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Risk
Risk management in oil and gas management
construction projects in Vietnam
Nguyen Van Thuyet and Stephen O. Ogunlana
Asian Institute of Technology, School of Civil Engineering, 175
Bangkok, Thailand, and
Prasanta Kumar Dey
Aston Business School, Aston University, Birmingham, UK
Abstract
Purpose – The purpose of the paper is to the identify risk factors, which affect oil and gas
construction projects in Vietnam and derive risk responses.
Design/methodology/approach – Questionnaire survey was conducted with the involvement of
project executives of PetroVietnam and statistical analysis was carried out in order to identify the
major project risks. Subsequently, mitigating measures were derived using informal interviews with
the various levels of management of PetroVietnam.
Findings – Bureaucratic government system and long project approval procedures, poor design,
incompetence of project team, inadequate tendering practices, and late internal approval processes
from the owner were identified as major risks. The executives suggested various strategies to mitigate
the identified risks. Reforming the government system, effective partnership with foreign
collaborators, training project executives, implementing contractor evaluation using multiple
criteria decision-making technique, and enhancing authorities of project people were suggested as
viable approaches.
Practical implications – The improvement measures as derived in this study would improve
chances of project success in the oil and gas industry in Vietnam.
Originality/value – There are several risk management studies on managing projects in developing
countries. However, as risk factors vary considerably across industry and countries, the study of risk
management for successful projects in the oil and gas industry in Vietnam is unique and has
tremendous importance for effective project management.
Keywords Oil industry, Gas industry, Risk management, Project management, Vietnam
Paper type Research paper
Introduction
Projects are exposed to both internal risks (financial, design, contractual, construction,
personal, involved parties and operational risks) and external risks (economical,
social, political, legal, public, logistical and environmental risks). All the risks may
influence cost, schedule or quality of the project in negative ways (Charoenngam and
Yeh, 1999). Therefore, risk management should be well recognized and handled as an
integrated function of project management.
Vietnam is an emerging economy with increasing gross domestic product (GDP)
(World Bank, 2001). The construction industry is the main contributor to the growth International Journal of Energy Sector
with real expansion of 7.2 percent in 2001 and 14 percent in the first quarter of the year Management
Vol. 1 No. 2, 2007
2002. However, Vietnam’s construction industry has recently encountered many issues pp. 175-194
that cause negative impacts on construction projects, one of which is the lack of q Emerald Group Publishing Limited
1750-6220
systematic and effective risk management system. DOI 10.1108/17506220710761582
IJESM Risks in construction often cause time and cost overruns. Many projects have been
1,2 delayed or exceeded their planned budgets, as project managers could not manage risk
effectively. These problems seem to happen more frequently these days, because of the
emerging nature of the economy. Projects today are exposed to considerably more risks
and uncertainties because of factors such as planning and design complexity, presence
of various interest groups (project owner, consultants, contractors, vendors, etc.),
176 resource availability (material, equipment, funds, etc.), climatic environment, social
concerns as well as economical and political statutory regulations.
The oil and gas industry in Vietnam contributed 10 percent of the GDP in 2001
(Statistical Publisher, 2001). Today, the industry continues to grow strongly implying
demands for construction of new oil and gas facilities. Oil and gas construction projects
are often capital intensive. Hence, their successful implementation is strategically
important. However, oil and gas construction projects are exposed to risks because of
large capital investment, involvement of many stakeholders, use of complex
technology, high environmental and social impact.
Oil and gas projects in Vietnam are implemented through joint ventures
partnerships involving multinational companies like British Petroleum, Petronas,
Total, Chevron, Conoco, etc. Such partners supply capital and high technologies needed
for oil and gas projects which Vietnamese partners are still lacking. The participation
of foreign partners makes the projects suffer from risks such as differences in practices
between domestic and foreign partners, policy and political risks, financial risks, legal
and political risks. The inflation rate in Vietnam is quite high; while the national
currency is relatively weak. Vietnam is located in South East Asia, a region considered
the most dynamic and challenging in the world. The quality of management in
Vietnam is still below world standard as the country is emerging from a planned
economy. In view of the above, oil and gas construction projects in Vietnam pose lots of
risks that can cause adverse impacts on project implementation. Therefore, there is
urgent need for good risk management in oil and gas project management.
Accordingly, the objectives of the study are to determine the major risks affecting oil
and gas construction projects in Vietnam and propose appropriate strategies to
effectively mitigate the major risks.
Methodology
The questionnaires used to gather data were designed in accordance with the study
objectives, the literature and the research hypotheses. Two kinds of questions (open-
and closed-ended questions) were adopted for top management, project managers,
functional managers, and project team members. These questions were multiple choice
type. Additionally, interviews were conducted for further analysis. The questionnaires
were pilot tested to improve them before the field survey.
The target population for this study was people involved in oil and gas construction
projects in Vietnam in the middlestream and downstream project groups of Vietnam Oil
and Gas Corporation (PetroVietnam). Since, PetroVietnam is the major player in the oil
and gas industry in Vietnam, it represents the oil and gas industry in Vietnam.
Questionnaire respondents were top managers, project managers, functional managers,
risk experts, project team members, and other relevant staff of Petro Veitnam.
Primary data were collected by questionnaires and in-depth interviews, and
secondary data were also collected from various sources.
Secondary data were collected for the primary purpose of triangulation, i.e. the Risk
use of multiple sources of data for comparison. management
Descriptive statistics and hypothesis tests were utilized for data analysis. The
Statistical Package for Social Science version 10.1 (SPSS) was used for data analysis.
Three groups of variables were categorized to test differences in the opinions of
respondents. The categories were working experience of the respondents, the respondents’
job position, and the type of respondents’ company (state-owned and joint venture): 177
(1) Work experience variable group:
.
respondents . ¼ 10 years of working experience; and
.
respondents , 10 years of working experience.
(2) Job position variable group:
.
management – top managers, project managers, managers and
vice-managers of functional departments; and
.
employee – project team members, related staffs.
(3) Company type variable group:
.
state-owned companies; and
.
joint venture companies.
The x 2 test was chosen for testing hypotheses about differences in respondents’
responses. The null hypothesis in this study is that the variables in the same group do
not differ among themselves. Cross-tabulation in SPSS is used for the x 2 test. The
statistical significance level of 10 percent was used for the statistical tests. Since, the
study dealt with people’s opinion, 10 percent significance level is acceptable.
In order to avoid the influence of analytic biases from various sources, research
findings were verified and tested as follows:
(1) Checking for researcher effect:
.
biases stemming from the researcher effects on the site; and
.
biases stemming from the effects of the sites on the researchers. To cope with
them, careful examination of the study and checking feedback were needed.
(2) Checking the means of outliers – it was reviewed by colleagues to avoid
self-selecting biases.
Data analysis
The questionnaires were distributed to six of PetroVietnam’s subsidiaries specializing in
oil and gas projects in the middle to downstream activities. Five were state-owned
companies and one was a joint venture company. A total of 70 questionnaires
were delivered and 42 questionnaires were returned, the return rate is 60 percent. Table I
shows details of the questionnaire responses and Table II shows the distribution of
respondents’ age, working time and highest education level.
Deliberate attempt was made to include more managers in the study because
managers have more comprehensive knowledge on various aspects of projects.
The ages of respondents in this investigation vary from 25 to 50 years. The modal
age group is 31-35 (35.7 percent), the group from 25 to 30 is the second in size with
28.6 percent. All the respondents in the 45-50 age group were managers.
IJESM Of the respondents, 21 (50 percent) had more than ten years work experience.
The rest 50 percent of respondents had less than ten years of experience. All the
1,2 respondents had at least a Bachelor’s degree. Figure 1 shows the distribution
of respondents’ major field of studies.
Frequency Percent
Age
Group 25-30 12 28.6
Group 31-35 15 35.7
Group 36-40 2 4.8
Group 41-45 10 23.8
Group 45-50 3 7.1
Over 50 0 0
Total 42 100
Working time
, ten years 21 50
. ¼ 10 years 21 50
Total 42 100
Table II. Highest education
Distribution of Bachelor 38 90.5
respondents’ age, Master 3 7.1
working time and highest Doctor 1 2.4
education Total 42 100
Respondents' major field study Risk
management
Geology
5%
Petrochemistry
14% Mechanics
Natural gas 21%
system design 179
and
management
2%
Industrial system
management
7%
Finance and
accounting Industrial and
2% civil engineering
30% Figure 1.
Distribution of
Bussiness respondents’ major
administration field of study
19%
To apply the model, the opinion judgment scale needs to be converted into numerical
scales. PMBOK (2000) suggested that the “very high” take a value of 0.9, and that “high,”
“medium,” “low” and “very low” take values of 0.7, 0.5, 0.3, 0.1, respectively. A risk
assessed by a respondent is called risk score and is calculated from the general model:
Rij ¼ Frji £ Im ij
where, Frji ¼ frequency of occurrence assessed by respondent j for risk I; Imij ¼ degree
of impact if risk i assessed by respondent j.
By averaging scores from all 42 responses, it is easy to have an average score for
each risk, and this average score is called risk-index score and used to rank risks. The
calculation of risk-index score can be written as:
P42 i
j¼1 R j
RIi ¼
42
where, RI ¼ risk-index score for risk i; Rij ¼ risk score of risk i assessed by respondent
j. Risk ranking was done based on the risk-index score as shown in Table III. The
ten-risk groups are used in order to easily interpret the risk ranking.
Table III shows the list of ranked risks including 59 risks sorted in ascending order
according to their overall impact on projects in Vietnam. The major focus of this paper
are as mentioned in the research objective are the top-ten risks. They will be
thoroughly analyzed to find out their causes and characteristics, whereby appropriate
measures to mitigate them can be proposed.
of occurrence frequency (0.625) and the fifth highest mean of impact degree (0.705)
(Table IV). These indicate that the oil and gas projects in Vietnam are prone to this risk.
Projects are required to be approved by several administration levels. Bureaucratic
administration systems, poor law implementation and the incompetence of
government staff were the main causes for this risk.
The next four risks are “poor design” (RI ¼ 0.4767), “incompetence of project team”
(RI ¼ 0.4419), “inadequate tendering” (RI ¼ 0.4324) and the “late internal approval
process from the owner” (RI ¼ 0.4276). The other nine risks in the top-ten risks group
are internal. Among them are five risks related to management of the owner, and
they are at quite highly placed in the risk ranking: third (incompetence of project team),
fifth (late internal approval process from the owner), sixth (inadequate project
organization structure), seventh (improper project feasibility study) and ninth
IJESM
Mean of Mean of Risk-index
1,2 occurrence impact score
No. Risk code Risk frequency degree (RI)
Hypothesis testing
The x 2 hypothesis tests were carried out to check the differences in the judgments of
the respondents on the risks. The tests focus on three groupings: job position, working
experience and company type. The null hypotheses are:
H01. There is no difference in the judgment about risks among respondents having
different job positions.
H02. There is no difference in the judgment about risks among respondents having
different working experience.
H03. There is no difference in the judgment about risks among respondents
working for different company types.
The significance level for the hypothesis test is 10 percent. Using SPSS software, x 2
test was done and the results are shown in Table V. It is found that there is not much
difference in the judgment of respondents in all the three groupings. In the working
experience grouping, there were only three risks having significant differences
(inefficient and poor performance of constructors; delay in signing contract; and lack of
knowledge and experience in construction). In the job position grouping, there were six
risks having significant differences (incompetence of project team, government
interference; work conditions deferring from contract; unusual weather, war; shortage
of new technology; and financial problems with consultants). In the company type,
there were 11 significant differences (improper project planning and budgeting;
ambiguous conditions of contract; insufficient laws on projects; inefficiency of legal
process, economic and financial crisis; increase of equipment cost; difference of
standards and codes in JV; change in laws and regulations; poor relation with
government departments; inflexible and complex rules and regulations of lender; and
environmental protection pressure of other groups).
The findings of less difference in the judgement of risk having different job
positions (3 out of 59) and working experience (6 out of 59) imply the relative
agreement from the respondents irrespective of experience and job position.
However, there are significant differences in the company type grouping (11 out of
59 risks). The different characteristics of the two company types may create these
differences. For example, in joint ventures both international and local partners need to
1,2
184
IJESM
Table V.
x 2 test results for
hypothesis testing
RI according to working experience
Rank Risk code Risk factor $10 years ,10 year P Significance at 10 percentage
(1) (2) (3) (4) (5) (6) (7)
8 R11.6 Inefficient and poor performance of constructors 0.43 0.4033 0.056 Significant
13 R6.2 Delay in signing contract 0.4513 0.4362 0.065 Significant
16 R9.1 Lack of knowledge and experience on construction 0.4035 0.322 0.048 Significant
RI according to job position
Management Employee P
3 R8.5 Incompetence of project team 0.4513 0.4362 0.032 Significant
31 R2.2 Government interference 0.3001 0.2729 0.063 Significant
34 R6.5 Work conditions deferring from contract 0.2531 0.2857 0.033 Significant
39 R4.1 Unusual weather (flood, earthquake . . .), war . . . 0.2412 0.2623 0.082 Significant
48 R11.11 Shortage of new technologies 0.2045 0.2295 0.011 Significant
50 R9.2 Financial problems with consultants 0.1859 0.2217 0.062 Significant
RI according to company type
State-owned Joint venture P
9 R8.2 Improper project planning and budgeting 0.4035 0.322 0.025 Significant
15 R6.4 Ambiguous conditions of contract 0.3512 0.2294 0.054 Significant
18 R3.2 Insufficient laws on projects 0.321 0.41676 0.064 Significant
19 R3.3 Inefficiency of legal process 0.3225 0.3939 0.029 Significant
26 R1.9 Economic and financial crisis 0.2845 0.40294 0.085 Significant
27 R1.7 Increase of equipment cost 0.3087 0.22386 0.001 Significant
28 R7.2 Difference of standards and codes in JV 0.32 0.11588 0.096 Significant
30 R3.1 Change in laws and regulations 0.2714 0.39152 0.052 Significant
53 R8.8 Poor relation with government department 0.1752 0.2592 0.056 Significant
55 R10.3 Inflexible and complex rules and regulations of lender 0.1698 0.13956 0.072 Significant
58 R5.4 Environmental protection pressure of other groups 0.145 0.103 0.072 Significant
Note: P – probability value calculated form x 2 test
use the same construction standard, meaning that one partner may not use his familiar Risk
standard but have to adapt to a new standard. This need for adaptation can cause management
difficulties in practice. The state-owned companies, by contrast, still prefer to use the
old construction standard they are familiar with. That is responsible for the significant
difference in perception on the different standards and codes risk between state-owned
companies and joint ventures. Another example is relation of joint ventures with local
government departments. For joint ventures, the good relationship with the 185
government is a critical factor of project success. As such, they emphasize on this
issue while the state-owned companies put less emphasis on it because they themselves
belong to the government, thus the government may give them priorities in running
projects.
Among the top-ten risks, inefficient and poor performance of contactors has
significant difference in each grouping. In the working experience grouping, there
exists a disagreement on the judgment about “inefficient and poor performance of
constructors” risk between respondents having much experience and those having less
than ten years experience. The former has the mean of risk-index score of 0.43 while
the latter has 0.403 (Table V). This implies that the more experienced respondents
perceive the risk more than the group with less experience. In the job position variable
group, the significant difference occurs in the “incompetence of project team” risk. The
managers gave higher risk-index score than employees (0.4513 against 0.4362). Thus,
the managers are more concerned by the incompetence of project team than employees.
However, it is useful for the project teams’ competence improvement because managers
are in the position to give support and more consideration for improvement (through
training) when they feel their project teams are not competent. There is much
difference in risk-index score between the state-owned companies and joint venture
companies (0.4035 against 0.322) implying significant difference in perception of the
“improper project planning and budgeting” risk. It would seem that the competence of
project team, the high technology support and other potentials of joint venture
companies give them confidence that they do not perceive improper project planning
and budgeting as being risky as the state-owned companies.
Its findings are more critical considering that the oil and gas industry is the major
contributor to the overall economy of Vietnam but highly exposed to risks due to its
own characteristics and fast changing external environment.
This research focused on two main objectives namely – finding out the major risks
affecting oil and gas construction projects and deriving appropriate strategies to
effectively mitigate the major risks. Using questionnaire survey, this study has
systematically examined the risks affecting oil and gas construction projects. The
risk-index score developed, supported by in-depth interviews, have helped in
identifying major risks and their mitigating measures. The top-ten major risks
identified were:
(1) bureaucratic government system and long project approval procedure;
(2) poor design;
(3) incompetence of project team;
(4) inadequate tendering;
(5) late internal approval process from the owner;
(6) inadequate project organization structure;
(7) improper project feasibility study;
(8) inefficient and poor performance of constructors;
(9) improper project planning and budgeting; and
(10) design changes.
For projects to be successful, it is extremely critical that the major risks affecting Risk
projects be thoroughly examined. Their causes and characteristics must be carefully management
analyzed, in order to support the owner to propose the most appropriate and practical
strategies to mitigate them. In this research, the top-five major risks have been put
through this process. This research proposes requesting for administrative reform
from the government, maintaining good relationship with government, environment
authority, and NGOs, familiarizing with approval procedures, local laws and 193
regulations, partnering with major project stakeholders, engaging experienced design
organizations, applying concurrent engineering, translating owner’s ideas clearly to
designers, hiring of competent consultants to evaluate design works, training project
people, appropriate staffing, emphasizing on teamwork, enhancing of MCDM practices
in contract evaluation, fostering environment for non-collusive tendering and
enhancing legal enforcement, enhancing commitment of all people involved,
and empowering in order to effectively mitigate the major risks.
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Corresponding author
Prasanta Kumar Dey can be contacted at: p.k.dey@aston.ac.uk