Assest Management Conference 2013

Operations Due Diligence

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Richard Robinson4 June 2013

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Increasingly organisations are required to demonstrate due diligence for the management of assets. Traditionally this has been done ‘stair-wise’ (bottom up) outside the context of an organisation’s overall risk context. This tends to leave the senior decision makers with an uncertainty as to the precise meaning of the results.

Purpose

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Operations due diligence answers the question from a strategic viewpoint by determining the actual effective availability in the context of all the credible risk issues. It is especially useful when acquiring (or disposing) of an asset to confirm its proper market value.

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Operations Due Diligence

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A. Outline of the operations due diligence process

B. Two examples: * Critical Assets Due Diligence Review Gladstone Area Water Board* Effectiveness of the Western Outer Ring

Main (WORM) Project on Security of Supply of the Victorian Transmission System (VTS)

APA Group4

Presentation

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Top Down not Stair-wise Bottom Up

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Context vulnerability assessment (criticality)

Common mode (zonal) vulnerability assessment (risk)

Functional availability modelling

(reliability)

Options review and investment payback

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Primary operating mode

i) Context (or boundary) vulnerability assessment

iii) Functional availability modelling

ii) Common mode (zonal) assessment

Alternate operating modes

Site boundary

Threats (unwanted inputs)

Critical success factors

(desired outputs)

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Three assessments context

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This is a high-level context (boundary) vulnerability analysis establishing the risk context for the review. It examines the credible boundary threats to the critical success factors of the organisation, plant or project. This is an established process derived from the security/military intelligence community.

i. Functional boundary analysis.

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This process identifies the critical common mode and common cause failures such as issues associated with fires/explosions, pipe failures and power. This is usually done on a geographic and incident history basis. These are typical common mode failures for which organisations purchase insurance, especially for fires and explosions. This process is long established in underwriting and HPR industries.

ii. Zonal Vulnerability Assessment

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This focusses on the identified critical elements for each operating mode, consistent with standard reliability modelling techniques.

iii. High level functional availability modelling.

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Systems rather than components

i) Systems operate continuously (including any possible scheduled breaks);

ii) Systems are repairable;iii) System availability has reached steady state, that is,

enough time has passed from commissioning for the wearing in period to have negligible affect on system availability; and

iv) Systems have a constant failure rate (that is, random failures).

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Generative Interviews

In order to test the preliminary models and the results of the zonal assessment and context vulnerability assessment, a series of generative interviews should be conducted with representative key stakeholders. This is a worthwhile reality check in most situations and provides the most useful feedback to the proponent organisation.

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Comprehension

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Gladstone Area Water Board

13http://www.qca.org.au/files/W-GAWB2010-PriceInvest-Sub2-App16-1209.pdf. Viewed on 15Nov2012.

Gladstone Area Water Board (GAWB) commissioned R2A to undertake a critical infrastructure due diligence review.

Gladstone Area Water Board (GAWB) owns and operates bulk treated (potable) and raw (non-potable) water storage and supply system throughout the Gladstone region of Central Queensland.

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Gladstone Area Water Board

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!

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GAWB, bulk water, functionally

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Boundary Vulnerability Assessment

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GAWB Delivery Critical Success FactorsBoyne

SmelterCement

AustraliaGladstone Port Corp. Orica QAL QER RTA Transpacific GRC CSE &

CPMRaw water (Ml pa) 650 230 580 1,120 10,775 10 3,700 25 - -

Treated water (Ml pa) 80 40 - 570 6 - 515 - 9,000 -

Credible Threats1 Dam failure (earthquake, flood) xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx2 Bushfire (catchment) x x x x x x x x x x3 Power failure (cyclone/storm, supply failure, switchyard failure) xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx4 Regulatory changes incl. reduced allocation x x x x x x x x x x5 Inundation / flood (tailwater) xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx6 Industrial issues incl. contractors esp treated water xxx xxx - xxx xxx - xxx - xxx -7 External comms failure eg backup comms, telephone, modems x x x x x x x x x x8 Drought xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx9 Contamination x x x x x x x x x x

10 Sabotage / Terrorism xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx11 Sun Water infrastructure failure xx xx xx xx xx xx xx xx xx xxx

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System Availability Model

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Results

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Results

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Western Outer Ring Main (WORM)

20http://www.aer.gov.au/sites/default/files/C-5%20R2A%20WORM%20Security%20Supply%20Report.pdf Viewed 18 Oct. 2012.

R2A were commissioned by the APA Group to complete a review of the security of supply of the Victorian Transmission System (VTS) with particular regard to the economic benefits to existing and long-term customers of the proposed Western Outer Ring Main (WORM) Project in Victoria

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Middle Functional Model

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Effectiveness of the Western Outer Ring Main (WORM) Project on Security of Supply of the Victorian Transmission System (VTS)

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Iona

Culcairn

to / from NSW

970 TJ per day max (both Gippland and

Bass Basins)

to / from SA

SEA gas pipeline

Iona UGS

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to / from NSW

to Tasmania

Longford

LNG AGS

Pakenham

Rockbank

20%50%

30%

Longford: 1,045 TJ per day max (3 gas trains)

Dandenong

353 TJ per day

max pipe transfer

limit

Melbourne gas market 800 TJ ave winter demand

Proposed WORM ($85m)

92 TJ per day max to Melbourne

Stonehaven compressor

upgrade

S

418 TJ per day max

with WORM and

compressor upgrades

Brooklyn

W

Wollert compressor

upgrade ($24m)

215 TJ per day max

C

60 TJ per day max

R PB DDDocklands

From Bass Basin

From Gippsland BasinFrom

Otway Basin

Middle Level Model

The middle level model shown above describes the basic system and was used as a basis to develop the higher, functional system diagram which is the basis for the payback model, shown below.

High Level Functional Model

Wollert

LongfordIona

Culcairn

Pressureconstrained

Melbourne gas market (approx 80% of Victorian market or 800 TJ for average winter peak)

NSW

353 TJ per day max limit

92 TJ per day max limit

ProposedWORM

970 TJ per day max limit (Longford and

Bass gas)W

W L DB

C

30% 20% 50%

Pakenham

Bass gas

60 TJ per day max limit

P

West

North

East

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Functional Model

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Wollert

LongfordIona

Culcairn

Pressureconstrained

Melbourne gas market (approx 80% of Victorian market or 800 TJ for average winter peak)

NSW

353 TJ per day max limit

92 TJ per day max limit

ProposedWORM

970 TJ per day max limit (Longford and

Bass gas)W

W L DB

C

30% 20% 50%

Pakenham

Bass gas

60 TJ per day max limit

P

West

North

East

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East Supply Model

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Credible External and off-site Common Mode Failures East Supply Model BoundaryDays Prob Unavailout (pa) -ability

East supply failure (accidental) 14 0.025 0.35East supply sabotage/terrorism 7 0.010 0.07 Longford -

Off shore plant failure 14 0.03 0.47 Dandenong Dandenong OperatorBushfire 5 0.10 0.50 pipeline City gate 0.9840

Industrial issues 1 0.1 0.100 0.01 0.00

0.00 0.9900 0.9990 0.9990Total Days Unavailable: 1.49

Availability: 0.995927

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East Supply Interruption

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Season

Victorian,market,average,demand,,(TJ,per,

day)

Surplus/deficit,with,total,East,failure,?,(TJ,per,

day)

Surplus/deficit,with,total,East,failure,plus,

WORM,?,,(TJ,per,day)

Extra,gas,available,to,

market,due,to,WORM,,(TJ,per,

day)Summer 331 216 296 ?Shoulder 633 ?84, ?6, 78Winter 995 ?443, ?368, 75

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Winter Season Interruption Costs

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East%supply%failure%duration(days) $%per%TJ Without%WORM with%WORM Difference5 $106,300 D$235,454,500 D$195,592,000 $39,862,50010 $89,750 D$397,592,500 D$330,280,000 $67,312,50015 $81,460 D$541,301,700 D$449,659,200 $91,642,500

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Summer season demand

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LoCOperator error

Dropped customers

Price gouging

Network damage

Summer demand exceeds available

supplies

Single event threat scenarios

VOLL mgt

Load shutdown

WORM project

Supply side - market forces competition policy

Demand side - emergency response co-operation policy

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Shoulder season demand

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LoC

Total loss of East supply

Failure of east pipelines

Shoulder demand exceeds available

supplies

Operator error

Dropped customers

Price gouging

Network damage

Load shutdown

VOLL mgt

WORM project

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Winter season demand

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LoC

Total loss of East supply

Loss of two Longford trains

East supply line failure

Winter demand exceeds available

supplies

Dropped customers

Price gouging

Network damage

Load shutdown

Operator error

Dandenong city gate failure

WORM project

VOLL mgt

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Findings

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In the immediate term, the WORM Project was determined to be economically viable to existing customers on the basis of the reduced cost of risk in the shoulder and winter seasonal markets.

Additionally, the WORM Project is a vital element to support an augmentation of the supply transmission capacity to the Victorian gas market, facilitating long-term market expansion benefits.

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Explaining “Everything”

In these times of "due diligence" the need to explain "everything" in ways that senior decision makers understand has become paramount. Operations due diligence addresses this concern by placing reliability of systems into the downside risk context of major enterprises. This requires the convergence of existing risk and reliability skills.

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