Capital Efficiency – Importance To A Major Petroleum Company
James N. Sullivan, Vice Chairman of the Board
Construction Industry Institute's Annual Conference
Also see a press release regarding this speech.
For those of you who aren't up to date on what's happening in our industry, let me give you a quick snapshot.
The price of oil today is about $14 a barrel - that's about $6 less than this time last year. And it's affecting our short-term cash flow and earnings, I can tell you. What I can't tell you is what the oil price is going to be tomorrow - and neither can anyone else. What we do know is there's a huge surplus of oil out there that's going to take awhile to draw down.
Despite the low prices caused by this excess supply we've publicly declared that we intend to stick with our capital program. We have an overall objective to beat our competition and we want to remain No.1 in Total Stockholder Return. We declared that back in 1989, and after 9 years and 7 months, we still hold the No. 1 position, but the competition is right on our heels.
In order to stay No.1, we feel that we must pursue an aggressive growth strategy. Fortunately, we have lots of opportunities to grow. Those opportunities are being funded by a strong balance sheet and $6.3 billion this year alone in annual capital expenditures.
But, you might ask, how are you going to be able to stick with your program and achieve your goals in light of the low oil prices?
There's only one way I know to do it. And that's to keep increasing our efficiency. The more efficient and effective we can be in spending those $6.3 billion, the more discretionary cash we'll have to fund other projects, or reduce our debt load, or increase our dividend or whatever.
We have publicly stated our growth strategy and we have the projects. Now, how do we do a better job than our competitors ... at lower cost ... at lower cycle time ... and remain No.1 in Total Stockholder Return?
I'm going to tell you a little bit about what one of our strategies is, and I'm not giving away any secrets because most of it is in the execution.
We have a great five-step process we call the Chevron Project Development and Execution Process. We call it "CPDEP," but I'll just refer to it as our Project Management Process from here on out.
- Phase 1 of our process involves framing the business goal to be pursued and ensuring that it aligns with our business objectives.
- Phase 2 involves the search for and identification of the alternative that meets the criteria developed in Phase 1.
- Phase 3 involves the development of the alternative selected in Phase 2.
We commonly refer to these first three phases as "Front End Loading," where the majority of a project's value is identified.
If you don't make sure this Front End Loading part of the process is used effectively, you might select the wrong project. You might even build it well, but it would still be the wrong project. If you use the Project Management Process the way it was designed, and you take the time to frame the opportunities well and evaluate all the reasonable alternatives during the Front End Loading phase, you'll end up with the right project.
Now, after you've determined that you've selected the right project, you move on to Phase 4.
- Phase 4 involves the timely and precise execution of the plans that were developed in Phase 3, in other words, building the project.
- And, finally, Phase 5 involves operating and, very important, evaluating the results of the project.
Now, as I said, it's a great process. And we've had some real success using it, which I'll mention later.
But we stumbled a bit in the beginning. In the early 90s our alliance partner, Independent Project Analysis (IPA), showed us that our project costs were routinely higher than our competitors - some by as much as 25 percent.
Although we'd already achieved No.1 in Total Stockholder Return by that time, we obviously needed to do something about our costs or we wouldn't stay there for long. So we developed the five-step process I've just described to bring those costs down.
Even though it took a lot of hard work to put it together, a process is no good if people won't use it. Our first attempts to deploy our Project Management Process were disappointing. Skeptics were everywhere. People felt the process was too restrictive. They felt it robbed them of the authority to make quick decisions. Obviously, some successes were needed to demonstrate the value of using it.
Let me give you an example of one of those early successes.
We operate some production facilities offshore Zaire - or what is now called the Democratic Republic of Congo - on Africa's west coast. When I first visited our facilities there back in the 1980s, I was truly embarrassed. They were in terrible shape. Ever since the oil price crash of 1986, we had been divesting operations that we felt didn't measure up ... didn't add value to the company.
So we asked ourselves would it be economically wise to upgrade facilities for an operation where our share of production is only 10,000 barrels a day? On the surface the answer appeared obvious. These operations were a perfect candidate for sale. But, to make a long story short, we decided to run a detailed analysis of those operations using our new five-step process.
The answer that came out the other end surprised us all. That answer was keep it! Although we didn't produce many barrels, as it turned out those barrels were very profitable.
From time to time I was privileged to take part in the project management exercise that we conducted on our Zaire operations. I vividly recall the visible transformation of skeptics into believers that took place during that exercise. And the facilities, the ones I was so embarrassed about, well, I would be proud to show anyone those facilities today.
A few early successes like Zaire convinced enough people that our Project Management Process actually worked. Since then we have used it successfully in many other cases.
Just to mention a few recent ones:
We recently completed a couple of petrochemical plant expansions at Port Arthur, Texas, and Pascagoula, Miss.
The process helped us reduce our project costs by 13 percent in the first instance and helped us achieve "pacesetter" status on costs and scheduling in the other. The "pacesetter" label basically means you're in the top 10 percent in both cost reduction and project scheduling.
Our Project Management Process has been instrumental in helping us improve our scheduling, lower our costs, improve our safety performance and increase the value of many of our upstream projects around the world.
- In the Gulf of Mexico we once again achieved "pacesetter" status on our deepwater Genesis oil production project, which is about to begin operations.
- In Papua New Guinea, we brought one new oil field along from discovery to first production in a record 16 months. We reduced the time it took to achieve first oil from another field by two months and achieved safety results 50 percent better than the industry average.
- In Indonesia, we found a way to significantly improve the cash flow of a major producing asset by half a billion dollars.
- In Angola, we've made some very large discoveries lately. We're taking a phased development approach to several recent projects there, which has allowed us to start producing the oil sooner than we might have if we had waited for all the permanent offshore facilities to be built first.
These are real, tangible improvements - improvements that have a real impact on Chevron's bottom line ... improvements made possible through the use of our Project Management Process.
So, have we done all we can do to improve our capital efficiency? Is there no room for improvement? Of course not. There are still some John Waynes out there. You know ... shoot first ... ask questions later. We are still engaged in the struggle to change our corporate culture through "reinforcement-based leadership" and other programs. We still have to overcome the lingering mind-set that says, "Look ... I'm the boss ... I'm paid to make decisions. To ask for help suggests that I'm not managing my business properly. If I use this 'process' instead of my own 'gut reaction,' it'll be seen as a sign of weakness."
I'm happy to report that we've made significant progress overcoming this mind-set, but we haven't convinced everyone yet. That's the challenge we're faced with.
The need to improve capital efficiency in the oil business is clear-cut. It's dictated by several realities. One of which I've already covered is prices. But there are several other realities that underscore the need to improve capital efficiency - realities that are beyond our control.
The economic situation in Asia has had a definite effect on the demand part of the equation. Demand for oil in Asia increased faster than any other part of the world for a number of years. That growth in demand has suddenly disappeared. And it's anybody's guess when it'll come back.
Unlike the days before the break-up of the Soviet Union, when you knew who your competitors were, today there are many new players. We, and a lot of other multinational oil companies, were outbid recently on a project in Venezuela by the Chinese national oil company. Nobody saw that one coming.
So competition is getting stiffer.
Because of the low oil price, government partners are finding it more difficult to fund their share of projects. It will take some creative thinking by all participants to resolve that issue.
And, finally, although we consider our industry high-tech, some aspects of technology we have little influence over, such as the development of alternate fuels, more fuel-efficient automobiles and so forth.
Those sorts of things are determined, in large part, by the price of oil over which we, again, have no control.
Now ... what can we control?
Basically, we can control our internal business drivers. We can make sure that our true focus is directed at the competition rather than competing with ourselves internally. We can make sure that we're putting the right people in the right place at the right time.
Of course, we can't accomplish any of the goals we've set for ourselves without the continuing commitment and dedication of our people. It's the only way we'll stay No.1 in stockholder return - the only way we'll beat the competition.
We periodically conduct worldwide surveys to get a feel for what our employees are thinking ... what their concerns are ... what they like ... what they don't like.
In the most recent survey, I was very pleased to see that our "employee commitment index" had gone up three points. Three points may not sound like much, but it represents a 15 percent gain in real commitment from our people. It says they're willing to work harder and contribute more to their jobs.
Finally, we can improve our capital efficiency by investing only in those projects that add value to our company.
And once we determine what the right projects are, we can make sure that we build them cheaply, quickly and safely. In other words, we must execute our plans with excellence.
Our Project Management Process provides us with a proven, reliable mechanism to do just that. And let me also note that use of our Project Management Process doesn't stop at the shop door.
One of the most important elements of its use involves our alliance partners, our contractors. Their participation in the process is an absolutely indispensable part of a project's success.
As part of our effort to encourage greater use of our Project Management Process, we've put together a Project Resources Group to oversee its deployment.
Our Management Committee, which consists of the top 40 people in the corporation, met just last week to review our mid-year results and our plans for the second half of the year.
During that meeting, we agreed that we must continually reinforce, encourage and support the use of our Project Management Process if we are going to keep our No.1 position in Total Stockholder Return. We also identified several actions that will increase the effectiveness of the process.
First, we intend to work with IPA and the industry to expand the metrics for evaluating the capital efficiency of industry projects. The current metrics only evaluate the effectiveness of that portion of an investment that deals with facilities. We need to be able to evaluate the entire life cycle of a project.
Next, we need to improve the effectiveness of our Decision Review boards. They're the ones responsible for advancing the good projects and killing the bad ones. They're the gatekeepers ... the people who ensure that the project teams have met all the expectations during each phase of the process.
One way we plan to improve the effectiveness of these boards is to include peer employees from other work groups as other companies have done successfully. We also devised a new tool, which we call the "Decision and Execution Quality Index," that will help us answer some basic questions that have cropped up when we've used the process. Namely:
- What's the health of my project?
- What's the quality of my decisions?
- How can I measure my progress?
This new tool will help us find out how we're doing at the end of each phase of a project. It will greatly improve our ability to predict the costs, the schedules and the operating characteristics of all our projects.
We feel that our Project Management Process is an indispensable tool that will help us maintain our No.1 position in Total Stockholder Return - the tool that can help us reduce our cycle time and our costs, help us generate revenue quicker, and, most important, help us increase the efficiency of our growth capital.
Updated: August 1998