This week’s Pipeliners Podcast episode features Justin Shannon of Marathon returning to the podcast to lay out a plan for how to start Risk Management in pipeline operations.
In this episode, you will learn about how to start and implement a risk management program, how risk management applies to COVID-19, using risk management to support leak detection, and the framework you should use when developing a risk management program. You will also learn about the math behind risk management.
How to Start a Risk Management Program: Show Notes, Links, and Insider Terms
- Justin Shannon is a Strategy Advisor at Marathon Petroleum Corporation (MPC). Connect with Justin on LinkedIn.
- Marathon Pipe Line (MPL) is a subsidiary of Marathon Petroleum Corporation that owns, operates, and develops midstream energy infrastructure assets. MPL operates pipelines, storage tanks, and barge dock facilities.
- Listen to Justin’s previous podcast appearance in Episode 78 on Risk Management in Pipeline Operations.
- A Risk Management professional uses decision analysis tools to help decision-makers in an organization make better decisions after weighing the risks.
- Leak Detection is the process of monitoring, diagnosing, and addressing a leak in a pipeline to mitigate risks.
- Berkshire Hathaway is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States.
- Warren Buffet is the chairman and CEO of Berkshire Hathaway.
- Charlie Munger is vice chairman of Berkshire Hathaway.
- Inversion Thinking is a critical thinking tool to start backward from the desired result and think of everything that you do not want to happen on the path to the result.
- Monte Carlo analysis is a simulation model that uses probability distribution to substitute for unknown values to help determine outcomes, thereby reducing risk.
- COVID-19 is officially defined as a mild to severe respiratory illness that is caused by a coronavirus, is transmitted chiefly by contact with infectious material (such as respiratory droplets), and is characterized especially by fever, cough, and shortness of breath and may progress to pneumonia and respiratory failure.
- CERA Week provides an integrated framework for understanding what’s ahead for global energy markets, geopolitics, and technology.
- CERA Week 2021 is scheduled for March 1-5 in Houston.
- OTC (Offshore Technology Conference) is a series of conferences and exhibitions focused on exchanging technical knowledge relevant to the development of offshore energy resources, primarily oil and natural gas.
- OTC 2020 was postponed from May until Third Quarter 2020 due to COVID-19.
How to Start a Risk Management Program: Full Episode Transcript
Russel Treat: Welcome to the Pipeliners Podcast, episode 120, sponsored by iPIPE, an industry-led consortium advancing leak detection and leak prevention technologies to eliminate spills as pipeliners move towards zero incidents.
To learn more about iPIPE or to become an iPIPE partner, please visit ipipepartnership.com.
Announcer: The Pipeliners Podcast, where professionals, Bubba geeks, and industry insiders share their knowledge and experience about technology, projects, and pipeline operations.
Now your host, Russel Treat.
Russel: Thanks for listening to the Pipeliners Podcast. I appreciate you taking the time. To show that appreciation, we give away a customized YETI tumbler to one listener each episode. This week, our winner is Gretchen Wendtland with Phillips 66. Congratulations, Gretchen, your YETI is in the mail. To learn how you can win this signature prize pack, stick around until the end of the episode.
This week, Justin Shannon with Marathon returns and we’re going to continue our conversation about risk management, and we’ll going to talk about how do you start such a program. We’re going to talk about that because that’s something I’ve been noodling around in my brain for a while, and I wanted to get Justin’s help.
Justin, welcome back to the Pipeliners Podcast.
Justin Shannon: Thanks for having me, Russel.
Russel: What I wanted to do, and I know that you’re not exactly working in pipelining anymore, you’ve moved to some other roles in risk management in your organization. What I wanted to do is talk a little bit about how somebody might start a risk management program around whatever activity they’re doing.
How do you think you ought to start that? I’m thinking just generically, we’ll start there and then I want to work through a couple of specific examples.
Justin: Generically, Russel, I think it’s important for everybody to understand that risk management isn’t something that just risk analysts, risk professionals, risk managers can do, but anybody can do it and everybody really should do it. You can take these basic principles of risk management and apply them to whatever area of control that you have within the company.
If you’re the CEO, you can apply them to your decision-making at that level. If you lead a group of 10 people and you’re the leak detection group, you can apply it at that level. If you’re an individual contributor, you can apply it at whatever level that you have control over.
It really starts with asking yourself, “What am I trying to accomplish? What is my goal? Why does our group, why does my department, why does my company exist? What type of things are we trying to accomplish?”
From there, you’re trying to figure out what are the things that stop me from accomplishing those goals? I like to study successful people and look at how they look at decision-making. I like these quotes from Charlie Munger, the partner of Warren Buffett at Berkshire Hathaway.
He says he uses inversion thinking. What that is is instead of asking himself, what do I have to do to accomplish my goal? He asks himself, what would I have to do to get the opposite outcome?
Trying to figure out if my goals is to make $100, what are all the things that I could do to make sure I don’t make that $100. Then, I want to avoid those things.
Risk management, at its basic level, is you’re trying to identify things and get yourself in a mental model and a mental mode of thinking about the things that can change the future, can change your expectation of the future and admitting that the future isn’t certain.
I’m going to have goals. I’m going to have forecasts. I’m going to have my idea of how things happen, but the future is going to change. There’s a lot of uncertainty. I want to understand that uncertainty and understand the things that could impact those different outcomes.
Russel: Before we got in the mic we were teeing this up a little bit. One of the things that’s up for me…If you think about what’s going on in the market right now around oil and gas, if you think about what’s going on with the Coronavirus.
We’re a vendor. There’s a lot of uncertainty right now about even being able to fly, or go to a conference, or if the conference is even going to be held. There’s been some conferences canceled.
How would you apply that to…I’ve got a thousand to spend. I’m trying to optimize how that would turn out from a sales and marketing perspective. How would you apply this kind of process to that question? I bet there’s a lot of people listening that would have that question.
Justin: Sure, this is a different example than what we talked about. [laughs]
Russel: I’m catching you a little of the…
Justin: Yeah, you caught me off guard, but I think this is good because you can apply these same concepts to anything. I think you first ask yourself what are you trying to accomplish with that a thousand dollars. What’s your goal?
Russel: Let’s just kind of walk it out, right? I would say my goal is if I’m thinking about going to trade shows, so my goal is I want to create a hundred thousand dollars in possible opportunity. I have enough conversations with people and find enough things where there’s a hundred thousand dollars in opportunity.
Justin: The first thing, it’s important to understand what we just did. What kind of problem are we trying to solve? What is my objective? You have to really think about now what are my options? What are my alternatives? Do I have 10 trade shows that I can go to, or can I go to a combination of them? Kind of lay those out.
Once you have your options, you go and gather the information. There’s going to be X amount of people at this trade show, and I’m targeting this type of audience. You go and you gather your information: “this is the type of audience that’s going to be there; the grand number of those people.”
Then as you’re doing that I think it comes time to say what kind of impacts, if one of the trade shows is in an area that has been affected by the Coronavirus, maybe that’s something now we need to consider. You need to identify those things and say my plan is if I go to this conference, I’m going to be able to be in touch with this many people in this conference, it’s this many people.
You have this expected number of contact points, and now you’re to identify what are all the things that could derail that, and maybe they’re…
Russel: Let me try, again, I want to try and walk this out with you because I think the things you’re laying out most people that work in that domain would kind of be there already. They’re going to know these are the places I need to be, here’s who’s there, here’s the number of people that are there, and here’s the cost of going there, and here’s what I think I could get out of that.
That part is kind of what’s the opportunity analysis. I think the other thing that’s interesting is when you flip this, and this is the part that I think a lot of people don’t do, and I think it’s probably why you like the inversion thinking, is what are all the things that could cause me to not identify that? One thing would be the trade shows cancel. What would cause the trade show to be canceled?
Weather, I’ve been involved in one measurement school that got canceled because of a hurricane. Right now, there’s a real possibility that a trade show would get canceled because of the Coronavirus. I know that a number already have been, CERA Week probably most notable, recently. What might cause that to be more or less probable?
If it’s something that’s only in the U.S., maybe less, but if it’s something like OTC, the Offshore Technology Conference and there’s loads of people coming in from all over the world? Maybe a high probability.
Justin: Higher probability.
Russel: Right? So…
Justin: You’re already thinking about the likelihoods and the probabilities, and factoring that in there.
Russel: Right. Right. Then the other thing that you’d have to look at is yeah, the historical attendance has been this, but I also know that some people have put in place travel bans and they’re limiting travel, so how might that affect even the trade shows that occur? Who’s actually there? Gosh, I wish I hadn’t brought this up. [laughs]
Justin: Now you’re going to go to anything.
Russel: Well, no, the problem is much of the money’s already been spent. Yeah. [laughs] It’s like, man. This is basically what you’re illustrating, right?
Justin: Yes, and I think a lot of times when we think about risk management we think about precisely calculated values and numbers, but in my opinion, the true value comes through these steps. It’s really thinking it through and thinking about the different outcomes, thinking about the ranges. You just said it was…
Russel: Kind of the decision framework is what I would call that.
Russel: What are all the things that go into making this decision?
Russel: Let’s do this again. I had in mind that we’d step through this a couple three times and do the same kind of analysis. Let’s do leak detection as a topic, and I want to apply risk analysis. If I’m thinking about, “What’s my strategic objective?” in leak detection, my strategic objective is to detect any leak as soon as it happens.
There’s the mechanisms available to me for doing that. There are computerized process models. There’s direct assessment, patrols. There’s multitudes of technologies I can use, and they work in different ways.
Then there’s the cost of those technologies. Yeah, it’d the cost of those technologies, and then there would be…I’m thinking about risk of actually having a leak, but that’s more leak prevention from that standpoint.
Justin: Right. You start with that. You would start with your objective there of detecting a leak. Then you’d say, “What’s a failure? What is the opposite of that?” It would be having a release and not detecting it. Would that be correct?
Russel: Yeah, I think so. I think that’s right. I think you know as much about this as I do.
Justin: I’ll fake it ’til I make it here. I think we could walk through this one. It’s you have a release, and you don’t detect. Then you would ask yourself, “Well, what would cause that event to happen?”
Russel: Yeah, so the first thing that comes up for me to answer that question is a really small leak. Small enough that I can’t detect it.
Justin: Let’s just start there with that cause, then. Now that we have that cause, what do you have in place today that would detect it? Is there anything in place today that might detect that small leak?
If there’s not, then you start identifying the things that you could maybe put in place. That would be one example, but let’s go to another cause.
Russel: Instrument failure.
Justin: Instrument failure. Then you would ask yourself, and the way you’d probably want to work this out is you’d probably want to list out all your causes first to go those mental juices flowing and stay in that rhythm.
After you listed out your causes, so instrument failure. Then you go through and say, “Well, what do I have in place to make sure instrument failure doesn’t happen?” Maybe I have a maintenance program.
Russel: Yeah, maybe I have some kind of system that is going to notify me if an instrument isn’t working or if a number coming from an instrument is suspect.
Justin: Right. Maybe you routinely replace your instruments once they become a certain age.
Russel: Or you do field verifications, witness and calibration, and that sort of thing.
Justin: Through that process, you could then look at what you have laid out and all your causes, and you can say, “For these three causes, I feel like I’m very well protected. We have a lot of things in place. We have a lot of controls in place. But for a very small leak, or for this other cause, we don’t really have anything that could stop that from happening if it were to happen. That’s where I’m exposed, and those are my gaps that I need to fill.”
At the same time, you need to ask yourself, “what would really be the impact of that?” If it’s a very small leak, maybe that impact of the event is not big enough to constitute a large amount of money or resources.
Russel: Yeah, maybe it doesn’t warrant or maybe it doesn’t justify expending a lot of resources for it.
Russel: Then that could be further colored by, “Well, it’s a small leak, and it’s in a buried pipeline. It’s rural, versus it’s a small leak, and it’s an underwater pipeline.”
Justin: Right. That’s a totally different scenario.
Russel: It’s where the president operates his pleasure craft.
Justin: [laughs] Right. You might take a little more care there. I think risk management at its very core is resource allocation. It’s trying to figure out where do I want to put my capital, my money, and where do I want to put my people and my other resources, and get my most bang for my buck?
The most successful companies and the most successful leaders, they weren’t just great leaders, but they were also great resource allocators.
Russel: Yeah, exactly. I guess the thing that’s interesting to me in this as I’m sitting here just having this conversation is this kind of process of creating this decision framework can get very complex very quickly. Would you agree with that, I guess I would ask?
Justin: Yeah, I think it’s a delicate balance, because the benefit of proper risk management is it’s not easy. It makes you think hard, for lack of a better term. It makes you really, your brain hurt, and it’s not always a pleasurable experience.
It’s that framework that makes you do things that your brain is not conditioned to do. We’re not really conditioned to think about how all the bad things that can happen. Our brains are conditioned to think about the good things that can happen.
You can have the ostrich effect. We put our head in the sand, because it’s not really a pleasant activity to go through and try to list out all these terrible things that might happen, but that’s the beauty, and that’s the benefit of proper risk management.
Russel: That makes perfect sense. I guess the other thing, too, is if you build this framework and some new piece of information shows up, like a new technology or a new regulatory requirement, or something like that, how difficult is it to take something like that, plug it in, and rework the framework?
Justin: I love visuals. If you have a nice way to document your thinking or the process you went through. I like to use bowtie diagrams. If you’re not familiar with those, go and google them. You’ll see why they’re calling bowtie diagrams.
They’re a nice visual of thinking through frameworks just like this, where you’re thinking about what’s my loss event? What are the different causes? What do I have in place? If you have that in a nice visual or some type of documentation, you can always go back and say, “Here’s what I was thinking at the time.
“I know these things changed, so let’s go through this again with our new state of the world.” You don’t have to create it from scratch.
Russel: Right. You need some kind of approach or tool to capture your decision-making framework.
Russel: I would guess, or I would speculate, that if I’m a practitioner, that the value is more in the framework than in the output of the analysis.
Justin: I think I agree with that. The value, I can’t remember the exact quote, but I think it was some general who had said, “The value in planning is not the plan, it’s the process of planning.” I also think about Einstein, when he said, “If I had an hour to solve a problem, I’d spend 55 minutes thinking about the problem and 5 minutes solving it.”
I think you’re exactly right. That thinking process, putting your brain through that process and thinking in a way that you don’t normally think, that’s the value.
You do want to have something that documents it, so you can go back and look and see, “Okay, here’s what I was thinking. I have all these things laid out, and I know I have to reproduce that.”
Russel: Right, because I’m not going to remember it all. If something is inherently complex — and I think pretty much even the simplest decisions can be made complex — if something’s inherently complex, then I don’t have it available to me as recall.
I can recall where I put it and reorient myself. I’m with you. I think probably the hardest thing we do is think, and I think the nature of technology, and the nature of the world we live in, is that it’s requiring a lot more thinking and a lot less doing. That’s just how we’re going to have to interact with the world.
Justin: The way I look at this is you can make any decision very complex, but we have to be careful not to, if the decision is a very low consequence decision, if I’m trying to decide what kind of pizza I’m getting for dinner, let’s not make that complex.
Russel: I think the point’s really well made that there’s a level of, well, what is the decision I’m making here, and what’s the appropriate level of analysis for that decision? Sometimes, that’s zero or nearly zero, and sometimes it’s a whole lot.
If I think about it from a personal standpoint, if I’m thinking about my house, and the issue is do I replace a light fixture or not, well, do you have the tools? Do you know how to do it? Can you do it safely? Yeah, replace it. No big deal.
Justin: Make the decision and get on with it. Don’t get…
Russel: On the other hand, if I’m thinking about I’m going to remodel my kitchen, that’s a whole different question. Let’s do one more walkthrough example and see where that takes us. There’s a lot of conversation in the pipeline industry now about zero incidents.
If I’m going to take a risk approach, I’m going to look at pipeline safety, and I’m going to say my goal is zero incidents, I guess, if you take the same thing, and you walk it out, the first thing is, well, what do you need to do to get zero incidents?
That’s actually a hard question to answer, but if you do the inversion thinking, and you think about what are all the kinds of incidents I could have…I get a big, long laundry list of that, and then I say, for each incident, what are the things that could cause this incident?
I get a laundry list of that, and then I look at each of those causes, and I say, “What are the things I have in place that would prevent that cause?” Now, I’m starting to have a decision framework.
Justin: Yep. You could almost use the risk management to prioritize that list as well. You can’t make everything important, so where do I want to put my resources? This is where I think the risk management is important, because like you said, you could have a list of, “Here’s all the different types of incidents. Here’s all the different types of causes.”
Let me get that list, but let’s start analyzing the big ones. Let’s start analyzing the things that cause us to lose our shirt. What things put us out of business? Let’s start there.
Russel: Yes, exactly.
Justin: Then let’s work our way down, because I can’t focus on everything. If everything’s important, nothing’s important. Let’s focus on those big-ticket items and establish an appropriate framework there, and then move your way down into the smaller ticket items.
Russel: I think it’s probably pretty easy when you do something like this to say, “Well, these are the things that could put me out of business.” It’s probably pretty easy to say, “Well, these things really have no notable impact.” It’s all that ground in the middle that’s challenging. [laughs]
Justin: You might have that five things that are very obvious. It’s obvious you don’t want those things to happen. They are terrible for the industry. They’re terrible for the public. They’re terrible for your company. You want to avoid them at all costs.
Then the things that nobody would ever know about, and they probably have zero impact on just about anybody. Then, yeah, the things in the middle. That’s where the risk management will come into play, having that appropriate analysis.
We haven’t really talked about — and I think this is a good thing — we haven’t really talked about the math behind risk management. I’m a math guy. I have a math background. What we’ve talked about so far is the thinking. It’s the identification.
It’s using your brain to really think through those things. I honestly believe that’s 90 percent of the risk analysis. At that point, now, you can start to use some of the tools. You can start to use Monte Carlo analysis.
You can start to use probability and statistics, start putting some numbers to things.
Russel: Even, I guess, Justin, one of the things that I’ve got to say…You gave me that big stack of documents to read before we got on this episode. I did. I sat and read that stuff, and I found it interesting.
I have to say that this is the first conversation or thinking I’ve done about risk management where all of a sudden, I’m beginning to understand what it is. I think this comment, this path you’re going down about the math, is really…The math needs to be appropriate to the decision you’re making.
Russel: It might be as simple as I’m evaluating 30 alternatives, and I’m trying to figure out, in order 1 through 30, how should I sequence them? Versus I’m looking at the entirety of a pipeline safety management program for a large, top tier pipeline company, and what am I doing there?
That’s going to require some more advanced math, because I got to correlate, cross things that aren’t easily correlated. I’m with you. I think that, as I’m sitting here, and I’m talking to this with you, I think, “Yeah, okay, that makes sense.”
Now, here’s the next question. When do I start using that advanced math?
Justin: I would just caution anybody. If you get to the point where you need to start using the math, and you’re not comfortable with it, don’t. You’re going to have just the process of going through, identifying, and making your brain hurt, that’s going to be beneficial.
When you get to the point where you need some more advanced statistics, or if you’re going to use some simulation analysis, get somebody that understands it or go get some training yourself, because it can be dangerous if you don’t know how to use it.
You can come up with some very precise answers and some very pretty graphs that tell you something. You just want to make sure that you understand what’s going into those graphs, what’s going into those calculations.
We’ve talked about this in the last podcast. We’re taught in ninth grade, or maybe even sooner, that you have to round to the significant digits based on your inputs in science class. If one of my inputs is rounded to the nearest tenth, I can’t have an answer that’s rounded to the nearest thousands.
In measurement, it’s the same way. There’s an error there that it applies. What I see often is that I call it overusing of math. We love, instead of starting with the thinking, we start with the math, and we start with the calculations.
We come up with very precise answers that make us feel good, but they’re not beneficial to decision-making. What they do is they develop overconfidence and your overconfidence in that number, in that calculation, because it looks like it was very scientific.
In the background, one of the inputs was rounded to the nearest 10,000 barrels, but your answer is rounded to the nearest 1 barrel. You just have to be careful not to overuse math. Make sure you understand that garbage in is garbage out.
Use the math that you’re comfortable with, and if you’re not comfortable with it, find somebody who can help you with that.
Russel: I think math should be something that helps you more easily visualize a complex decision-making framework. It should not be the other way around.
Justin: [laughs] Yeah, exactly. If it makes the decision more complex, you’re not using it correctly.
Russel: Right, and if it raises more questions than it answers, you’re not using it correctly.
Justin: We’ve all seen that. It’s like, “Here’s my analysis, and here’s my spreadsheet of numbers.” It doesn’t make the decision any easier, and it doesn’t really highlight anything, any useful information, but it looks very complex.
Russel: But I did interesting math.
Justin: I know from experience how this works.
Russel: It’s like we as engineers, because we are geeky, and we like math, we tend to sometimes make things more complicated than what they need to be.
I think my biggest takeaway from this conversation is just getting really clear about your ally framework, about here’s what I’m trying to accomplish. Here’s all the ways I could accomplish it. Here’s all the things that could happen if I didn’t accomplish.
Here’s all the things that could cause that to happen. Then now I’m going to scorecard these things in some way to get some idea of what’s more or less important. Now, I’m in a position to actually start using that as a tool to make decisions.
Justin: Then making sure that you commit yourself to that action, and you say, “You know what? I went through the analysis. I went through the process, and this is what it tells me. The logic was correct. I’m going to start wherever this thing tells me to go. That’s where I’m going to start, and that’s how I’m going to prioritize my resources.”
Really commit to it. If you trust in your process and your analysis, now, you have to commit to it, because you can’t let your biases get in the way of good decision-making. The analysis and tools, they’re only tools.
You plug your brain in and make sure you’re making good decisions, but really commit to that.
Russel: I think, though, what’s really interesting in this conversation is it’s all about the framework and understanding the framework. If something happens that’s unanticipated, what you do is you go back, and you update your analysis and revise your framework based on that new learning.
Justin: Yep, that’s good.
Russel: Or new technology or whatever else. What you never do is second guess your framework.
Justin: You don’t throw out the framework because you had an incident. You go back and see, “Where did this slip through the cracks? How do I apply it?” Maybe it was a once in a century event, and I don’t need to do anything.
Or maybe I really do have a real big gap there that I need to fill.
Russel: Justin, this has been really, really helpful for me, because I have been thinking a lot in the last six months about how do we take what goes on in the pipeline control center and apply some kind of risk management to it.
I think, for the first time, I’m beginning to get a clue about what would need to happen to start the process. What I was making up, given what I knew about risk management, is it’s all this cool math.
What I was missing is, well, it’s first understanding the nature of the problem, and then it’s some cool math.
Justin: The beauty of it is you can apply it to the control room. Somebody else can apply it to right-of-way management. Somebody else can apply it to their investment philosophy. Somebody else can apply it enterprise-wide. It’s a way to think. It’s a way to make decisions and make sure that you’re thinking through the possible outcomes of your future.
This has been great, Justin. I appreciate you coming back, even though you’ve moved on from pipelining. We think you need to come back into the pipeline business.
Justin: Thanks, Russel.
Russel: I hope you enjoyed this week’s episode of the Pipeliners Podcast and our conversation with Justin Shannon. Just a reminder, before you go you should register to win our customized Pipeliners Podcast YETI tumbler. Simply visit pipelinerspodcast.com/win to enter yourself in the drawing.
If you would like to support the podcast, please leave us a review on Apple Podcasts, Google Play, or whatever smart device podcast app you happen to use. You can find instructions on how to do this at pipelinerspodcast.com.
Thanks for listening. I’ll talk to you next week.
Transcription by CastingWords