© ChevronTexaco 2004

Accelerating the Deployment of Technology to Business Opportunities

Kevin Kimber – ChevronTexaco

David Matheson - SmartOrg

Value-Based Management Systems

2

Exploration & ProductionRefiningChemicalsPowerTechnology

ChevronTexaco ranks among the world’s largest global energy companies

ChevonTexaco Headquarters

• 180 countries

• 53,000 employees

• US $8.5 Billion capital

• 11.9 billion BOE oil and gas reserves

• 2.6 million BOE daily net production

• RRR of 114% in 2002

4th largest publicly traded integrated oil in the world

based on reserves and production

Global Business – Global Technology

3

Technological advancement and integration are key to future ChevronTexaco opportunities…

• Heavy oil production and upgrading

• Deepwater production systems

• Global gas supply and markets

• Zero-incident / zero-impact operations

• Energy systems and fuels of the future

4

Heavy Oil – A Huge Resource but a Real Challenge

UpgradingSteamflooding

Technology plays a key role in Commercialization of Heavy Oil Reserves

• Steamflooding has added $ billions in value through increased recovery

• Upgrading has added $ millions in increased product value

• CT spends about $30 million per year on R&D in this area

• Heavy oil is very thick and viscous making it difficult to produce from underground formations and requiring greater processing to refined products

• Costs more to produce• Sells for less

0

50

100

150

200

250

300

350

400

52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97

SteamfloodPrimary

Pro

duct

ion

(MB

OP

D)

Field discovered 1941

1st Production Steamflood

start up1 Billion

bbls

300,000 BOPD

COGEN operational

Production History of Duri Steamflood

5

Role of Portfolio Optimization Process & Toolsfor Heavy Oil Technology

Like many organizations, we faced significant challenges…

• Business needs for technology were not being met in a timely fashion

• Corporate growth objectives demanding more for less

• Technologists keeping projects alive too long

• Inconsistent project evaluations

• Not enough project failures

• Difficulty comparing projects of different types

• Limitations of thumbs up / down approach to project prioritization

6

CT Heavy Oil responded by implementing a value-based management process.

Project Justifications

• Business cases

Portfolio Decisions

• Subjective Factors

Before: a roll-up event

Project Evaluations

• Specify & quantify uncertainty

• Clear standards• Give teams real

direction

Peer & Expert Review

• Transparency• Credibility and

Comparability

Portfolio Decisions

• Value-based• Solid information• Strategic

Alignment

Uncertainty Tracking

• Baseline assessments• Updates based on evidence

After: a value-based management process

7

Templates provided a standard basis for evaluation and comparison.

We found we could address 40 projects with just three templates:•Improvements to oil production efficiency•Improvements to upgrading processes•Generic

Basis for consistent and comparable assessments of technical risk and commercial contribution

Oil Production Profile

2000 2005 2010 2015 2020 2025 2030 2035

Year

0

50

100

150

200

250

300

BB

L O

il/D

ay

Pe

r P

att

ern

Base Case Technology Case

Project Evaluations

• Specify & quantify uncertainty

• Clear standards• Give teams real

direction

Peer & Expert Review

• Transparency• Credibility and

Comparability

Portfolio Decisions

• Value-based• Solid information• Strategic

Alignment

Uncertainty Tracking

• Baseline assessments• Updates based on evidence

After: a value-based management process

8

Explicitly managing project uncertainty helps teams drive the upside.

Project Value Given Technical SuccessNPV of Commercial Contribution - Project Cost ($million)

Combined uncertainty

Cost of Fuel

Base CAPEX

Base Non-fuel Cost

Base SOR

Base Initial Steam Injection Rate

Base Duration at Peak

Base Time to Peak

Base Peak Production

Period 1 Duration

Tech CAPEX

Period 2 Deploy Duration

Deployment Delay

Period 1 Annual Deployments

Product Value

Tech Incremental Non-Fuel Cost

Base Production Decay

Period 3 Deploy Duration

Tech Incremental Peak Production

Period 2 Annual Deployments

Period 3 Annual Deployments

40 60 80 100 120 140 160 180 200 220 240

1 2.2

0 0

0 0

0 0

760 760

0 0

0 0

138 138

2 1

0.007 0.0015

2 1

2 0.5

25 200

16 26

-0.18 -0.4

-0.1 -0.02

5 2

1 4

75 800

50 750

Base Case = 81.84

Helped team move away from concerns about capital cost of new technology and

focus on acceleration of deployment and maximizing

peak production

Project Evaluations

• Specify & quantify uncertainty

• Clear standards• Give teams real

direction

Peer & Expert Review

• Transparency• Credibility and

Comparability

Portfolio Decisions

• Value-based• Solid information• Strategic

Alignment

Uncertainty Tracking

• Baseline assessments• Updates based on evidence

After: a value-based management process

9

A transparent process helped address the “garbage-in, garbage-out” problem.

Commercial Value Given Technical Success Range of Uncertainty ($million)

Improving Computational Capability

Shearing

LSTS

Performance Prediction

Dow nhole Steam Prof ile Control

2D NMR

Thin Sand Thermal

Dow nhole Steam Prof ile - New Wells

Catalyst

Remote Sensing

Steam Inj Well BP

Steam Distribution

Bio-Upgrading

Heat Management

Improve Hydrocoking Process

Well Gauging

High Mobility Ratio Waterf lood

HOSGD

Reservoir Opportunity Identif ication

VAPEX

Cold Flow

Heavy Oil Chemistry

Sulfur & Metals Removal

CASH

-100 0 100 200 300 400 500 600

Project 1

Project 2

Project 3

Project 4

Project 5

Project 6

Project 7

Project 8

Project 9

Project 10

Project 11

Project 12

Project 13

Project 14

Project 15

Project 16

Project 17

Project 18

Project 19

Project 20

Project 21

Project 22

Project 23

Probability of Technical Success

Shearing

Heavy Oil Chemistry

Improving Computational Capability

Bio-Upgrading

Thin Sand Thermal

Sulfur & Metals Removal

VAPEX

Catalyst

High Mobility Ratio Waterf lood

LSTS

Improve Hydrocoking Process

Performance Prediction

HOSGD

Steam Inj Well BP

Reservoir Opportunity Identif ication

Cold Flow

CASH

2D NMR

Dow nhole Steam Prof ile - New Wells

Heat Management

Remote Sensing

Steam Distribution

Well Gauging

Dow nhole Steam Prof ile Control

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80

Project 1

Project 2

Project 3

Project 4

Project 5

Project 6

Project 7

Project 8

Project 9

Project 10

Project 11

Project 12

Project 13

Project 14

Project 15

Project 16

Project 17

Project 18

Project 19

Project 20

Project 21

Project 22

Project 23

Project 24

• Historically this was one of the most challenging issues

• Process and tools key to overcoming

Project Evaluations

•Specify & quantify uncertainty

•Clear standards•Give teams real

direction

Peer & Expert Review

• Transparency• Credibility and

Comparability

Portfolio Decisions

• Value-based• Solid information• Strategic

Alignment

Uncertainty Tracking

•Baseline assessments•Updates based on evidence

After: a value-based management process

Project Comparison Tools

10

Using value as the primary decision criteria helps people make and accept decisions.

0 50 100 150 200 250 300 350 400

Expected Commercial Contribution (NPV Given Technical Success $million)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Pro

ba

bil

ity

of

Te

ch

nic

al

Su

cc

es

s

LSTS

Dow nhole S

Steam Dist

Dow nhole SHeat Manag

Shearing Heavy Oil

Sulfur & M

Improving

High Mobil

Cold Flow

VAPEXCatalyst

Remote Sen

Performanc

HOSGD

Improve Hy

CASH

Reservoir

Well Gaugi

2D NMR

Thin Sand

Steam Inj

Bio-Upgrad

Bread & Butter Pearls

White Elephants Oysters

0 5 10 15 20 25 30 35

Cumulative Portfolio Cost (NPV $million)

0

100

200

300

400

500

600

700

800

900

1000

1100

Cu

mu

lati

ve

Po

rtfo

lio

Va

lue

(N

PV

$ m

illi

on

)

Dow nhole S

Steam DistDow nhole S

Heat Manag

Well Gaugi

Remote Sen

Cold Flow

Reservoir

HOSGD2D NMR

High MobilVAPEXHeavy Oil

Improve HyCatalystSteam Inj Performanc

Sulfur & M

CASHLSTSThin Sand Shearing Bio-UpgradImproving

Project Evaluations

•Specify & quantify uncertainty

•Clear standards•Give teams real

direction

Peer & Expert Review

• Transparency• Credibility and

Comparability

Portfolio Decisions

• Value-based• Solid information• Strategic

Alignment

Uncertainty Tracking

•Baseline assessments•Updates based on evidence

After: a value-based management process

Portfolio Evaluation Tools

CFO Chart

Innovation Screen

11

Project Evaluations

•Specify & quantify uncertainty

•Clear standards•Give teams real

direction

Peer & Expert Review

• Transparency• Credibility and

Comparability

Portfolio Decisions

• Value-based• Solid information• Strategic

Alignment

Uncertainty Tracking

•Baseline assessments•Updates based on evidence

After: a value-based management process

Evidence-based uncertainty tracking gives improved visibility to project changes.

0 50 100 150 200 250 300

Baseline Project Value (Expected NPV $million)

0

50

100

150

200

250

300

Cu

rre

nt

Pro

jec

t V

alu

e (

Ex

pe

cte

d N

PV

$m

illi

on

)

CASH

Well GaugiCold Flow Reservoir

HOSGDSteam Dist

Heat ManagRemote SenSteam Inj Dow nhole SHigh Mobil Improve HyVAPEXSulfur & M

2D NMRDow nhole SPerformancCatalyst

Bio-UpgradLSTSThin Sand Heavy Oil Improving Shearing

Improved

Worsened

Capturing Basis of Assessment

Value Tracking

12

The result: acceleration of technology to business opportunity.

2003 2004 Improvement

New ideas screened

22 35 60%

Projects initiated

6 9 50%

Projects Deployed

1 2 100%

Projects Terminated

3 6 100%

13

Acceleration is worth tens of millions.

Illustrative Scenario:

• Stopping one project a year earlier than we otherwise would, saves the avoided project cost, but more importantly…

— Allows funding & resources to accelerate another project or initiate a new one

• Annual value of this scenario:

— $10 million or 30% of annual budget

Targeted improvement in business impact over next 3 years is 100%

14

Summary

Goal was to develop a process & tools to:

• Ensure technology development is aligned with business strategy & intersects opportunity

• Accelerate development & deployment of technology

• Optimize technology portfolio value

Benefits of a Portfolio Mgt Process for Heavy Oil Technology

• Consistent & comparable project evaluations

• Clear commercial benefits & deployment schedules

• Earlier project “kills”

• Accelerated initiation & deployment of projects

• Transparent, value-based portfolio decisions

• Greater portfolio value

15Value-Based Management Systems

SmartOrg® provides software and services to help companies evaluate their opportunities and make the best decisions about where to invest, especially when the future is clouded with uncertainty. Customers use SmartOrg® to build their capability in driving innovation from idea to commercial results and in selecting projects, improving returns in their portfolio.

SmartOrg® helps companies to attain the highest value from projects and portfolios.

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