Chevron Case Study

Environmental Risk Management at Chevron Corporation: Should Mr Keller try to bring DEMA about its company-wide implementation? Environmental risk management is a key concern at Chevron Corporation. Like other major oil companies, Chevron faces risk in its daily operations, including of damage to the natural environment, human health, corporate profitability, or all three. At the same time, Chevron must be practical regarding the amount of money spent on measures to manage these risks.

Within Chevron there is a need to understand the true costs of environmental incidents and the effect of investments on the likelihood and scale of such incidents. Effective risk management could reduce overall costs and protect or enhance the Chevron brand name and reputation. Currently, the company has several tools in place to manage environmental risk, for example Policy 530, management evaluation and promotion systems tied to environmental performance, insurance and emergency response programs.

The Chevron Research and Technology Company (CRTC) sought to extend the available tools for risk management within Chevron and the final product of these efforts was DEMA (for Decision Making): a quantitative prioritization tool that could help any manager determine, on a cost-benefit analytical basis, which projects should be carried out before others.

Regarding the question on whether or not DEMA should be implemented company-wide; there are arguments for and against. The analysis below will provide an overview of the arguments for and against, in order to reach a conclusion about the most advisable decision.

On the one hand there may be discussion about the validity of the conversion factors of DEMA and thus the system’s analytical capability. Monetary expressions for the benefits of risk reduction proposals may be controversial, with conversion factors being to some extent subjective, and thus less useful. Even if such conversion factors are useful, there is a risk of affecting the firm’s reputation with external stakeholders. Customers, regulators, environmentalists and the public may react adversely to the practice of monetizing issues such as environmental safety and human health and safety and weighing these out against the costs of risk reduction.

On the other hand, DEMA draws attention to long-term repercussions of current practices. Without an analytical system such as DEMA, these repercussions may be ignored. Ignoring these repercussions transfers risks to future shareholders and can impact the future of the company in many ways.

Furthermore, although quantifying benefits of risk reduction proposal is a challenge, once a set of conversion factors was in place, users of DEMA could calculate the total expected dollar impact of scenarios and estimate the benefits of a certain project.

Thereby, the system can clarify true costs and benefits of risk reduction proposal, allowing the company to evaluate these systematically and enabling the company to reduce more risk at lower costs. Evidence of success with DEMA stem from its implementation at the Richmond refinery and in the operating company OPIC. At the Richmond refinery, which constitutes roughly 5% of the corporation’s net property, plant and equipment, DEMA saved several millions.

To a greater extent, the arguments for outweigh those against and DEMA has the potential to increase management attention by potentially increasing returns on their investments in risk management. This in turn will likely improve risk management and efficiency. Although there are certain drawbacks of the system and company-wide implementation may pose a challenging goal, the costs of implementation are low, and previous experiences with the system have shown potential benefits of this systematic and analytical approach to the complex management problem of environmental risk management to be high.