International Journal of Industrial

Engineering & Technology (IJIET)

ISSN(P): 2277-4769; ISSN(E): 2278-9456
Vol. 4, Issue 5, Oct 2014, 23-32
TJPRC Pvt. Ltd.

PETRO REFINERIES ASIA LTD: MANAGING RISK IN PROJECTS

RESEARCH AND TEACHING NOTE
RAJ S MALIK1 & SANJAY KUMAR2
1
2

Chief Manager, IOC LTD

Professor, Management Development Institute, Gurgaon, Haryana, India

SUMMARY OF THE CASE

This case examines the nature and role of risk management in projects. The case describes the project undertaken
by the company to set up a facility for processing of Special Cut Naptha as a part of refinery #6 at PRAL. The project
was initially delayed because of inappropriate contractor selection and the contract was finally awarded to an experienced
vendor. The case begins with the General Manager of the refinery #6 Mr Thakur, expressing his angst at the delays and
asking his managers to commission and start commercial production of the refinery at the earliest, i.e. tomorrow.
He overrides the objections of the Sr Safety Manager and asks him to get the critical tests done by tomorrow. The Chief
Production Manager Mr Chowdhary is the main protagonist and he is unsure whether to take charge of the new project and
start commercial production.
The case discusses three major issues

Internal Audit of various checks and risks involved in the project, and also the stage gate process which is
followed to mitigate risk in such projects. Since the project is funded through internal accruals and thus no
external audit of safety and construction and erection activities is scheduled.

Issues related to the three category of risks in an organization, with the procedural risks (related to standard
operating procedure) having a direct impact on the career of the managers. Mr.Chowdhary faces the dilemma of
whether to follow the orders of the General Manager who is also the officer who evaluates his performance.

Issues related to competence certification are discussed here, and the requirement of differentiating technical skills
internally is raised.
The case ends with Mr Chowdhary considering whether to accept the charge of commissioning the plant next day

without all the pre-commissioning checks being carried out as per established procedure. The case provides an interesting
twist of an alternate solution to the dilemma faced by Mr Chowdhary.
Learning Objectives
The case can be used for teaching the students the about project risk management. This case can be used to
illustrate and discuss several important issues in the area of Project risk management and project management including

Incorporation of project life cycle, project schedules and uncertainty as part of risk management plan. Avoidance
of severe time constraint situations, as they lead to potentially risky decisions with an inevitable attempt to short
circuit established procedures.

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Raj S Malik, Sanjay Kumar

Importance of skill acquisition and certification systems as a part of technical risk management in plants with
complex technologies.

Stage gate processes and their effectiveness in risk management

Project delays and contractors qualification, pre commissioning checks and importance of stage gate processes in
safety audit

Role of external consultants and stakeholders in risk evaluation and mitigation. Risk Management Office as a
solution to the dilemmas of the individual officers, to operational pressures.

Issues Embedded in the Case

Issues to be discussed for understanding project risk management and project management from the case

Should Mr Chowdhary accept the charge for start of the new project?

Is there a real risk of fire / safety in the new project? Do the instructions given by the GM absolve the managers of
the responsibility in case of a fire?

What can be done to provide a solution to the dilemmas of officers like Mr Chowdhary? Why is Mr Chowdhary
asking so many technical questions at the late night meeting with Mr Roy?

How is risk management / mitigation built into the stage gate checks process?

What is the effect of involvement of external agencies in stage 4 audits. Can an Office of the Risk Manager do
the work of external agencies, if the project is internally funded.

Discussion of Issues in the Case

Issue 1: Should Mr Chowdhary Accept the Charge for Start of the New Project?
The question should be asked since it is the key question of the case. The pros and cons of accepting the charge of
the new unit for start of commercial production are discussed below:
Pros

It will put Mr Chowdhary in the good books of the General Manager Mr Thakur and possibly earn him a
promotion. Thus his personal goals are satisfied if he says yes and nothing untoward happens.

The risks of fire at start up are remote as stated by Mr Roy.

It is Mr Roy who is incharge of the safety function. If he is agreeing, why should Mr Chowdhary object.

If Mr Chowdhary objects and is overruled by Mr Thakur: which is a fair possibility, and the plant is started
without any problems, then Mr Chowdharys career at PRAL is over.

He should be a part of the team and should go with the decision of the majority of members and the GM.

Cons

If Mr Chowdhary accepts the charge of the new plant and some untoward incident happens, then it will be Mr
Chowdhary who will be responsible. In this case the probability is very high that his career will be over at PRAL.

Impact Factor (JCC): 4.3857

Index Copernicus Value (ICV): 3.0

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Petro Refineries Asia Ltd: Managing Risk in Projects Research and Teaching Note

If Mr Chowdhary takes this decision after being exposed to international best practices, then his culpability is
enhanced. After all he was supposed to have learnt from the international joint venture and transferred best
practices to Refinery # 6 at PRAL.

Mr Roy who is supposed to raise objections for safety, is being extremely flexible with procedures. He is violating
standard operating procedures and thus incurring category 1 risks. However Mr Chowdhary is ultimately
responsible, since Mr Roy reports to him.

Responsibility for the actions of bypassing procedures may not go to Mr Thakur the GM. It may devolve to each
manager, as the GM has not asked any specific procedure to be violated. This has been pointed out by Mr
Chowdhary himself.

Alternate Solution
Mr Chowdhary can ask for some very specific tests for ensuring safety. This may violate the deadline set by Mr
Thakur, but may not significantly alter the deadline. Also it may make the commissioning safer or atleast reduce risk of an
adverse incident happening during startup. In fact he seems to be exploring such an option during the last late night
meeting with Mr Roy. Also it puts him on a stronger ground in case of any fire or such untoward incident.
Issue 2: Is There a Real Risk of Fire / Safety Issue in the New Project? Do the Instructions Given By the GM
Absolve the Managers of the Responsibility in Case of a Fire?
Mr Chowdhary is trying to assess this very issue in the last conversation with Mr Roy. The anxiety of
Mr Chowdhary and the lack of sufficient preparation by Mr Roy is apparent, even through all the technical discussion. This
means that there is a risk of fire- what is debatable is the probability of a fire at start up.
The instructions given by the GM simply related to speeding up the process. But he is careful enough to ask only
necessary tests to be done. The timeline is insufficient, but all the managers are senior executives with years of refinery
experience under their belts. In such cases, they are not bound by the GMs instructions, in case they feel that there is a risk
of fire or that safety of the plant is being threatened. In this case, each officer can ask for more tests as per the prescribed
manual or standard operating procedure. Their failure to do so cannot be blamed on the GMs orders. Mr Chowdhary
argues this in the case. (page 8, para 1)
Issue 3: What Can Be Done to Provide a Solution to the Dilemmas of Officers Like Mr Chowdhary? Why is Mr
Chowdhary Asking So Many Technical Questions At the Late Night Meeting with Mr Roy?
The dilemma that officers like Mr Chowdhary face is that if they do not agree to the demands of superior officers
like the GM Mr Thakur, then the Annual Performance Review is affected. It they want to go to a higher officer, then they
are accused of breaking the Chain of Command. In such cases the organization can prevent hasty decisions which are in
violation of the standard operating procedure by the following steps:

Creation of a layer of expertise within the organization with a certification process.

Creation of the office of Risk Management to vet all such projects. (discussed in re detail later)

Creation of mandatory third party audits specially by experts in the industry.

Such steps break the code of the team, and bring in the urgently required right to dissent to the employee.

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Raj S Malik, Sanjay Kumar

Only enlightened employees armed with a right to dissent can stop such decisions from taking place.
Mr Chowdhary is asking so many questions, as he is looking at an alternative solution which will allow for other
tests, thus enhancing safety, without overtly delaying the project for too long. He is trying to find out what steps have been
taken by Mr Roy the safety officer to ensure safety of the new project, and to see if he can identify some steps that may
need to be taken.
Note: The case has a situation in the stage gate process of engaging external consultants for designing the
facilities and also timely audit of the works being carried out. It is a very important aspect and can avoid lots of subjectivity
and the related risks. The consultation structure if present in the project can be used for activities such as discussions of
risks, the progress being made with control measures, and the identification of new risks. The external expert advice was
sought in this case for designing of structures and design of pipeline size pump capacities and electrical load etc. The
supervision was with the internal engineers and project managers. The audits were also done internally for the progress of
work. This could have been given to external agencies and which could have avoided the actions due to internal pressures
and also the certification of external agencies could have avoided the subjectivity in the internal inspections and also the
inter department responsibility shirking could have been avoided.
The external stake holders like financial institutions, while financing the projects, make it mandatory for the
companies to have external safety audits for the project so that their finances are being utilized for safe projects. The
company has utilized their internal resources for financing of the project and external safety audit was not mandatory
which has resulted certain situations which can cause certain uncertainties in the project.
Issue 4: How is Risk Management / Mitigation Built Into the Stage Gate Checks Process?
Stage Gate Processes and Their Effectiveness in Risk Management
The projects today are facing pressure to reduce the cycle time with improved quality and success rate of the
project the companies are looking towards stage gate systems to manage the projects.
A stage gate process is a conceptual and operational road map for moving the new project from idea to
commissioning of the project that is a blue print for managing the project process to improve effectiveness and efficiency.
A walk through the stage gate process of a refinery project is as detailed below:
Gate 1: Gate 1 deal with the project feasibility and magnitude of opportunity which fits with the company
policies. The feasibility report is the gate 1 for the special cut naphtha project.
Stage 1: Stage 1 is techno/commercial viability for the project is decided and it involves a variety of inexpensive
activities which involves a preliminary technical assessment involving in-house appraisal of the proposed project. The
purpose is to assess development routes, intellectual property issues, technical feasibility, possible time and costs to
execute, technical, legal, and regulatory risks and roadblocks.
The risks related to stage gate 1 are commercial risks which are:

Commercial

Competing projects

Competitive pressures

Impact Factor (JCC): 4.3857

Index Copernicus Value (ICV): 3.0

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Petro Refineries Asia Ltd: Managing Risk in Projects Research and Teaching Note

Demand management

Innovation

Market growth

Market share
Gate 2: The project is subjected to a second and more rigorous screen at this gate. The project is reevaluated in

the light of information obtained in stage 1. If the decision is go then the estimate for the project is prepared.
Stage 2: The business case opens gate for the project development. In stage 2 the business case is constructed.
The stage is detailed investigation stage, which clearly defines the project and verifies the attractiveness of the project
before heavy spending. The refinery project is submitted for approval of competent authority.
The risks related to stage gate 2 are the economic in nature and are:
Commodity prices, currency stabilization, demand growth, demographic trends and energy price etc.
Gate 3: This is the final gate before the development stage. The internal designs are firmed up with some
consultant for designing the various parameters of the project. The design and preliminary operations are reviewed at this
gate. The full project team an empowered, cross functional team headed by a leader with authority is designated.
Stage 3: Stage 3 witnesses the implementation of the development plan and the physical development of the
project. The numerous milestones and project reviews are built into the development plans. The tenders for the project are
invited and work is awarded for the execution of work.
The risks related to this stage gate are:
Contract General Conditions
Arbitration, courts, changes of general conditions, commercial issues etc.
Gate 4: The work starts at this gate with the work is reviewed and checked. The test and validation plans for the
next stage are approved for immediate implementation and plans are reviewed for probable future execution.
Stage 4: In stage 4 the contracts for the individual groups are awarded after the invitation of tender by the
contactor in consultation with the project managers and the execution of work is started. The supply of materials also takes
place and quality checking and inspection of works by project managers and the company happens.
The risks related to this stage gate are:
Skills

Adequate prior experience, availability of skilled staff etc.

Suppliers and Sub-Contractors

Ability to deliver, skills, quality of equipment, alternate suppliers and contractors etc.
Gate 5: The final gate opens the door for full commercialization of the project. It is the final point at which the

project can be killed. This gate focuses on the quality of the activities in testing and validation stage and their results.

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Raj S Malik, Sanjay Kumar

Criteria of passing the gate focus largely on pre-commissioning checks of the works executed during the project and
appropriateness of the launch and operation start up plans. The operating plans are reviewed.
Stage 5: The final stage involves implementation of the production plan. Given a well thought out plan of action
and backed by appropriate resources, barring any unforeseen events, it should be clear sailing for the new project it means
commissioning of the project.
The risks at this stage are:
Safety

Contract safety, HSE processes, human error, Safety guidelines issued in or referenced in contract etc.

Project Delays and Contractors Qualification, Pre Commissioning Checks and Importance of Stage Gate Processes
in Safety Audit
The delays in the project occur mainly due to the contractors not having the required technical qualifications.
The contractors tend to consider that they can do any work once money is available with them. The scenario is different
actually. The technical matters in the project affect the overall performance of the project. The contractors not having the
required technical experience shall tend to analyze the cost on different conditions and the actual conditions shall be
experienced by them at site shall be totally different and this will affect their costing and profitability. The contractor tries
to cut corners to reduce his cost to minimize his loss, which is unacceptable to the client, and the project suffers as
contractor does not work and leaves the job in between.
The case has a situation where the job has got delayed due to contractors not having the required technical
qualifications and had to be changed for not carrying out the work. The project suffered on this account.
Cost and time are the key issues and it is the scale and complexity of the technical requirements of a project that
are the main driving forces on cost and time. If the technical scale and complexity are not understood then cost will
increase and the work will take longer. The cost will increase not only because there is more work to do than had been
realized but also because more work usually takes longer. More time almost always means more money.
The ultimate logic for the client to consider is that leaving all risk in the performance of the prime contract with
the prime contractor does not equate to eliminating the risk of the prime contract not being performed on time and to
specifications.
Each organization is having different qualification criteria for their works. Theory does not condition the aspects
of organizations. It is as per the experiences faced by various organizations. The project managers should properly
understand the requirements of the project and then should make the qualification criteria for the contractors.
Many large contracts and projects absolutely rely upon engineers to undertake or participate in crucial activities
such as

Estimating cost

Estimating time

Producing outline designs, prototypes at the tender stage

Impact Factor (JCC): 4.3857

Index Copernicus Value (ICV): 3.0

Petro Refineries Asia Ltd: Managing Risk in Projects Research and Teaching Note

Producing complex designs, products and systems in prime contract

Producing technical proposals as part of the bid

Producing required specifications

Producing specifications and statements of work for contractor/supplier request for quotation

Project manage the contract

Generate change proposals

Handle day to day interface with clients and suppliers

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The importance of ensuring that the engineers who bear the responsibility for those activities are commercially
aware as well professionally competent cannot be overstated. The legal, contractual and financial implications of their
actions should be essential part of their understanding of their responsibilities. The development of commercial engineers
should be seen as a strong plank in overall process of project risk management.
Pre Commissioning Checks and Safety Audits
Engineering Group of OISD is a nodal agency lending support to other groups in OISD on technical matters
besides making new standards and revision of existing engineering standards on the basis of technical developments/
advancements. The cross-country pipeline activities are also coordinated by the group. Following are the areas of work of
the group.
External Safety Audit (ESA): Engineering Group lends support to upstream and downstream groups in OISD to
carry out ESA. The concerned member looks into the safety features in Design, Construction, and Operation &
Maintenance mainly besides verifying the efficacy of fire & safety & detection system in place. ESA of cross country
Pipelines i.e. Liquid, Gas, LPG is being carried out exclusively by engineering group.
Pre - Commissioning Safety Audits: Pre-commissioning Safety Audits of new facilities in cross country
Pipelines and in downstream installations are carried out on the basis of structured check lists and walk through
observations. Carrying out of internal safety audit by multi-disciplinary groups, filling up of OISD checklist and
certification that all project work is over and installation is ready for commissioning are precursors to Pre Commissioning
Safety Audit.
Issue 5: Role of External Consultants and Stakeholders in Risk Evaluation and Mitigation. Risk Management
Office as a Solution to the Dilemmas of the Individual Officers, to Operational Pressures
Role of external consultants has been discussed above. Now we may look at Importance of Risk Management
Office
Kaplan has said for all rhetoric about its importance and the money invested in it, risk management is too often
treated as a compliance issue
He has further added that the risks are best managed through active prevention: monitoring operational processes
and guiding peoples behavior and decisions toward desired norms.
The concept of monitoring and controlling means checking performance against plan by conducting variance
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analysis and perform integrated change control process. The organizations should have Risk Management office
independent of project management people.
In referring to the organization of a risk analysis, a distinction must be made between those people who will be
carrying out the analysis, those who will be involved in it and those for whom it is intended.
Who Performs the Risk Analysis?
Before starting the analysis, an analysis team must be put together. This may be a team of people involved in the
project, although people from outside of the project could also be involved. The advantage of using people from outside of
the project (not necessarily from outside of the organization) is that they are able to be more objective in carrying out the
analysis, separate from their role within the project. External people require a bit more time to gain insight into the project
and to win the necessary commitment from the project team members.
If those involved in the project perform the risk analysis themselves, it is important that they are able to let go of
the project, and a generalist (project manager or support staff) is preferred to a specialist (for example, lawyer or designer).
In general, the risk analyst does not provide any intrinsic input to the analysis. The risk analysts task is to
question and trigger those involved so that they come up with new ideas in identifying the risks of a project. The risk
analyst can contribute knowledge to this process, but it is the project team members themselves who must indicate whether
certain factors truly represent risks within their project.
Who is Involved in the Risk Analysis?
In order to carry out the risk analysis, input from those centrally involved in the project is required. After all, they
are the ones who have insight into the possible risks involved within the project.
Those involved in producing the content of the risk analysis can be divided into two groups: generalists and
specialists. Generalists are people such as the project manager, planner and the project supporter essentially those who
have an overview of the project as a whole and thus do not approach it from one specific discipline. Specialists are
designers, lawyers, technical experts, etc, who view the project from the standpoint of a specific discipline.
Generalists as well as specialists will be involved throughout the entire analysis. In some cases, it can be
advantageous to give some cases, it can be advantageous to give some thought to the specific contributions of both types of
individuals.
Generalists are usually involved when events such as exploratory interviews are held. To gain an impression of
the project, a first glance into the risks and the risky topics, discussions in which the generalists involved in the project are
present, will be the most effective. In addition, generalists are particularly adept at estimating the consequences of a risk
for the entire project.
Specialists, on the other hand, possess specific areas of expertise, which enables them to gain a good insight into
the probability that a certain risk will occur. The expertise of a specialist is quite useful during interviews, when certain
topics or risks are explored in greater detail.
Regardless of who is involved in the risk analysis, it is important that these people represent a good match for the
projects content. This means that those involved can, as a group, oversee all of the aspects and subjects involved in the

Impact Factor (JCC): 4.3857

Index Copernicus Value (ICV): 3.0

Petro Refineries Asia Ltd: Managing Risk in Projects Research and Teaching Note

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project. Actually, as was described earlier, it is important to have all of the angles (legal, technical, financial, etc)
represented by those people sitting at the table. It is also crucial to strive for an equilibrium between the various disciplines,
to prevent certain topics from becoming over- or underplayed.
Finally, a few words about involving parties external to the project in the risk analysis. It can be advisable to
involve one or more external parties who have experience with similar projects, in addition to the employees from the
project team. In this case external means a person from outside of the project, but not necessarily from outside of the
organization, so an experienced project leader from the same organization could be involved. The task of these external
experts is to break though project blindness. It seems to e difficult for teams to remain objective and critical when
examining something in which they have already been immersed for quite some time. When choosing external parties, care
must be taken to ensure that these individuals do not have conflicting interests within the project that could exert a negative
influence on the project.
For Whom is the Risk Analysis Intended?
In carrying out the risk analysis, it is important to know from whose perspective the risk analysis is being created
and who will or must use the results. The interested parties are:

The client;

The project leader;

The financial backer;

Politicians;

The project organization.

REFERENCES
1.

Kerzner, H. (2009). Project Management, Wiley International.

2.

Raymond, G. and Walker, P. (2005). Managing Risks in large projects and complex procurements, Broadleaf
Capital International, John Wiley and Sons Ltd.

3.

Chapman, C. Ward, S. (2010). Project Risk Management, John Wiley and Sons, Ltd

4.

Verzuh, E. (2003). Project Management, John Wiley and Sons, Ltd.

5.

Managing Risk: A new framework Kaplan R., and Mikes A., HBR June 2012 pg 3-13.

6.

Managing the Multiple dimensions of risk A Balanced Score Card Report Part 1 and II Kaplan R and Mikes A..
2013, Article No. B1107A Harvard Business Publishing

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