How to Create a World-Class Project Management Organization? Dr. Nick J. Lavingia, P.E. Chevron Project Management Consultant APEGGA Annual Conference, Calgary April 26-27, 2007 Nick Lavingia

Dr. Nick J. Lavingia, P.E. Project Management Consultant Chevron Nick has over 30 years of Global Project Engineering, Management, Consulting and Training experience in the Energy industry. As a Project Management Consultant at Chevron, he provides Consultation and Training to Project Professionals worldwide. Nick has a B.S. and M.S. in Chemical & Petroleum-Refining Engineering and a Ph.D. in Engineering Economics & Management from the Colorado School of Mines. He is a registered Professional Chemical Engineer in the State of California. Nick is a member of Project Management subcommittee for Athabasca Oil Sands expansion project. He has published and presented many papers at technical organizations and is a recipient of industry award from Pathfinder for outstanding Contribution to the advancement of Project Management Technology and Chevron Chairman’s award for implementing Value Engineering throughout the corporation. Nick Lavingia

Agenda Business Case for Improvement Five Steps to Success: Step 1: Common Language (PMI’s PMBOK) Step 2: Common Project Development & Execution Process Step 3: Application of Value Improving / Best Practices Step 4: Total Cost Management Step 5: Training & Certification Summary Q&A Nick Lavingia

Business Case for Improvement Improved Capital Stewardship Lower Costs Better Projects More Projects Improved ROCE Higher Earnings Growth 100 Higher Market Confidence Higher P/E Improved TSR Nick Lavingia

Project Management’s Impact on the Bottom Line Project Management Improves ROCE by Increasing Revenues, Decreasing Expenses, and Reducing Capital Employed REVENUE MINUS EXPENSES CAPITAL EMPLOYED = ROCE Nick Lavingia

Project Management Leads to Pacesetter Performance (Cheaper, Faster, and More Predictable) 1.25 Company X Industry Average 30% Improvement Industry Average 1 Facility Cost Pacesetter Company 0.75 0.75 1 1.25 30% Improvement Execution Schedule Nick Lavingia

Step 1. Common Language Nick Lavingia

PMI’s PMBOK Project Management Skills from PMBOK: --Project Integration Management --Project Scope Management --Project Time Management --Project Cost Management --Project Quality Management --Project Human Resource Management --Project Communications Management --Project Risk Management --Project Procurement Management Nick Lavingia

Step 2. Common Project Development & Execution Process Nick Lavingia

Project Development & Execution Process A Process that Facilitates the Optimal Use of Resources (Dollars, People and Technology) Over the Life of an Asset / Project to Maximize Value. Desired Outcome Select the Right Projects by Improving Decision Making Improve Project Outcomes through Excellence in Execution of Decisions Nick Lavingia

Project Management Vision High Random Success Good Projects Average Execution Consistent Success Good Projects Good Execution Decision Quality Mid Success Unlikely Poor Projects Poor Execution Random Success Poor Projects Good Execution REFER TO VIEWGRAPH Key Points: Goal of the process is to have all of our projects fall into the top right quadrant. Doing the right project poorly or doing the wrong project well, leaves money on the table Chevron could use elsewhere. Without consistent process, projects fall all over the grid. Low Mid High Execution Quality Nick Lavingia 17

Project Development & Execution Process AFE 1 2 3 4 5 PHASE 1 IDENTIFY & Assess Opportunities PHASE 2 SELECT from Alternatives PHASE 3 DEVELOP Preferred Alternative PHASE 4 EXECUTE (Detail EPC) PHASE 5 OPERATE & Evaluate Determine Project Feasibility and Alignment with Business Strategy Produce an Operating Asset Consistent with Scope, Cost and Schedule Select the Preferred Project Development Option Finalize Project Scope, Cost and Schedule and Get the Project Funded Evaluate Asset to Ensure Performance to Specifications and Maximum Return to the Shareholders REFER TO VIEWGRAPH Key Points: Key objectives of the five phases Phase 1 - Clearly frame goal Phase 2 - Generate several alternatives & then select the best alternative(s) to move forward Phase 3 - Fully define scope of selected alternative(s); select one alternative to move forward Phase 4 - Implement execution plan Phase 5 - Monitor performance AFE = Appropriation For Expenditure Nick Lavingia

Project Management’s Impact on Creating Value Value Identification Value Realization Good Project Execution Good Project Definition A VALUE B Poor Project Execution In the early phase the value of an opportunity is identified, but not realized until the later phases. Both are important. Curves represent: A - Selecting the right project and doing it well B - Selecting the right project and executing poorly and eroding value. C - Doing the wrong project well D - Doing the wrong project poorly. Critical to the success of the SBU to generate the highest earnings and NPV is the ability to manage the portfolio of excellent opportunities. Project Planning is a critical phase in managing the portfolio because this is where value is identified and created. CPDEP provides the core work process that allows multi-functional teams to collaborate in the generation of well thought out development plans. Each asset in the portfolio has a CPDEP Roadmap which identifies the critical decisions required to advance the asset, the information needed to make the decisions, and the resources required to generate the information. Innovation and creativity are essential to driving the value of our assets even higher. Generating creative business and technical alternatives, and the use of innovative technology are examples of value-added activities in the early phases. Review / reinforce the 1:10:100 rule. C Poor Project Definition D AFE Phase 1 Opportunity Identified Phase 2 Generate & Select Alternatives Phase 3 Develop Preferred Alternative Phase 4 Execute Phase 5 Operate Nick Lavingia

Project Development & Execution Process AFE 1 2 3 4 5 PHASE 1 IDENTIFY & Assess Opportunities PHASE 2 SELECT from Alternatives PHASE 3 DEVELOP Preferred Alternative PHASE 4 EXECUTE (Detail EPC) PHASE 5 OPERATE & Evaluate Clearly Frame Goal Test for Strategic Fit Preliminary Overall Plan Preliminary Assessment ~1 % Engng. Phase 1 Estimate Generate Alternatives Preliminary Development of Alternatives Develop Expected Value Identify Preferred Alternative Phase 2 Est. Fully Define Scope Develop Detailed Execution Plans Refine Estimate Submit Funding for Approval ~25 % Engng. Phase 3 Est. (+/- 10 % Accuracy) Implement Execution Plan Min. Changes Finalize Operating Plan Business Plan for Phase 5 Project Review Operate Asset Monitor & Evaluate Performance Identify New Opportunities REFER TO VIEWGRAPH Key Points: Key objectives of the five phases Phase 1 - Clearly frame goal Phase 2 - Generate several alternatives & then select the best alternative(s) to move forward Phase 3 - Fully define scope of selected alternative(s); select one alternative to move forward Phase 4 - Implement execution plan Phase 5 - Monitor performance AFE = Appropriation For Expenditure Nick Lavingia

Influence vs. Expenditures Major Influence Rapidly Decreasing Influence Low Influence Final Authorization INFLUENCE EXPENDITURES Front End Loading IDENTIFY Gate Gate SELECT Gate DEVELOP EXECUTE OPERATE Gate Gate Gate Gate Gate DSP DSP DSP DSP DSP Front End Loading DSP = Decision Support Package Nick Lavingia

Multifunctional Project Team Key Players Decision Makers Multifunctional Project Team --Business, Technical, Operations and Maintenance Stakeholders Contractors Vendors / Suppliers Nick Lavingia

Management’s Role (1) Accountability—Business evaluation should be conducted 1 to 2 years after project completion and Project Sponsor should be held accountable for the financial outcome. Accessibility—Management should actively participate in gate keeping meetings at the end of each phase of the Project Management Process and communicate frequently with the project team. Nick Lavingia

Management’s Role (2) Leadership—Management should establish clear expectations and objectives for the project team. Resources—Provide resources of right people and funding to support the project team. Behaviors—Demonstrate visible support and provide positive consequences for following Project Management Process, Best Practices and sharing Lessons Learned. Nick Lavingia

Step 3. Application of Value Improving / Best Practices Nick Lavingia

Value Improving / Best Practices Value Improving / Best Practices are tools to improve project planning and execution. In conjunction with a structured Project Management Process they can optimize: Cost Schedule Performance Safety Nick Lavingia

Value Improving / Best Practices Phase 1 IDENTIFY & Assess Opportunities Phase 2 SELECT from Alternatives Phase 3 DEVELOP Preferred Alternative Phase 4 EXECUTE (Detail EPC) Phase 5 OPERATE & Evaluate Decision & Risk Analysis Project Execution Planning Lessons Learned (Seek) Pre-Funding Assessment (Share) Value Improving Practices by IPA Peer Review Post Project Assessment Business Evaluation P&ID $ EST AFE PFD D Legend: AFE = Appropriation for Expenditure D = Decision Point PFD = Process Flow Diagram IPA = Independent Project Analysis, Inc. P&ID = Piping & Instrumentation Diagram Nick Lavingia

Step 4. Total Cost Management Nick Lavingia

DEVELOP Preferred Alternative Total Cost Management Phase 1 IDENTIFY & Assess Opportunities Phase 2 SELECT from Alternatives Phase 3 DEVELOP Preferred Alternative Phase 4 EXECUTE (Detail EPC) Phase 5 OPERATE & Evaluate Economic Analysis (NPV, ROR, Payout) Cost Estimating (Conceptual) Planning/Scheduling (Milestone) Benchmarking (Cost / Capacity) (Funding +/- 10% Accuracy) (Definitive) (Cost Collection / Analysis) (CPM Bar Chart) (CPM Resource Loaded) (Monitor & Update) (Set Pacesetter Target) (Pre-Funding Assessment) (Post-Project Assessment) Contracting/Procurement (Strategy) Cost Control/Forecasting (WBS) Progress reporting Finance/Audit (Pre-Qualification) (Award / Monitor) (Closeout) Performance Measurement (Establish Progress Payments) (Earned Value) (Establish Cost Accounts & Budgets) (Trend / Forecast) (Capital versus Expense) (Asset Accounting) P&ID $ EST AFE PFD D Legend: AFE = Appropriation for Expenditure NPV = Net Present Value PFD = Process Flow Diagram D = Decision Point ROR = Rate of Return P&ID = Piping & Instrumentation Diagram EPC = Engineer, Procure & Construct CPM = Critical Path Method WBS = Work Breakdown Structure Nick Lavingia

Step 5. Training and Certification Nick Lavingia

Training Project Management Skills from PMBOK --Project Integration Management --Project Scope Management --Project Time Management --Project Cost Management --Project Quality Management --Project Human Resource Management --Project Communications Management --Project Risk Management --Project Procurement Management Business Decision & Risk Analysis Leadership Roles & Behaviors Nick Lavingia

Certification All Decision Makers should be certified in: -- Overview of PMBOK Areas -- Business Decision & Risk Analysis -- Leadership Roles & Behaviors All Project Professionals should be certified in: -- PMBOK Areas Nick Lavingia

Summary Common Language, Common Project Development & Execution Process, Application of Value Improving / Best Practices, Total Cost Management and Training / Certification can help create a World-Class Project Management Organization that Delivers: Better Cheaper Faster Safer PROJECTS Nick Lavingia