Environment risk Management at Chevron Corporation

Background of Chevron Corporation

1906 : Established by John D.Rockefeller as Standard Oil Company in California

1926: The entity merged with Pacific Oil Company

Early 1980s: Changed its name to Chevron Corporation

1984: Acquisition of Gulf Corporation

1997: Earnings of over $3 billion on revenues of $42 billion, a company record

Operations of Chevron Corporation

O Petroleum and natural gasO ExplorationO ProductionO Refining, and O Marketing

O PetrochemicalsO Coal MiningO Owns worldwide fleet of Oil Tankers,

Advanced Research Facilities and a Global Telecommunication Subsidiary

Environmental situation

O Large sums spent on environmentO In 1997, it amounted to $893 million (2.1% of

revenues, and 9% of total costs)O Included $237 million of capital expenditure

O In short run, environmental investmentsO Reduced cash flowsO Competed with other better paying

investments O Problems of implementation and incentive

design for spending on environment

Emergence for Risk Management O Decision making was more judgmental

rather than analytic.

O Marine oil spill mitigation cost doubled due to lack of analysis.

O Management based decision and policies

O Lack of procedural guidance for Environment Management

Internal Risk Management

O Policy 530 applied to worldwide operationsO Integrated safety and environmental

protectionO Compliance to environmental regulationsO Innovative and creative solutions for

environmental management.O Ensure conformity by regular audits.

O Employee education and training programs O To reduce the probability and severity of

environmental damageO To reduce number of events like spills and

accidents

Internal Risk ManagementO Formation of Worldwide Spill response group

O To ensure 24 hour availability against environmental emergency

O Management evaluation and promotion as tool for creating incentivesO Environmental performance as a parameter for

appraisal.O Lack of environmental consideration affect promotions

directly.

Benefits

Risk management saved $20 million annually.Incidents of emergency reduced substantially.

External Risk ManagementO Self insurance up to around $200 to $300 million

and external purchases above that level

O The of amount of deductible varied in different areas of corporation

O It insured large risks since it could not afford to be self insured against a catastrophic event

O Established relation with a collection of insurance providers

O Purchased insurance at corporate level

Responsibility for risk

O Decisions of Environment risk management not centralized

O Exceptions include :The risk management group responsible for

purchase of external toolsHealth, safety and environment group

O Most other environment decisions made at operational level since ground-level managers had flexibility to ensure safety and prevent adverse events.

Analytical Risk Management

O Analytical model that treated environment projects as capital projects

O Prioritization tools to decide which environment projects to be conducted

O E&S risk management process developed by CRTC had 4 phases:

Identify events, perform risk assessment, identify alternatives and make a decision.

O Qualitative estimates of likelihood and consequences plotted on risk matrices , assigned risk value to each event

Analytical Risk ManagementO Risk value for 4 distinct categories of events:Health and safety, environmental, public concern

and financial effectsO Risk value of 4 or 5 would need cost-benefit

assessment of possibilities for reducing the riskO CRTC wanted to augment the E&S guidelines

by developing a decision making tool, since the off-shelf-manuals and software packages for cost-benefit analysis were not satisfactory

O CRTC final product was DEMA, quantitative extension of E&S risk management process’s procedures

DEMA

O DEMA was prioritization tool that helped a manager take decision about project to be carried out before others

O Basically a spreadsheet, which included:• Input sheets, one per potential project• Valuation tables(for converting inputs into

dollar values)• Two recap sheets(summarized the cost-

benefit ratio of each risk reduction proposal.

DEMAO Quantitative extension to E&S risk

management proceduresO Cost benefit analysis to be done by managersO A spreadsheet model consisting of input

sheets, valuation tables and recap sheetsO Input sheet compared the impact w.r.t:

O Likelihood of occurrence of adverse eventO Health and safety impactO Environmental impactO Financial performanceO Impact on public concern

DEMA

O DEMA allowed the users to enrich the taxonomy by proposing categories that were especially important for their own business units

O Scores used as inputs to the DEMA process were not comparable across impact categories

O Standardized table to transform the scores into dollar values (Discounted to present values)

O Benefit= Dollar impact without project- Dollar impact after project implementation

DEMA

Implementation:O Pilot run at Chevron Overseas Petroleum

Inc.O Expected to generate several million extra

dollars’ worth of risk reduction benefitsO Results were positiveO DEMA determined the allocation of risk

management resourcesO Overall efficiency of risk management

investments increased

Implementation of Systems for formal Risk Analysis

O DEMA given trial runs atO Chevron’s refinery in Richmond, CaliforniaO Chevron Overseas Petroleum Inc. (COPI)

O Plot of projects benefits to cost ratios against cumulative cost of projects done to choose projects

O DEMA procedures at Richmond enabled risk reduction benefits at no additional cost

O Significant benefits of DEMA were reported by COPI managers

O Important as COPI did substantial business in countries with weak environmental regulations

Learnings

O It is imperative to quantify risk management to better assess future risk and current investment

O Long term view is better when it comes to risk management

O Every decision cannot based on the gut and experience of management. It is important the gut be supported by numbers and vice-versa

O Despite its subjectivity DEMA had proved to be a resourceful tool and had shown clear benefits

LearningsO Due to its decentralized nature Chevron needed a

central software to guide all environmental decisions as it directly impacted the image of the company

O As Chevron operated in many countries with poor regulatory systems this tool would help in judging and prioritizing what the company should do to mitigate risk

O Given the company’s huge spending on Environment related costs it is important that the allocation of money brings maximum benefit and also supports the bottom-line in the long run and this is calculated with the help of a good software which can look at things from all perspectives as was proved with the Richmond plant

Learnings

O Chevron’s positioning as a responsible company made it very important for them to make the process more quantifiable and analytical to increase its authenticity

O The huge spending need to be justified and their benefits explained to shareholders who are interested only in numbers.

DEMA- Long Term EffectO Without some analytical system like DEMA

long term consequences of current practices could be ignored. O This would transfer risks to future shareholdersO In an efficient market with full understanding of

risks long term consequences should impact current stock price

O The increased managerial attention from a system brings about greater creativity with respect to risk management and greater efficiency

O Environmental risk is more difficult to manage than financial risk (e.g. currency risk) where instruments exist to hedge risk

Thank you …