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Operations Due Diligence

Richard Robinson 4 June 2013

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Purpose 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. 2 2


Operations Due Diligence 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. 3 3


Presentation 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 Group 4

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Top Down not Stair-wise Bottom Up

Context vulnerability assessment (criticality)

Options review and investment payback

Common mode (zonal) vulnerability assessment (risk) Functional availability modelling (reliability)

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Three assessments context

Threats (unwanted inputs)

Site boundary

i) Context (or boundary) vulnerability assessment

Critical success factors (desired outputs)

Primary operating mode

iii) Functional availability modelling

ii) Common mode (zonal) assessment

Alternate operating modes

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i. Functional boundary analysis. 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. 7 7


ii.

Zonal Vulnerability Assessment

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. 8 8


iii. High level functional availability modelling.

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

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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 aect 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. 11 11


Comprehension

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Gladstone Area Water Board 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 (nonpotable) water storage and supply system throughout the Gladstone region of Central Queensland. http://www.qca.org.au/files/W-GAWB2010-PriceInvest-Sub2-App16-1209.pdf. Viewed on 15Nov2012.

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Gladstone Area Water Board

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GAWB, bulk water, functionally

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Boundary Vulnerability Assessment

GAWB Delivery Critical Success Factors

Raw water (Ml pa) Treated water (Ml pa) Credible Threats 1 Dam failure (earthquake, flood) 2 Bushfire (catchment) 3 Power failure (cyclone/storm, supply failure, switchyard failure) 4 Regulatory changes incl. reduced allocation 5 Inundation / flood (tailwater) 6 Industrial issues incl. contractors esp treated water 7 External comms failure eg backup comms, telephone, modems 8 Drought 9 Contamination 10 Sabotage / Terrorism 11 Sun Water infrastructure failure

Boyne Smelter 650 80

Cement Australia 230 40

Gladstone Port Corp. 580 -

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Orica

QAL

QER

RTA

Transpacific

GRC

1,120 570

10,775 6

10 -

3,700 515

25 -

9,000

CSE & CPM -

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

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Middle Functional Model to / from NSW C

92 TJ per day max to Melbourne

to / from SA

Proposed WORM ($85m)

SEA gas pipeline

Iona

S Stonehaven compressor upgrade

From Otway Basin

Wollert compressor upgrade ($24m) W

418 TJ per day max with WORM and compressor upgrades

W to / from NSW

20% Melbourne gas market 800 TJ ave winter demand

353 TJ per day max pipe transfer limit Iona UGS

Culcairn

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

50%

30% Pakenham R Rockbank

B Brooklyn

D

D Docklands

Dandenong

215 TJ per day max LNG AGS

P 970 TJ per day max (both Gippland and Bass Basins)

to Tasmania 60 TJ per day max From Bass Basin

Middle Level Model

Long ford

From Gippsland Basin

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Functional Model North

NSW C

Culcairn

92 TJ per day max limit

West

Proposed WORM

353 TJ per day max limit

970 TJ per day max limit (Longford and Pakenham Bass gas) P

Wollert W

East

Longford

Iona B

Pressure constrained 30%

W 20%

L

D 50%

60 TJ per day max limit Bass gas

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

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East Supply Model

Credible External and off-site Common Days out East supply failure (accidental) 14 East supply sabotage/terrorism 7 Off shore plant failure 14 Bushfire 5 Industrial issues 1 0 Total Days Unavailable: Availability:

Mode Failures Prob Unavail (pa) -ability 0.025 0.35 0.010 0.07 0.03 0.47 0.10 0.50 0.1 0.10 0.01 0.00 0.00 1.49 0.995927

East Supply Model Boundary

Longford Dandenong pipeline

Dandenong City gate

Operator

0.9900

0.9990

0.9990

0.9840

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East Supply Interruption

Season

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

Summer Shoulder Winter

331 633 995

Surplus/deficit, Extra,gas, Surplus/deficit, with,total,East, available,to, with,total,East, failure,plus, market,due,to, failure,?,(TJ,per, WORM,?,,(TJ,per, WORM,,(TJ,per, day) day) day) 216 296 ? ?84, ?6, 78 ?443, ?368, 75

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Winter Season Interruption Costs

East%supply%failure%duration (days) $%per%TJ 5 $106,300 10 $89,750 15 $81,460

Without%WORM with%WORM D$235,454,500 D$195,592,000 D$397,592,500 D$330,280,000 D$541,301,700 D$449,659,200

Difference $39,862,500 $67,312,500 $91,642,500

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Summer season demand Demand side - emergency response co-operation policy

Supply side - market forces competition policy

Load shutdown VOLL mgt

Single event threat scenarios

Dropped customers

WORM project Operator error

LoC

Price gouging

Summer demand exceeds available supplies

Network damage

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Shoulder season demand Load shutdown Total loss of East supply Failure of east pipelines

Operator error

WORM project

VOLL mgt

LoC

Shoulder demand exceeds available supplies

Dropped customers

Price gouging

Network damage

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Winter season demand Load shutdown Total loss of East supply

VOLL WORM mgt project

Loss of two Longford trains East supply line failure Dandenong city gate failure Operator error

LoC

Winter demand exceeds available supplies

Dropped customers

Price gouging

Network damage

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Findings 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. 29 29


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. 30 30


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