Environment risk Management at

Chevron Corporation
Background of Chevron Corporation

1997:
1984: Earnings of
Acquisition of over $3
Gulf billion on
Early 1980s: revenues of
Changed its Corporation
$42 billion, a
1926: The name to company
entity Chevron record
merged with Corporation
Pacific Oil
1906 : Company
Established by
John
D.Rockefeller
as Standard
Oil Company
in California
 Operations of Chevron Corporation
O Petroleum and natural gas
O Exploration
O Production
O Refining, and
O Marketing
O Petrochemicals
O Coal Mining
O Owns worldwide fleet of Oil Tankers, Advanced
Research Facilities and a Global Telecommunication
Subsidiary
 Environmental situation
O Large sums spent on environment
O 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 investments
O Reduced cash flows
O 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 operations
O Integrated safety and environmental protection
O Compliance to environmental regulations
O 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
damage
O To reduce number of events like spills and accidents
 Internal Risk Management
O Formation of Worldwide Spill response group
O To ensure 24 hour availability against environmental emergency
O Management evaluation and promotion as tool for
creating incentives
O 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 Management
O 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 tools
Health, 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 Management
O Risk value for 4 distinct categories of events:
Health and safety, environmental, public concern and
financial effects
O Risk value of 4 or 5 would need cost-benefit
assessment of possibilities for reducing the risk
O 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.
 DEMA
O Quantitative extension to E&S risk management
procedures
O Cost benefit analysis to be done by managers
O A spreadsheet model consisting of input sheets,
valuation tables and recap sheets
O Input sheet compared the impact w.r.t:
O Likelihood of occurrence of adverse event
O Health and safety impact
O Environmental impact
O Financial performance
O 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 benefits
O Results were positive
O DEMA determined the allocation of risk management
resources
O Overall efficiency of risk management investments
increased
Implementation of Systems for formal Risk Analysis
O DEMA given trial runs at
O Chevron’s refinery in Richmond, California
O 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
 Learnings
O 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 Effect
O Without some analytical system like DEMA long
term consequences of current practices could be
ignored.
O This would transfer risks to future shareholders
O 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 …