Strategy

The capital efficiency of any business is a critical measurement of the health and long term viability of the company and the effectiveness of their management. Capital efficiency is simply the ability to use our shareholders' funds effectively by reinvesting them in projects with superior returns above those they could receive in other investments. These investments might be in other energy companies or even entirely different businesses. Our ultimate goal is to have the highest Total Shareholder Return (TSR) of any of our peer competitors. Between 1989 and 1996, we succeeded by having an annualized TSR of 18.90/0. above our closest competitor at 18.10/0. and the overall stock market at 16.4% But we can't rest on our past achievements. Our competitors are continuously improving, and we have to find ways to constantly do things better. At Chevron with a 6 billion dollar annual budget, an improvement of 5% in capital efficiency equates to incremental annual savings of $300,000,000/year. This savings will allow us to create new opportunities and further expand our business. In other words, for similar projects, some companies' project management system adds value to the project while other company's project management system lowers the value of the project.

To that end, all of us are focusing on new innovative ways and technologies for developing Offshore Projects at the lowest cost, while improving the safety, reliability, and flexibility. The technology development from steel-pile jacket platforms, to tension-leg platforms, to spars is one example of such an evolution.

In an effort to improve project decision making and execution of Chevron's prospects, we recently formed a small services company called Project Resources.

This company has a core group of decision analysts and project management experts who facilitate project development efforts worldwide. In addition, they serve as contacts for supporting key services such as cost estimating, benchmarking and contracting.

Another function of Project Resources is in assuring excellent project execution across all operating companies. This is accomplished by supporting the project management process, as well as managing the careers and developing the competencies of project professionals worldwide.

Our expectation is that this experiment of utilizing a near virtual group to heavily leverage Project Management resources across Chevron's various operating companies will result in better deployment of best practices and will lead to the improvement of capital efficiency.

Process

Back in 1991 we developed a 5 step process called the Chevron Project Development and Execution Process commonly called CPDEP. CPDEP is a common process for Chevron to improve project selection and execution. The five phases of CPDEP are: Phase I-Identify and Assess Opportunities - The objective in Phase I is to clearly frame the goal to be pursued and insure alignment with business objectives. This includes performing a preliminary assessment of uncertainties and potential returns.

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