CHEVRON PIPE LINE COMPANY Risk Based Prioritization Process

CHEVRON PIPE LINE COMPANY Risk Based Prioritization Process

Risk Management Phases PHASE I u Develop risk scenarios / situations that can lead to negative consequences u Estimate the severity of the negative consequences u Estimate how frequently these scenarios can occur

Risk Management Phases PHASE II u Develop potential risk control activities for the risk scenarios u Develop estimates of how these activities impact the consequence and frequency of the risk scenarios

Risk Management Phases PHASE III u Evaluate the effectiveness of risk reduction projects by estimating the: – baseline risk associated with a scenario – modified risk after the project is completed – resulting reduction in risk from the project

The Prioritization Problem Too many activities competing for too few resources

What makes prioritizing difficult? Competing objectives Critical review Customers D ecisions Uncertainty ? Cost Control Internationalization Differing opinions Need to do more with less Dispersed information/ multiple stakeholders

What is the Priority System Intended to Achieve? u Use limited resources in a way that best serves the objectives of CPL u Provide managers and operators with a consistent method for communicating what risk management resources will accomplish u Improve the consistency and defensibility of decisionmaking

Defining benefits: Chevron operating objectives Maximize the value of CPL as the preferred provider of pipeline transportation Maximize Health & Safety Maximize Regulatory Compliance Maximize Environmental Protection Maximize Public and/or Communities’ Confidence Maximize Financial Performance Workers Ecological Resources Business Contribution Public Aesthetic & Recreational Resources Operating Cost Savings Response Cost Savings Maximize CPL Customer Satisfaction Maximize Employee Partnering

Risk Dimension Scales Public Confidence / Reaction u u u u Formal public recognition Positive public comment Neutral Negative phone calls, letters Negative local news Prolonged negative local news Negative national news

Risk Dimension Scales Customer Satisfaction u u u Attracting new customers Preferred supplier of transportation services Perceived improvements, informal compliments Neutral Complaints, dissatisfaction Formal complaints, key customers collaborating to leave or leaving

Risk Dimension Scales Regulatory Relations - Scales vary from u u Formal positive recognition, to Partial or complete shut down of facilities, large fines Environmental Protection - Scales vary from u u Permanent damage to an ecologically sensitive area, to Minimal impact to an ecological resource

Scoring of Projects u Scenario based approach used to evaluate projects u Chevron management has established a dollar value for each scale for measuring performance in each risk dimension u Scoring measures the performance in each risk dimension u The results of scoring is a dollar based benefit of implementing a risk control project

Overall benefit Risk Dimensions Maximize Health & Safety Maximize Regulatory Compliance Maximize Environmental Protection Maximize Public and/or Communities’ Confidence Maximize Financial Performance Maximize CPL Customer Satisfaction Maximize Employee Partnering Scoring Scales [Risk assessment] Xi Weights [Risk tradeoffs] WH-S Xi WRegs Activity benefit = Risk with - Risk without [Risk-based prioritization] Xi WEnv Xi WPub Xi Xi W$ Overall measure of risk (or risk reduction) WCust Xi WStrat

Mitigation Measure Evaluation u Evaluate benefit vs. cost for projects or project alternatives Net Present Values calculated for risk benefits and project costs at an appropriate discount rate u Replace gathering lines at Rangely, Colorado Benefit Summary Worker H&S Public H&S Environment Public Reaction Regulatory Relations Financial Impact Customer Satisfaction Partnering with EE 0 0 302 0 159 67 273 7 Total Benefit 808 Do Benefits Outweigh Costs? Total Benefit = $808 M (NPV) Project Cost = $130 M (NPV) B/C Ratio = 6. 6

Scoring Summary Scored Ranking Benefit / Cost Comment 1. Project A 6. 4 25 K Strong project 2. Project B 4. 8 100 K Strong project 3. Project C 3. 4 200 K Acceptable project 4. Project D 1. 5 225 K Evaluate relative to other projects 5. Project E 1. 3 200 K Evaluate relative to other projects 6. Project F 0. 8 1 MM Evaluate relative to other projects 7. Project G 0. 8 600 K Profit Center decision based on strategy and available $. Lower benefit due to no severe risk impacts.

CAPITAL PRIORITIZATION 10 9 8 Quick Release B/C Ratio 7 6 5 Additional Review 4 3 2 1 0 Cumulative $ Weaker Justifications

Benefits of Project Scoring Process u Input from subject matter experts used for scoring projects u Model integrates risk with financial performance of a project u Project scoring process is documented and typically used for capital projects over a selected cost threshold u The scoring process provides consistent evaluation of projects, with minimal opportunity for “gaming” the project funding process

Personal Information Jal Sethna, P. E. (281) 596 -3522 jset@chevron. com