The following is an opinion piece written by Evgeny E. Telenkov, deputy head of the risk management department at Norilsk Nickel and Yana Morford, business owner at Skyz Academy. The views expressed within the article are not necessarily those of Corporate Risk and Insurance.
The operations of Norilsk Nickel and other metallurgical companies are closely related to risk management. One of the main categories of risk that a company can successfully manage is technical-production risk (hereinafter referred to as TPR). The technical and production risks themselves are of an industrial and environmental nature. The effect of these risks may affect the production volume, the need to repair damaged assets, and reimbursement for the damages inflicted on third parties and the environment.
One of the key issues in the evaluation of technical and production risks is determining a current probability of risk for a future event. As a rule, it is quite difficult for a person, even an expert, to determine the probability at which a particular risk is realized. There is always the possibility of error. Different people perceive the likelihood of risk and danger in different ways. One’s perception is influenced by their character traits, mood, health, and age. When estimating risk, people are guided by the knowledge gained from previous companies, competency in a particular domain, as well as their own tendency to take a risk. In this regard, the quality of assessment heavily depends on those who perform this expertise. The risk manager should always take this into account in his work.
Another significant problem in assessing the likelihood of the implementation of technical and production risks is the use of statistical data.
First of all, there are often no relevant statistics from which an estimate of the risk probability could be conducted.
Secondly, even available statistics frequently do not reflect the specific conditions related to the evaluation of particular risks. For example, the probability of breakage of a ball mill within a particular factory does not necessarily correlate with the breakage probability of that same ball mill at a different factory. This could be explained by the fact that the millwork is impacted by various factors that are not addressed in statistics. For example, the technological parameters of incoming ore, quality and promptness of routine repairs, the level of professional training of plant operators, operational loads, parameters and operating status of adjacent equipment (conveyors, pumps), etc.
Thirdly, the use of statistics collected in the course of monitoring the operation of specific equipment for future risk analysis purposes is also problematic. Old equipment tends to break more often than new ones. Timely replacement of parts and components means reducing the risk of breakdown. In this regard, it is not enough to simply extrapolate statistical data on equipment damage for the next year; we need to consider additional adjustment of the probability values.
The modern theory of risk management suggests that, where possible, when doing a risk assessment, one should take into account not only a single specific probability value of realization of risk, for example, 6% or 14%, but consider risk as a distribution (function) of probabilities. This approach allows for a more accurate assessment of the risk using interval values. At the same time, the damage from the risk implementation is also a random variable, which should be assessed in accordance with the specified boundary values and distribution function.
At Norilsk Nickel, we use a stochastic (probabilistic) approach for technical and production risk assessment based on scenarios of maximum possible and most probable loss. The advantages of this approach compared to the expert assessment of determining the probability of risk implementation are:
- There is no need to require experts to accurately determine the value of the probability of risk occurrence.
- The possibility to simultaneously consider different scenarios, ranging from the most likely to the least favorable scenarios when assessing the one particular risk. There also could be additional intermediate scenarios.
- The ability to determine the statistical parameters specifying the risk assessment, such as mode - the most frequent loss resulting from the implementation of risk, and also able to calculate the losses coming from the implementation of risk for any given percentile.
- The ability to calculate the total portfolio impact of risks on the production activities of the enterprise.
This approach allows you to perform detailed diagnostics of the risk profile of an enterprise and to assess the potential damage associated with the realization of risks not only for the production and financial activities of Norilsk Nickel, but also for the objectives of the enterprise related to environmental protection, ecology, and labor protection.
To manage the technical and production risks, we have identified the following set of basic objectives:
- Financial results. Achievement of targets for revenue and operational profit (EBITDA).
- Occupational Safety and Health. Prevent a rise in the number of injuries/accidents at work. Fatal accidents are absolutely unacceptable.
- Environmental. Prevent the conduct of activities that do not comply with legal requirements and established standards in the field of environmental protection.
In the chart shown in Figure 1, there is an impact of technical and production risks on the objectives of the mining and smelting enterprise.
According to this chart, the implementation of technical and production risks, usually, leads to property damage as well as other damages associated with production suspension. At the same time, there is a great possibility of environmental harm and harm towards people’s safety and wellbeing.
Figure 1 - The impact of technical and production risks on the objectives of the mining and smelting enterprise.
Click photo to enlarge image
When assessing technical and operational risks, it is necessary to take into account the consequences of the first and second levels (as shown in Figure 1). The consequences of the first level directly include suspension of operations / production (production shutdown), environmental harm, and harm towards people’s safety and wellbeing. Considering a holistic approach, it is important to take into account the consequences of the second level, which include the cost of repairs, penalties, incremental transactional costs, and reputational damages.
The practical application of this approach in conjunction with the methods of stochastic modeling allows us to examine and analyze risks on a deeper level, and to conduct their quantitative analysis, taking into account uncertainties in the long-term planning and day-to-day operations of business.
The above was an opinion piece written by Evgeny E. Telenkov, deputy head of the risk management department at Norilsk Nickel and Yana Morford, business owner at Skyz Academy. The views expressed within the article are not necessarily those of Corporate Risk and Insurance.
Click photo to enlarge image