EVALUATION METHODOLOGY:
PROJECT IMPLEMENTATION RISK ASSESSMENT
Merlin commonly evaluates projects utilizing a risk assessment criteria. Merlin assesses the likely outcome due to various failure scenarios of the project execution plan.

The Operator and Prime Contractor usually place emphasis on achieving on-time and under-cost completion and do not always provide contingency planning until a crisis develops. The project execution plan as agreed between Operator and Prime Contractor is usually realistic for the specified assumptions but is probably neither optimistic nor overly pessimistic. It is most often described as a plan with a 50% probability of being achieved within budget and schedule – it also has a 50% probability of exceeding the cost estimate and not being completed on time if it has truly been developed with this philosophy.

In addition to cost and schedule variance, the other major project risk exposure is confidence in reliability and capacity of the project facility. Merlin has a unique history and reputation for providing both technical risk analysis and standard project risk analysis. Technical risk analysis includes detailed review of the process technology, the specific hardware to be used, and the overall project implementation planning.

Merlin Associates will provide a set of risk criteria or a band of predicted outcomes. The basis of Merlin’s risk analysis is development of an independent capital cost estimate using Merlin’s proprietary Capital Cost Estimators. Merlin’s proprietary project schedule is linked to the capital cost estimator. Merlin has developed and maintained a summary level project schedule for each of the LNG chain segments utilizing only sufficient activities to determine project duration, critical path activities, and sufficient activities to allow detailed capital cost estimating. The summary level project schedule will typically have 400 - 600 activities depending on whether the full feedgas system is included or not. The Merlin summary level project schedule with the Merlin capital cost estimate predicts expenditure phasing on monthly and annual time periods.

The capital cost estimate with the associated project schedule is the Merlin deterministic capital cost estimate. This detailed estimate is summarized to 30 - 50 major cost categories for probability analysis. Statistical probability analysis for the costs and schedule is done using the @Risk program with Latin Hypercube random sampling of all the assigned probability distributions. We use triangular probability distributions and take into account the affects of cost/schedule variables that have internal dependencies with other cost/schedule variables. A typical probability analysis requires from 750 - 1500 iterations in order to produce smooth probability curves.

Although the full spectrum of project probabilities are developed, Merlin typically report the Mean non-exceedance probability data (usually similar to the project’s 50% probability data); the 75% non-exceedance probability data (sometimes called "Most Likely"); and the 95% non-exceedance probability data (often called the "Worst Case Scenario"). The Merlin 75% probability data is a prediction of project outcomes assuming industry average problems, engineering judgment of additional project costs for the site-specific location to resolve these problems, and adjustment for known site-specific problems. The 95% probability data assumes a higher frequency and duration of problem occurrences.

The complete risk analysis method is justified for the financing community on all LNG grass roots chain projects and most expansion projects. It is frequently justified for many of the equity participants who often do not have internal technical expertise in LNG technology and an up-to-date database of LNG project costs. Use of a third party consultant jointly by the LNG sellers and buyers is useful to eliminate internal disagreements and can greatly assist in reaching agreement on the actual details of the final sales agreement. Most LNG projects are multi-participant projects where an independent third party used jointly by all parties can be very helpful in avoiding internal conflicts.