环境风险管理案例分析报告

　 A Report on Chevron Environmental Risk Management [DATE]

　2010-1-9

　Executive summary

　Chevron Corporation is a giant international oil company in North America providing energy and chemical products such as crude oil and natural gas to the growth of the world’s economies. Chevron’s mission is to create superior value for the stockholders, customers, employees. It is also known by its reputation on environmental risk management and environment conservation.

　Each year, Chevron has spent large sums of investments on environmental risk management programs and also accounted for a large amount of cost of incidents happened during the operation process. Despite the achievement on financial performances in recent years, Chevron consistent looked into the risk management process and intended to find new ways on environmental risk management.

　In the first part, we will identify the type of environmental risks that Chevron would face in the process of oil exploration, oil exploitation, crude oil transportation and oil refining. In the second part, we will assess the effectiveness of using the traditional tools on environmental risk management programs. In the third part, we will introduce the development of the quantitative risk management methods and assess the effect of using DEMA decision marking system. In the final part, we will give arguments on the company-wide use of DMAE for the systematic analysis of risk management options.

　In conclusion, our report has made an overall assessment on the effectiveness of managing environment risk both by using traditional tools and also the quantitative methods. We are certain that the traditional tools are effective in managing the environmental risk and the quantitative method is also effective in terms of lowering the cost of environmental risk management. From the risk management perspective, our ultimate goal is to find ways in the future environmental risk management which is not only effective but also efficient.

　Introduction:

　Chevron Corporation is the largest oil company in the Gulf of Mexico and elsewhere in North America which produce crude oil and natural gas. Chevron’s history can be traced back to more than one hundred years ago which it was first established by John D. Rockefeller in San Francisco. After one hundred years’ evolution, Chevron has become one of the largest acreage holders in the industry of every major U.S. producing area and it owned dozes of oil tankers, advanced research facilities and a global telecommunication subsidiary.

　Chevron’s financial performance in the year 1997 had improved a lot better than in 1996. Its annual revenue had reached $42 billion and its net income was over $ 3 billion in the year 1997. Its debt to capital ratio also fell to 26%, the lowest level since before the Gulf merger in 1984. Chevron’s success didn’t just come without cost. Just like other major oil companies, Chevron had also to spend large sums of investments on investments and operating expenses designed to solve environmental problems that Chevron had encountered. The figure was about $893 million included $237 million in environmental capital expenditure and $656 million in expenses required to control pollution flows, comply with environmental regulations, and rehabilitate previously contaminated sites. It accounted to 2.1% of the total revenue and 9% of the total cost. The figure might not give us the intuition of how significant the cost is especially when compared with the giant number of annual revenue. The concerns would only arise when we compared the figure with other oil companies, such as Exxon, its environmental cost was about $1566 million in 1997 which accounted to 1.1% of the revenues and 5.5% of total costs. So, the questions aroused from the following issues:

　Is Chevron using the right tools for managing environmental business risk? Why do the tools differ from those used to manage other types of business risk?

　Should Chevron make company wide use of quantitative risk management tools like DEMA? The decision making system for the formal, systematic analysis of risk management options?

　To start answering these questions, I believe our team would have to first looking into environmental risks that our company is facing when doing the oil business. Environmental risks are really a big deal for oil companies, because if we don’t deal with it, it grows even more serious and when the problem comes, the cost would be tenths of times bigger than we using preventive measures. For example, in case of an underground oil tank leakage, the cleanup cost is about $250,000, while the replacement cost of the oil tank for a new one only cost $15,000, more than ten times cheaper if we use preventive measures, not to mention the cost of damaging the environment and also the bad reputation for the company.

　Part 1: Identify the type of environmental risks of Chevron

　In addition to the risk just mentioned above we also have to face a list of environmental risks occurs in the process of oil exploration, oil exploitation, crude oil transportation and oil refining. During the process large scales of land or area will be damaged, oil wells will be drilled, sometimes, the habitats living in the area will be affected. Risks all involves oil well explosions, leakage of oil during the transportation, emission of gases in the oil refining process and the creation of other harmful chemicals during the production process. The most serious accidents may happen in the transportation process when an oil transporter crashed in the sea area and tons of oil leaked to sea surface. It would be hardly possible to clean up the environment especially when the accident happened in the open public sea. Life of hundreds of natural sea habitats would be endangered. The accident actually happened in 1989, an Exxon Valdez oil spill in Alaska. The total cost of spill to Exxon Company accounted to 5 billion including $269 million in compensatory damage to commercial fisherman and other punitive damages which were still under appeal. Exxon had already paid nearly $1 billion for the accident. The cost of such kind of risks is too tremendous; therefore, it should be prevented by taking risk precaution measures.

　Part2：The analysis of traditional risk management tools used by Chevron

　Traditionally, the environmental ethics of Chevron led the company to adopt risk management measures. The statement of “the Chevron Way” says: “We are committed to protecting the Safety and Health of people and the environment. We will conduct our business in a socially responsible and ethical manner. Our goal is to be the industry leader in Safety and Health performance, and to be recognized worldwide for environmental excellence.” The statement explains why the Chevron’s manager had put a lot of concerns on environmental issues, not only because they wanted to secure the profits for their stakeholders, but also they have a strong desire to protect the safety and health of people and the environment.

　Tool 1: Insurance against external environmental risk

　Insurance is an effective management tool to manage external risks, such as the oil tankers leakage. The cost of such kind of accidents is too big and cannot afford by the company when it did happen. When we contracted with the insurance company, the insurance premium we had to pay is comparatively small. The company usually has self insurance up to $200 million and $300 million and purchase external insurance above that level. For example, Chevron has established a relationship with a collection of insurance providers, such as Marsh McLellan, which sold umbrella protection for a serious of liabilities ranging from earthquakes to oil spills, plant fires, and other accidents.

　The insurance policy may give certain protections again the certain environmental risks; however, the total insured amount including internal and external insurance will only be $500 million. What if the cost of catastrophic events exceeded $500 million just like Exxon Valdez oil spill in Alaska. What is the most suitable amount of insurance that the company should undertake and how many should it be provided by internal self insurance and how much should be purchased from external insurance is still an open question.

　Tool 2: Internal risk management (Policy 530)

　Policy 530 is the most powerful tool used by Chevron to manage environmental risk. It entitles the rights to the senior executives to be more “judgmental than analytical”. The Policy 530 identifies 10 key elements for improving the Safety and Health of people and the environment: compliance assurance, community awareness ant outreach, emergency preparedness and response, energy and resources conservation, legislative and regulatory advocacy, pollution prevention, product stewardship, property transfer, safe operations, transportation and distribution. These 10 biblical laws serve as a guiding principle to the risk management practices. For example, in the early 1980s, the underground steel tanks were discovered to be leaking. The company decided to replace all the tanks with double walled fibred glass tanks even though most of the tanks were in good condition and also there were no regulations which would force them to make such decision. The decision of replacing all the tankers was solely based on subjective management judgment without any cost and benefits analysis. The Policy 530 may give many privilege to the senior managers to make decisions freely however, decision making process may sometimes too subjective and could also be biased. After all, the yes or no decision making only give us 50% to 50% of chance to get the right answer.

　Tool 3: Employee education and training programs

　Chevron had also invested heavily in employee training and education programs. On the job training is vitally important for workers in Chevron to ensure them know how to comply with the safety rules and regulations and also help them to become more aware of the potential dangers that they may encounter. By doing on the job training, most of the accidents can be avoided and even there is emergency event, the workers know how to protect themselves against the risks. The training cost may be expensive since some training programs needs a lot of experts to predict and analysis the potential risks and most of the time needs simulation. Firstly, all the personnel have to join the program which means they have to stop normal works and come to the lessons. Equipments are required when training the workers. For example, for an emergency evacuation of the personnel when the working site is on fire could be very costly because many workers are working on the oil wells which is located on the sea. Therefore, lifeboats and floating suits are required for training, there should also have a number of profession trainers, lifeguards and medics. The cost of training programs varies in many vacations and despite that the safety and health of people and the environment would value much more than the pennies threw on them.

　Tool 4: The Success Sharing Plan

　It is a primary incentive system provided by Chevron, about 98% of the employees participated in profit sharing and saving plans. It tied environmental performance to the promotion process, so when managers made contributions to save the environmental cost, they will be promoted to new assignments. As a result, the cost of incidents at Chevron fell substantially during the late 1990s. For example, the cost of incidents in domestic refining was estimated at $ 110 million, just two years later the managers were able to reduce the annual cost to $20 million through an aggressive program of incident reduction. In general, the Success Sharing Plan is effective motivate the managers at the business level to set aggressive safety and environmental goals rather than just doing the enough to meet the minimum requirements of the safety and environmental goals.

　However, in practice, the plan was mainly based on the profitability of the programs with only a minor part related to attaining the long term environmental goals. It is because there is always a conflict between the short term financial performance and the long term environmental goals. Long term environmental protection measures needs large investment and its benefits could only be measure in the long run. Besides, it is difficult to measure the net present value of long term environmental benefits that the managers had achieved. Just as the famous economist Milton Friedman said, in the long run, everybody dies.

　The above analysis on the traditional tools used by Chevron is conducted in one by one basis; in general we believe that the traditional risk management tool is effective and more incorporated with the organization’s culture which managers had live with it and practice with it for many years. For example, the use of Tool 2, the Policy 530 was largely based on subjective management decision, it may be quite different from those quantitative methods used to manage other types of risks because the managers’ decisions often affects the safety and health of human life and environment which cannot be quantified in monetary terms. In the short run, the investment cost for long term environmental benefit may outweigh the balance sheet accounts; however, if we take a view from the long term perspective, the long term benefits will surely outweigh the cost.

　Other Tools such as Tool 1, Tool 3, Tool 4 are also consider to be effective since examples and cases analysis in the above showed us that the traditional tool has effectively helped to management level to reduce the number of accidents and the cost of incidents for most of the cases.

　Nevertheless, there are still some controversies and open questions need to be answered from the above analysis. The demerits of using the traditional tools have also been pointed out in each case. Our job is not to doubt the success we have been achieved today, rather our following discussion will be more focus on should we use quantitative risk management tools like DEMA(The decision making system) for the formal, systematic analysis of risk management options ?

　Part3：The development of the quantitative risk management methods and the effect of using DEMA decision marking system

　In the middle-1990`s, managers at the Chevron division began to develop an analytical model that treated environmental projects like capital projects to systematically implement the principles of Policy 530. The Chevron Research and Technology Company had created the Environment and Safety Risk Management Process based on the above model. Unsatisfied with off-the-shelf manuals and software packages for the cost-benefit assessment, CRTC employees augment the E&S guidelines by developing a decision-making tool that could be useful to all of Chevron`s operating companies. CRTC`s final product, called DEMA (for decision Making), was a quantitative extension of the E&S Risk Management Process`s suggested procedures.

　DEMA was a prioritization tool that could help any manager determine, on a cost-benefit basis, which projects should be carried out before others. The DEMA model was basically a spread sheet; it included some input sheets, one per potential project; some valuation tables for converting inputs into dollars values; and two “recap” sheets that summarized the cost-benefit ratio of each risk reduction proposal.

　DEMA was more a theory than a standard operating procedure, it had been given trial runs at Chevron`s refinery in Richmond, California and in the operating company responsible for overseas exploration and production. CRTC staffers thought that the application of DEMA procedures at Richmond enabled the refinery to generate several million extra dollars` worth of risk reduction benefits at no cost. COPI managers also reported that the system provided significant benefits simply by facilitating discussion about the prospects of accidents or environmental damage, and about the probabilities and relative importance of different kinds of problems. Overall, results from DEMA`s use in COPI indicated that the experience at the Richmond refinery was not unusual, and that similar levels of savings (relative to total assets or total expenses) could be realized throughout the company.

　Part4：Argument on the company-wide use of quantitative risk management tools like DMAE for the systematic analysis of risk management options.

　Just like what listed in “The Chevron Way”: We are committed to protecting the safety and health of people and the environment. We will conduct our business in a socially responsible and ethical manner. Our goal is to be the industry leader in safety and health performance, and to be recognized worldwide for environmental excellence. The company in such a profitable industry should take all their efforts to prevent the environmental risk rather than to tradeoffs between environmental quality and community safety against dollar opportunity costs of different risk reduction proposals. It is kind of discrimination and offensive to explicit valuations different of different risks will threaten the safety of different beings in some kind ways.

　Furthermore, even if we can monetized the different lives, the improved analytical capability is not very valuable because the standardized table of weights or conversion factors that would transform the scores from input variables into an aggregated dollar figure is bound to be an arbitrary estimate by managers. What is worse is this arbitrary estimate will mislead the managers and the public believe that they have done all what can be done because it is the optimum solution from “a precise scientific process and conclusion”.

　Should we throw away this sub-optimum solution in the condition there is no optimum solution in reality?

　No! Admitting the benefit is just an estimate, CRTC staffers thought that the application of DEMA procedures at Richmond enabled the refinery to generate several million extra dollars` worth of risk reduction benefits at no cost. Considering that the Richmond refinery only account for 5% of the corporation`s net property, plant and equipment, it will be a lot of money if the company widely use this quantitative tool in all factories. Besides, the number-though rough-will drawing more attention from the mangers to evaluate the adopted environmental risk management method and invent some better tools in the future.

　Conclusion：

　In conclusion, we appreciate the effectiveness of managing environment risk by using new quantitative method and believe it is a good attempt to develop an analytical model that treated environmental projects like capital projects. We are certain that the traditional tools are effective in managing the environmental risk, but this quantitative method is also effective in terms of lowering the cost of environmental risk management and reducing the dependence on subjective experiences by managers.

　From the risk management professionals’ perspective, our mission is to find ways in the future environmental risk management which is more effective and efficiency!

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