An infrastructure adaptation case study

<p class="MsoNormal" >2013 Trexler Adapting to Climate Change 2.0 Enterprise Risk Management

Researchers at Det Norske Veritas carried out the idealized analysis described above for an offshore oil rig to better understand how climate change forecasts can contribute to corporate adaptation decision-making.  The results are instructive in anticipating the challenges that companies will encounter in pursuing climate change adaptation strategies.   The results suggested that given forecasted climate change, it would be economically worthwhile to raise the rig by 1-3 meters to avoid “wave in deck” events during its 100 year lifetime.<a id="ednref1" href="#edn1" name="_ednref1" title="">[i]</a>   But it wasn’t actually that simple, and a real adaptation decision making process would likely have encountered several hurdles:</p>

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<li>Model Uncertainty.   The GCMs and other models being used to forecast wind and wave conditions delivered substantially different results, with two out of three suggesting only a minimal risk of “wave in deck” events, and the third suggesting a higher level of risk.  What is the appropriate adaptation response?  To treat the models as an ensemble and average the three very different results?  This could lead to an under-designed rig if the more extreme result turns out to be more accurate, or an over-designed rig in the opposite case.  Or perhaps, as is often done in such planning, the “outlier” modeling result could be discounted and ignored, which in this case would lead to few if any changes to the rig’s design. </li>

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<li>Risk Significance of the Results.  Oil rigs are already designed to be resilient to pretty extreme events.   In this case the models suggested that the probability of a “wave in deck” event might go from 1 in 4,000 years under today’s climate conditions, to 1 in 600 years under future climate conditions. Even if adapting the design of the rig to this changed risk profile pencils out as cost-effective, decision makers may question spending millions of extra dollars to address a 1 in 600 year event, especially in light of the model uncertainties already mentioned.</li>

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<li>Discount Rates.  The cost-effectiveness of raising the oil rig by 1-3 meters was based on net present value calculations using a 3% discount rate.  Commonly termed a societal discount rate, this is a much lower figure than is commonly used in corporate planning, where 9-15% discount rates prevail.  Higher discount rates, however, rapidly shorten the “risk timeframe” of analysis.  At a 15% discount rate, you don’t care too much what happens after little more than a decade, even if a piece of infrastructure is supposed to last for 100 years. </li>

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<p class="MsoNormal" >This simple case study suggests that adaptation planning, even if rigorously pursued, will often not lead to obvious and economically unambiguous conclusions.  Adaptation planning will have to be characterized by decision making under uncertainty (and sometimes quite substantial uncertainty).  </p>

<p class="MsoEndnoteText"><a id="edn1" href="#ednref1" name="_edn1" title="">[i]</a> Garre, L., Friis-Hansen, P., and Trexler, M. 2012. Adapting Engineered Structures to Climate Change. Presentation to Nordic Int'l Conference on Climate Change Adaptation, 29-31 August 2012, Helsinki.  Available at: http://www.nordicadaptation2012.net/Doc/Oral_presentations/5.4.2_Trexler.pdf</p>

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