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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
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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.
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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
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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]