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

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 decision- making

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

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

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

Risk Dimension Scales Regulatory Relations - Scales vary from u Formal positive recognition, to u Partial or complete shut down of facilities, large fines Environmental Protection - Scales vary from u Permanent damage to an ecologically sensitive area, to u 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 Overall measure of risk (or risk reduction) Overall measure of risk (or risk reduction) Scoring Scales [Risk assessment] Weights [Risk tradeoffs] Risk Dimensions Activity benefit = Risk with - Risk without [Risk-based prioritization] W H-S W Regs W Env W Pub W$W$ W Cust W Strat XiXi XiXi XiXi XiXi XiXi XiXi XiXi Maximize Regulatory Compliance Maximize Regulatory Compliance Maximize Health & Safety Maximize Health & Safety Maximize Environmental Protection Maximize Environmental Protection Maximize Financial Performance Maximize Financial Performance Maximize Public and/or Communities’ Confidence Maximize Public and/or Communities’ Confidence Maximize CPL Customer Satisfaction Maximize CPL Customer Satisfaction Maximize Employee Partnering Maximize Employee Partnering

Mitigation Measure Evaluation Replace gathering lines at Rangely, Colorado Benefit Summary Worker H&S0 Public H&S0 Environment302 Public Reaction0 Regulatory Relations159 Financial Impact67 Customer Satisfaction273 Partnering with EE7 Total Benefit808 Do Benefits Outweigh Costs? Total Benefit = $808M (NPV) Project Cost = $130M (NPV) B/C Ratio = 6.6 u Evaluate benefit vs. cost for projects or project alternatives u Net Present Values calculated for risk benefits and project costs at an appropriate discount rate

Scoring Summary Scored Ranking Benefit / Cost CostComment 1.Project A6.425KStrong project 2.Project B4.8100KStrong project 3.Project C3.4200KAcceptable project 4.Project D1.5225KEvaluate relative to other projects 5.Project E1.3200KEvaluate relative to other projects 6.Project F0.81MMEvaluate relative to other projects 7.Project G0.8600KProfit Center decision based on strategy and available $. Lower benefit due to no severe risk impacts.

CAPITAL PRIORITIZATION Additional Review Quick Release B/C Ratio 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)