Crisis Development 2008 02 06

Assessment of the
Significance of Crises
Through Examples from Various Industries
and the use of a Development Model

Franco Oboni & Cesar Oboni

Riskope International SA ©, 2004-*, www.oboni.net

Our Lives, Corporations, Projects
Can be seen as a never ending succession of
cycles of growth, peace, turmoil, i.e. cycles of
great changes we call crises.

Fast growth can be seen as a positive crisis: in
some cases it can, however, suddenly turn into a
negative crisis.

A crisis is a decisive moment, particularly in times
of danger or difficulty.


Generic Phased Crisis Model
Phase 1 Phase 2 Phase 3 Phase 4 Phase 1
Potential Latent Acute Return Potential

Emergency that
Event Intensity : from

Desired Level of
does not evolve into
Service
emergency to crisis

a crisis
Tolerated level of
disservice (minor Triggering
emergency) point for the
emergency
plan
Max tolerated Controlled
disservice limit crisis
(max emergency)
Crisis Uncontrolled
crisis…may evolve
to catastrophic
consequences
Catastrophic crisis

One crisis cycle (time)


ERM excellence criteria:
•Risk/reward optimization
•Enterprise wide view of risks
•Control processes for risks including:
•Hazard identification
•Risk evaluation
•Risk management and loss control
•Benchmarking against predefined risk
tolerability criteria


A Simplified Model of Public Reactions can be
Suggested to Evaluate Crises Acceptability…

but this approach is not sufficient to allow proper
allocation of mitigative funds.

Many Companies Start by Using Qualitative
(indexed) Approaches to Risk Assessment.
Likelihood of Occurrence
Consequences Very High High Moderate Low Negligible
Highest Risk Low Risk
VH/H VH/M VH/L
Very High
VH/VH VH/N
High Risk
H/VH H/M H/L H/N
High
H/H
High Risk Moderate Risk
M/H M/L M/N
Moderate
M/VH M/M
Low Risk
L/VH L/H L/M L/N
Low
L/L
Low Risk Negligible Risk
VL/H VL/M VL/L
Very Low
VL/VH VL/N

These approaches are ok at screening level. They may
help technical people, but fail to properly inform
decision makers and the CFO…do not help comparing
risks throught the Entreprise….


All along this presentation we will show a
simplified form of Quantitative Risk Assessment
applied to world-wide famous cases.

Some companies use ERM, some do not.

Of those that use ERM, some use overly crude
systems that blur reality either in too dark or too
rosy tones.

The future lies in using Risk to weigh decisions,
rather than just guiding mitigation


Example 1

Tailings Dam Failure at Los
Frailes: Boliden Shares Quotes
Direct costs: appx. 150MUS$


A useful metrics to measure, after the facts, the
“Enterprise disservice” of a company can be:

the Share Value drop in case of a crisis,
which, of course, compounds with the direct costs
of such a crisis


Examples of other metrics that can
be used:

Loss of habitat (km2)
•
• Loss of species (biodiversity, number of species)
• Loss of human lives (number of casualties)
• Any complex metric that can be derived for
example by using “multiple portfolio” analysis .


Generic Phased Crisis Model Example:

Potential
Acute Return

Latent
1999 Dec.
Report on the causes of the
dam failure is published by the
regional government of
Andalusia

Loss of share value appx. 95%, still not fully recovered in May 2007
The Dam Failure Occurred 04/98, but the latency started many
years before the crisis


A priori Estimates of the probability of the disservice to happen (F. Oboni & C. Oboni, Improving
Sustainability through Reasonable Risk & Crisis Management, Appendix 3, A Specific Tool for Estimating
a Probability, 2007)
Likelihood of Potential Frequency based Px to see the Example of common Example of Negative Example of Positive
Phenomena on a “Case History” even next year events with the events with the same events with the same
Approach (px min - px max) same level of level of likelihood level of likelihood
likelihood
Very High Happens Repeatedly (at least 0.1 - 1.0 Power loss at home Fender bender You find 1cent on the
(10-1 - 100)
Likelihood once last year, on a set of 1 to next year ground
Phenomena 10 items or persons.)

High Likelihood Happens Several Times 0.01 - 0.1 Someone in your A water tap leaks in your Someone in your circle
(10-2 - 10-1)
Phenomena (between 1 time last year and family moves house home gets pregnant
1 time in the 10 previous next year
years, on a set of 10 items or
persons.)

Moderate Happens Once in a While 0.001 - 0.01 One of your friends A mirror is broken A person you know get a
(10-3 - 10-2)
Likelihood (between 1 time in the gets fired out of the huge career
Phenomena previous years and 1 time in blue next year advancement
the 10 previous years, on a
set of 100 items or persons)

Low Likelihood Rarely Happens (1 time in the 0.0001 - 0.001 Someone in your A tailing dam fails A person you know
(10-4 - 10-3)
Phenomena 50 previous years, on a set of family or your suddenly becomes a
20 to 200 items or persons.) friend’s family have a millionaire
extremely severe car
accident next year

Very Low Extremely Rare (1 time in the 0.0001-0.00001 Total loss of a house An elevator get stuck A person you know
(10-4 -10-5)
Likelihood 50 previous years, on a set of in a village up to a inherits a very large sum
Phenomena 200 to 2000 items or persons.) small city from an unknown family
member

Lower Get stuck by A Hydro dam fails A person you know wins
probability exist lightning in a lottery


A priori Estimates of Class State of Nature Example Descriptors
VG Very Good Not in seismic area, firm foundation, regular
the probability of the maintenance, new materials, sound design, good
management, good communications.
disservice to happen G Good
(See reference on F Favourable
prior slide) M Moderate
P Poor Expert judgment in intermediate positions
VP Very Poor High seismic area, poor foundation, bad maintenance,
obsolete materials, poor design, bad management, bad
communications.

Likelihood of px VG px G px F px M px P px VP
Phenomena
10-1 1.5 x 10-1 2.5 x 10-1 4.5 x 10-1 7.0 x 10-1 1.0
Very High
Likelihood
Phenomena
10-2 1.5 x 10-2 2.5 x 10-2 4.5 x 10-2 7.0 x 10-2 0.1
High
Likelihood
Phenomena
10-3 1.5 x 10-3 2.5 x 10-3 4.5 x 10-3 7.0 x 10-3 0.01
Moderate
Likelihood
Phenomena
10-4 1.5 x 10-4 2.5 x 10-4 4.5 x 10-4 7.0 x 10-4 0.001
Low
Likelihood
Phenomena
10-5 1.5 x 10-5 2.5 x 10-5 4.5 x 10-5 7.0x 10-5 0.0001
Very Low
Likelihood


Was that crisis tolerable, when compared to a “large company”
tolerability curve?
1

0.9

0.8

Annual Probability
0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
0 100 200 300 400 500

Costs of Accident in MUS$

TOLERABLE from a large company’s tolerability point of view. As a matter of fact,
Boliden did not fold up, it even sustained two similar accidents. Another company,
Placer Dome, sustained a similar blow at Marcopper and also survived….
The latency lasted a few years before the crisis.


Tolerability is interpreted very differently from site to site.
1.000000

0.100000
Probability of Event

0.010000

0.001000

0.000100

0.000010

0.000001
0.01 0.1 1 10 100
Cost of Events ($ Million)

Each dot on the graph represents the centre of a risk
scenario

Other examples of tolerability curves.
1 99
0.9 128
0.8

Annual Probability
0.7
0.6 142
0.5
0.4 190
0.3
0.2
0.1 224
0 638
-100 100 300 500 700


Application to Terrorism Risk Assessment and
Management


It is in the Latency Phase that the
best returns are to be expected
from:
• Analysis of what could go wrong, and how much
it would “cost” the company: Risk Assessments
• Analysis of the means to bring the risks towards
a tolerable level in a sustainable way: Risk
Management
• Analysis of how to behave when a residual risk
hits, i.e. Crisis Management


Risk management is a balancing exercise between
mitigations, investment and residual exposure.
RISK MITIGATIVE
“Acceptable”
COSTS
Mitigative Threshold

ALARA
ALARP
BACT

Zero Risk
Costs to Attain
Acceptable
Acceptable
Residual Risk
Residual Risk
0% 100%

Residual Hazards
Mitigated Hazards


Example 2

Information warfare attack May
16th 2007: Apple Shares Quotes
Direct costs: Nil


Generic Explosive Crisis Model
Example:

Return
Latent Potential

Acute
Loss of Share value:
almost nil because crisis
was perfectly contained
(but some people did
lose a total of 4BUS$, as
other made that money)
Latency is not applicable
in this case


Generic Explosive Crisis Model
Phase 1 Phase 2 Phase 3 Phase 4 Phase 1
Potential Latent Acute Return Potential
Event Intensity : from

Desired Level of
emergency to crisis

Service

Tolerated level of
disservice (minor
Triggering point for
emergency)
the emergency plan
Max tolerated
Controlled crisis
disservice limit
(max emergency)
Crisis Uncontrolled
crisis…may evolve
to catastrophic
consequences
Catastrophic crisis

One crisis cycle (time)


tolerability curve?
1

0.9

0.8

Annual Probability
0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
0 100 200 300 400 500


A priori INTOLERABLE from a large company’s tolerability point of view. Risk was
mitigated by implementation of Information Warfare counter measures.
The latency is not applicable to this type of crisis.
The crisis got contained and dealt with right away thanks to proper planning
and crisis management. Someone did an analysis similar to this one and
designed proper risk management measures. You most likely did not even
know about this crisis.


Example 3

Project over costs lead to project
suspension: Nova Gold Shares
Quotes
Direct costs: appx. 250MUS$


Generic Explosive with “long latency”
Crisis Model Example:
Latent Return

Acute
2007, Nov. 26
Nova Gold Resources
announcement that they will
suspend construction at the
Galore Creek Mine.

Loss of Share Value 50%
Latency started 6months to several years before the crisis


tolerability curve?
1

0.9

0.8

Annual Probability
0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
0 100 200 300 400 500


BARELY TOLERABLE from a large company’s tolerability point of view.
The latency lasted at least six months to several years before the crisis.
It was time to pull the plug on this project, and the company’s JV with a major
mining company did exactly that.
The JV is now reexamining the project. The major company’s losses were
contained, and the minor JV member did not undergo immediate life breaking
losses.


Various ways of risk representation
exist.

A few examples follow:


Hazard at Road (Small Scale Events)
Canrash Red Beds, South Peaks
Yanashalla Area
$200
& 1999 Failure Area Rockfalls
km 17/18 Area Rockfalls
17.2 58.4 79.8
80.5 94.1
Rockfalls
$180
Rockfalls from undercut 57.5 85.7 112.7
km 24-28 Area overblasted zones
$160 Sackung
26.4 54.7 60.4 69.2 91.8
92.9
Rockfalls
$140
82.6 93.2 102.1
Risk US$M

Colluvium
$120
Rockfalls
56.4 60.1 73 93.5 101.3 110.7

$100
57.1 86.4 93.7 102.8
Red Beds Area
$80
15.819.3
16.7 22.3
17.6
18.7
19.5
16.3 53.9 60.8
62.3 69 81.5
83.2
83.9 105.3 111.9
107.7 113.1
108.5 113.7
115.1
17.9
18
22.9
23.6
$60 25.5
22.8
24.8
25.8 33.4 37.3
35.537.7 44.6
45.7
47.5 53.1
55.1
55.3
55.5 61.1 65.468.9 72.575.9
61.8 66.4
62.7 67.2
63.5 67.4
64.1 68.1
69.3 78.2 82.1 86.1 90.8 95.8
84.9 88.5 93.4
96.1 101.7106 109.8 116.6
104.2 111
107.1 113.4
19.7
30.5
$40 20.4 25.4
20.9
23.1 38.3 43.8 48.7
39.1
39.8 4546.7 50.3 56
51
51.4 59.8 64.7 69.7
61.3 64.9
65.1
65.6
65.9
66.2
66.7 81.1 98.7 114.8

21.6
22.4
$20 95
96.2
20.2 27.1 56.1 61.6 65.2 69.5
57.3 63 66.1 70 72.7
57.9
59.3 66.8
67
24.4
25.9 30.832.2 40.2 62.8
63.1
63.8
64.4 84.8
86
34.6
35
29 32.5 94.5
95.4
42.7
23.9 71.3
72.2
73.8
3.9 8.3 43.3
32.7 36.3
34.337 52.2
31.9 35.4 41.0
25.2
0.7 3.9 7.810.3 14.117.420.724.127.5 31.634.9 38.9 43.646.8
1112.7 17.8 22.2 25.929.3 33 35.3 404243.8 47.4
12.5 18.3 23.5 27.2 32.4 35.9 40.6 44.6
36.6
11.4 15.2 18.9 23.426.6 30.633.8 37.8 41.6 45.5 50.0
27.8 89.392.6
$0 2.6
2.7 11.8 19
19.5 24.627.9
19.9 2526.8
20.4 28.1
28.6
28.8
28.7
29.1 36.6 46.5 60.0
61.0
62.0
62.3 69.5
69.8
70.5
70.8 93.9
94.3
94.5
94.6
94.7
95 101 109
0 10 20 30 40 50 60 70 80 90 100 110 120

Highway Chainage


Tolerability for Risks on Pipeline and
Road
1.00000

0.10000
Probability of Occurrence

0.01000

0.00100

0.00010

0.00001

0.00000
0.001 0.01 0.1 1 10 100 1000
Cost of Consequence in MUS$
Riskope/client Guidelines BHP Guidelines Green triangle
Pipeline Rupture Hazard at Road (Small Scale Events) Blockage / deformation of Road


Hazard: Landslide

7,000
traffic hit
6,000
service disruption
5,000 infrastructure

4,000
Risk

3,000
2,000
1,000
0
7901 901 909
800
1 2 3 4
07
01
Segment #

Province-wide “ERM”


Examples of concrete actions
suggested after a Risk Assessment:
•Buses escorted like chemical trucks to the mine
•Mining trucks parking policy in the pit
•Check-in procedure for executives at hotels
•Behavioral recommendation for people
traveling with sensitive data
•Pipeline monitoring (instrumentation and patrolling)
•Transportation network modifications
•Building an entire processing plant on a fill
•Installing rockfall nets
•Implementing proper crisis communication procedures


Over the years we have identified
a list of project potential risks as
follows:


3 phases and a total of five steps in
the life of a project:
• Design/Implementation/Construction
– Infrastructure (setting the bases…)
– Superstructure (implementing…)
• Life/Service
– Service (using, developing, …)
– Maintenance (repairing, adapting…)
• Disposal/demolition (ending, releasing…)
Each step has its own hazards and
related risks…

CDA uses these potential project
risks to evaluate and compare
alternatives all along their expected
life in a transparent way.

CDA eliminates well known NPV
approaches pitfalls

• Tools exist and do work
• Experience is eloquent
• We all prefer to succeed rather than fail
• Thinking and fixing before it happens is way
cheaper than fixing afterwards
• Thanks to specific techniques each decision you
make can be supported by transparent and
rational evaluations
• ERM will not eliminate losses but reduce them
and allow for quicker rebound


Crisis Development 2008 02 06

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