CHEVRON PIPE LINE COMPANY Risk Based Prioritization Process

1. CHEVRON PIPE LINE COMPANY Risk Based Prioritization Process

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

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

4. Risk Management Phases PHASE III 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

5. The Prioritization Problem Too many activities competing for too few resources

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

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

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

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

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

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

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

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

14. Mitigation Measure Evaluation • Evaluate benefit vs. cost for projects or project alternatives • Net Present Values calculated for risk benefits and project costs at an appropriate discount rate Replace gathering lines at Rangely, Colorado Benefit Summary Worker H&S 0 Public H&S 0 Environment 302 Public Reaction 0 Regulatory Relations 159 Financial Impact 67 Customer Satisfaction 273 Partnering with EE 7 Total Benefit808 Do Benefits Outweigh Costs? Total Benefit = $808M (NPV) Project Cost = $130M (NPV) B/C Ratio = 6.6

15. Scoring Summary Benefit / Cost Scored Ranking Cost Comment 1. Project A 6.4 25K Strong project 2. Project B 4.8 100K Strong project 3. Project C 3.4 200K Acceptable project 4. Project D 1.5 225K Evaluate relative to other projects 5. Project E 1.3 200K Evaluate relative to other projects 6. Project F 0.8 1MM Evaluate relative to other projects 7. Project G 0.8 600K Profit Center decision based on strategy and available $. Lower benefit due to no severe risk impacts.

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

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

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