time is estimated to be 2 days on straight time or one 16 hour day on overtime.Failure of the installed spare shuts down the unit at a cost of $200k/day. Requires 1 day to restart plus $50k in other costs.Extra cost of overtime for 2 people for 16 hours ~ $1k.MTBF of pumps is 6 months, but the failures are random due to process upsets (from an earlier root cause failure analysis).Probability of failure of installed spare during time pump is repaired on straight time ~ 4/180 ~ 0.02.Probability of failure during overtime repair ~ 1/180 ~ 0.005


Maintenance DecisionMaintenance Decision--Making Making Example (continued)Example (continued)

The risk associated with the straight time repair is:0.02 x ($200k x 2 days + $50k) ~ $9k

The risk associated with the overtime repair is:0.005 x $200k x 1.5 days + $50k ~ $2k

The reduction in risk achieved by working overtime is:$9k - $2k = $7k. The cost is only $1k, so start calling folks out.

Alternatively, the unit supervisor may decide that product inventories are high, so a 2 day shutdown would cost only $50k. The risk reduction is now:

$1k - $0.25k ~ $1k, so the benefit and cost are about the sameAlso, discussions with operators may indicate that process upsets are more or less likely than normal over the next 4 days, which may affect the decision.


Materials Selection DecisionMaterials Selection Decision--Making Making ExampleExample

Assume that a crude unit turnaround occurs every 5 years. The carbon steel pipe still overhead line has required replacement at the last three turnarounds because of internal corrosion at a cost of $50k. A decision on whether to alloy up is needed.

NPV of $50k every 5 years for 20 years is ~ $86kOne time cost of stainless steel is ~ $150k.Probability of failure of carbon steel (hole through) during a run is 1/100 per year. Total cost of failure is $400k. The risk per year is $4k. The NPV over 20 years is ~ $36k.Probability of failure of stainless steel (CISCC) during a run is 1/1000 per year. Total cost of failure is $400k. The risk per year is $0.4k. The NPV over 20 years is ~ $4k.The reduction in risk of ~ $32k does not justify the cost delta of ~ $64k, but a “what-if” analysis should be done because this is a relatively close call.


H/S/E IssuesH/S/E Issues

In all cases, Health, Safety and Environmental (H/S/E) risks must be considered.

This is done using the risk matrix described earlier.Each facility should indicate categories of risk that can be accepted by each level of management.


Use of Risk AnalysisUse of Risk Analysisfor Screening Proposalsfor Screening Proposals

Risk analysis should be considered in screening proposals for inspection, maintenance, capital or other expenditures as follows:

For each proposal, estimate the current (unmitigated) risk using a risk matrix or numerical approach.

A structured expert elicitation process is not practical at thisstage due to time and resource constraints.

Consider the risk in prioritizing the proposals.For expenditures over a pre-defined threshold (e.g. $10,000), do a preliminary benefit-cost analysis considering the expected reduction in risk (mitigation), as well as the cost of implementation and any unintended consequences.


Risk Analysis for Developing Risk Analysis for Developing Equipment PlansEquipment Plans

Risk analysis is an ideal tool for use in developing an inspection and maintenance plan for each equipment item in a refinery or chemical plant, including:

Pumps and compressorsPressure vessels and tanksPiping circuitsEssentially all other rotating and fixed equipment.

The steps in this process are:Assemble an experienced team and facilitator.Determine unmitigated economic and S/H/E risk If the risk exceeds a threshold (e.g. $5k), develop cost effective inspection, maintenance or upgrade plans to mitigate the risk.


RiskRisk--Based Inspection (RBI)Based Inspection (RBI)

API RP-580 provides good general guidance on RBI.ASME is developing a similar standard (Inspection Planning) that will address more industries.API RP-581 provides a detailed “cookbook” approach to RBI.Risk-based inspection should be implemented as a part of an overall equipment plan development program, which, in turn, is integrated into a more general risk-based decision-making approach.


Risk Analysis for ProjectsRisk Analysis for Projects

Risk analysis should be used at all stages of a project:Screening to decide whether to develop a project in detail.Decisions on contractor selection.Process designDetailed equipment engineering:

Materials selectionEquipment selectionInstalled and warehouse spares.

Expert elicitation procedures should be considered to get the best possible estimates of probability and consequence.


Risk Analysis for Turnaround Risk Analysis for Turnaround PlanningPlanning

Probably the most valuable use of risk analysis in process plants has been for turnaround planning.

Each turnaround work request should be subjected to a risk-based benefit-cost analysis to determine if it is justified.A quick qualitative analysis is used for low cost items (<$5k).Risk-based approaches usually result in an overall reduction in scope, but items are also added to the list in most cases.Risk-based approaches have been used to determine turnaround intervals.

Cost savings are typically greater than 10 times the cost of the risk analysis.The risk analysis process typically identifies changes in operating and maintenance practices that can significantly reduce risk at a small cost.


Making RiskMaking Risk--Based DecisionBased Decision--Making Making a Part of the Culturea Part of the Culture

Before making any decision involving the allocation of resources, consider whether a risk analysis should be done.

The analysis can be qualitative and informal or detailed, depending on the risk and level of expenditure being contemplated.

As you do risk analyses, note the data that should have been available to allow a more accurate determination of probability and consequence.

Always document the proximate and, if feasible, the root causes of failures. This is by far the most valuable data for improving reliability.Keep detailed inspection and maintenance records organized and accessible.


Making RiskMaking Risk--Based DecisionBased Decision--Making Making a Part of the Culture (continued)a Part of the Culture (continued)

Avoid setting up a risk analysis bureaucracy.Risk analysis experts are needed, but they should focus on training, coaching and facilitating rather than doing the risk analyses themselves.Risk analysis should be owned by the operating organization.

Management at all levels must be willing to accept that even low probability events do occur occasionally.

If risk analyses are done properly, the cost savings will more than cover the occasional loss.Employees must be assured that they will be supported if a risk-based decision that is made in good faith does not have the desired outcome.


Critical Infrastructure Protection Critical Infrastructure Protection Priorities WorkshopPriorities Workshop

The White House Office of Science and Technology Policy (OSTP) sponsored a Workshop in Washington in September of 2002.The four breakout groups at the workshop produced a total of 17 proposals for actions to improve homeland security, primarily for the built infrastructure.The proposal to develop a process for risk-based decision-making was voted the top proposal by the Workshop participants.The five proposals from the Risk Analysis Breakout group are shown graphically on the next slide.


Needs for Risk AssessmentNeeds for Risk AssessmentIn Critical Infrastructure ProtectionIn Critical Infrastructure Protection

Data and Intelligence

for Risk Assessment

Implementation

DevelopStandardized

Process

DefineApplicability

OvercomingLegalLiabilityRisk Assessment

In Training and Education

Risk Communication and Public Acceptance


Risk CommunicationsRisk Communications

After the implementation of mitigation actions that are justified, there will always be some residual risk.

Good communication is essential to employee and public acceptance of the residual risk, and to the acceptance of risk analysis as a part of the decision-making process.Processes used must be transparent, and the criteria used must be broadly accepted.

ASME has produced a position paper on Risk Communications, and has developed a plan for obtaining broad acceptance of the principles therein.

We believe that this will be a significant benefit to industry in justifying internal risk assessments and in commenting on proposed new regulations.

Risk Based Decision Making

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