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The Use of Risk Analysis in

Decision-Making

Lyondell/Equistar 2003 Worldwide Reliability Forum


19 February 2003
Bob Sims, Becht Engineering Co., Inc., Liberty Corner, NJ
Phone (908) 580-1119, e-mail: bsims@becht.com

Introduction

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

Results of root cause failure analyses are important


sources of information for risk analyses.
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Current Applications of Risk


Analysis

Risk analysis is widely used to inform decisions in


areas where failures of equipment or systems can
have significant consequences. Some examples are:
9 Inspection and maintenance planning for:
Y Nuclear and fossil fuel power plants
Y Refineries and chemical plants
Y Other process facilities
9 Regulatory actions by the FAA and other government agencies
9 Management 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 DecisionMaking?

Many decisions that are made involve the allocation of


resources.
9 Available resources, whether natural or human, are finite.
Y 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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Overview

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

For the purpose of this discussion, risk is considered to


be the product of:
9 The probability that an adverse event or series of events
(scenario) will occur.
9 The cost of the consequences associated with the adverse
event scenario.
Y Note that a single event can have several consequence
scenarios both direct and indirect.

Risk analysis is a tool for determining risk.


9 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 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.
9 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 Matrix
P
r
o
b
a
b
i
l
i
t
y
C
a
t
e
g
o
r
y
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A
B
C
D
E
F

VI

IV

III

II

Consequence Category

Example of S/H/E1 Consequence


Categories for the Risk Matrix
Category

Description

Examples

Catastrophic

II

Major

Large number of fatalities; major long term environmental


impact.
Fatalities; major short term environmental impact

III

Serious

Serious injuries; significant environmental impact

IV

Significant

Minor injuries; short term environmental impact

Minor

First aid injuries only; minimal environmental impact

VI

None

No significant consequence

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


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Example of Probability Categories


for the Risk Matrix

Category

Description

Annual Probability Range

Very Likely

Possible

> 0.01 (1 in 100) but < 0.1

Unlikely

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

Highly Unlikely

Not Credible

Practically Impossible

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> 0.1 (1 in 10)

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


> 0.00001 (1 in 100,000) but < 0.0001
< 0.00001 (1 in 100,000)

Example of Economic Consequence


Categories for the Risk Matrix
Category

Description

Cost Impact

Catastrophic

> $10,000,000

II
III
IV
V
VI

Major
Serious
Significant
Minor
Insignificant

> $1,000,000 but < $10,000,000


> $100,000 but < $1,000,000
> $10,000 but < $100,000
> $1,000 but < $10,000
< $1,000

These categories should be adjusted depending on


the purpose of the analysis.
9 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.
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Numerical 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.
9 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.

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Determining 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:
9 major industrial accidents
9 nuclear power plant core damage
9 large scale terrorist attacks

In these cases, modeling and expert elicitation are


used to estimate the probability.
9 Good maintenance and inspection histories are essential.
9 Understanding prior failures through root cause failure analysis
is also very important.
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Determining Consequence

The consequences of an event are determined by


constructing credible consequence scenarios.
9 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.


9 Both short and long term costs should be considered.
9 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.
9 Quality of life issues (e.g. extra waiting time in airports)
should also be quantified.
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Determining Consequence
(continued)

The following references contain guidance on the


assignment of economic values to consequences:
9 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.
9 Federal Aviation Administration, Economic Analysis of
Investment and Regulatory Decisions Revised Guide, U.S.
Department of Transportation, FAA-APO-98-4, January 1998.

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Determining Risk and its use in


Decision-Making

Risk is the product of probability and consequence.


9 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:
9 The benefit of the mitigation is:
Y Benefit = unmitigated risk mitigated risk
9 The benefit minus the cost of mitigation can be used to justify
the allocation of resources.
9 The benefit/cost ratio may also be helpful in decision-making.

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Simplified Homeland Security


Example

Assume that a risk analysis has determined that:


9 There is a 1/100 probability of an attack on a facility containing
hazardous material during the next year.
9 If the attack occurs, there is a 1/100 probability of a serious
release to the public with a total consequence of $200B.
9 The total consequence of an unsuccessful attack is negligible.
9 The unmitigated risk is: (1/100)x(1/100)x($200B) = $20M
9 If 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.
9 The cost of the guards for all plants will be $200M per year.
9 The mitigated risk is: (1/1000)x(1/1000)x($200B) = $0.2M
9 The 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.


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Maintenance Decision-Making
Example

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.
9 Repair time is estimated to be 2 days on straight time or one
16 hour day on overtime.
9 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.
9 Extra cost of overtime for 2 people for 16 hours ~ $1k.
9 MTBF of pumps is 6 months, but the failures are random due
to process upsets (from an earlier root cause failure analysis).
9 Probability of failure of installed spare during time pump is
repaired on straight time ~ 4/180 ~ 0.02.
9 Probability of failure during overtime repair ~ 1/180 ~ 0.005
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Maintenance Decision-Making
Example (continued)

The risk associated with the straight time repair is:


9 0.02 x ($200k x 2 days + $50k) ~ $9k

The risk associated with the overtime repair is:


9 0.005 x $200k x 1.5 days + $50k ~ $2k

The reduction in risk achieved by working overtime is:


9 $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:
9 $1k - $0.25k ~ $1k, so the benefit and cost are about the same

Also, 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.
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Materials Selection Decision-Making


Example

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.
9 NPV of $50k every 5 years for 20 years is ~ $86k
9 One time cost of stainless steel is ~ $150k.
9 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.
9 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.
9 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.
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H/S/E Issues

In all cases, Health, Safety and Environmental (H/S/E)


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

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Use of Risk Analysis


for Screening Proposals

Risk analysis should be considered in screening


proposals for inspection, maintenance, capital or other
expenditures as follows:
9 For each proposal, estimate the current (unmitigated) risk
using a risk matrix or numerical approach.
Y A structured expert elicitation process is not practical at this
stage due to time and resource constraints.
9 Consider the risk in prioritizing the proposals.
9 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.

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Risk Analysis for Developing


Equipment 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:
9 Pumps and compressors
9 Pressure vessels and tanks
9 Piping circuits
9 Essentially all other rotating and fixed equipment.

The steps in this process are:


9 Assemble an experienced team and facilitator.
9 Determine unmitigated economic and S/H/E risk
9 If the risk exceeds a threshold (e.g. $5k), develop cost
effective inspection, maintenance or upgrade plans to mitigate
the risk.
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Risk-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.

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Risk Analysis for Projects

Risk analysis should be used at all stages of a project:


9 Screening to decide whether to develop a project in detail.
9 Decisions on contractor selection.
9 Process design
9 Detailed equipment engineering:
Y Materials selection
Y Equipment selection
Y Installed and warehouse spares.

Expert elicitation procedures should be considered to


get the best possible estimates of probability and
consequence.

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Risk Analysis for Turnaround


Planning

Probably the most valuable use of risk analysis in


process plants has been for turnaround planning.
9 Each turnaround work request should be subjected to a riskbased benefit-cost analysis to determine if it is justified.
9 A quick qualitative analysis is used for low cost items (<$5k).
9 Risk-based approaches usually result in an overall reduction in
scope, but items are also added to the list in most cases.
9 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.
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Making Risk-Based Decision-Making


a Part of the Culture

Before making any decision involving the allocation of


resources, consider whether a risk analysis should be
done.
9 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.
9 Always document the proximate and, if feasible, the root
causes of failures. This is by far the most valuable data for
improving reliability.
9 Keep detailed inspection and maintenance records organized
and accessible.

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Making Risk-Based Decision-Making


a Part of the Culture (continued)

Avoid setting up a risk analysis bureaucracy.


9 Risk analysis experts are needed, but they should focus on
training, coaching and facilitating rather than doing the risk
analyses themselves.
9 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.
9 If risk analyses are done properly, the cost savings will more
than cover the occasional loss.
9 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.

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Critical Infrastructure Protection


Priorities 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.

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Needs for Risk Assessment


In Critical Infrastructure Protection
Define
Applicability

Data and
Intelligence
for Risk Assessment

Risk Assessment
In Training and
Education

Develop
Standardized
Process

Implementation

Risk Communication
and Public Acceptance
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Overcoming
Legal
Liability

Risk Communications

After the implementation of mitigation actions that are


justified, there will always be some residual risk.
9 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.
9 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.
9 We believe that this will be a significant benefit to industry in
justifying internal risk assessments and in commenting on
proposed new regulations.
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