A new breed

  • Mar 01, 2000

A corporate culture that once considered environmental functions as nonproductive liabilities is witnessing a new generation of environmental managers. They are thinking beyond compliance and remediation activities and redefining their company's environmental policies to achieve business objectives.

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The effectiveness of pump and treat systems such as this one is being reevaluated by a new generation of environmental managers.
This new breed of environmental manager is focused on environmental, health and safety (EHS) programs that positively impact their companies' profits, competitive positions, public images and shareholder values.

New generation EHS programs

When environmental programs are driven by local, state and federal compliance requirements, the role of the environmental manager is compartmentalized, leaving little room for innovation. Cost-saving activities are restricted to minimizing compliance costs through better data management and standardization of protocols; staying up-to-date on technology; keeping abreast of changes in governmental policies and more proactively, participating in strategies that could lead to changes in rule-making at the state or federal level.

When environmental programs are propelled by key business drivers, the environmental function becomes an integral support function of a company's business goals. Examples of key business drivers include both increasing global competitiveness and public scrutiny of a company's EHS history.

Environmental programs that are not tied to business drivers are very difficult to sustain over long periods of time. When decision making for these programs is based chiefly on responding to problems rather than making a conscious plan based on sound financial decisions (business drivers), the improvements tend to diminish in importance and execution over time. Some examples of initiatives that are not strictly tied to government regulations include:

  • Improvements in resource utilization (energy, investment, raw materials and staff time);

  • Risk and liability reductions;

  • Increased production efficiencies;

  • Streamlined management of environmental data and information;

  • Waste minimization; and

  • Community support.

Full-cost accounting leads to environmental improvements

In the early '90s, numerous companies discovered that they had significantly underestimated the cost and importance of environmental functions. For example, an economic study of Amoco Corp.'s (now BP Amoco) Yorktown petroleum refinery revealed that annual environmental costs were 22 percent of non-crude operating expenses, significantly higher than the three to five percent originally estimated.1

One reason for the discrepancy was that only direct costs of environmental departments were measured. EHS costs that could be attributed to process or production departments were overlooked. Significant costs were found hidden in cost centers, or buried in general overhead accounts.

In the past five years, environmental managers have been using a variety of methods to measure the true cost of EHS programs throughout the company. True costs enable companies to evaluate waste, measure the benefits of new programs and improve decision-making in areas such as capital improvements, production process redesign, materials substitutions, asset protection, acquisitions and outsourcing.

Chevron Corp.'s oil production business unit is an example of how accurate cost tracking can improve environmental programs. The unit had a solid program for tracking costs attributed to offshore oil spills but no comparable program for onshore spills. When managers looked at all the costs involved for onshore spills — including preparing internal and government reports, non-compliance fees (penalties, variances, fines), lost business due to shutdowns, repairs, spill clean up and managing impacted soil and groundwater — they found under-reporting of true costs by more than a factor of two.

Based on the new data, Chevron's environmental managers put together a new program for pressure testing pipelines as a leak prevention measure, found innovative ways to reduce remediation costs, improved management of chemical usage, more efficiently managed used drums and drum storage and abandoned production in fields that were no longer economical. The company also implemented a more efficient incident and near-miss reporting program and began using root-cause analysis techniques to evaluate the causes of incidents.2

The company was able to reduce onshore leaks by more than 50 percent over a three-year period compared to costs incurred in previous years. Perhaps more importantly, the new spill prevention program raised the environmental awareness of employees at all company levels, while still improving production.

Performance based contracts

The costs of remediation are inherently difficult to estimate, due to the uncertainties associated with the impact of complex residuals on human health and the environment, particularly when groundwater is impacted. Even the most experienced remediation contractors sometimes exceed budgets by 200 to 500 percent.

Historically, remediation contractors met these uncertainties by providing services on a time and materials basis. This means that the site owner assumed all economic risk, since engineering and consulting contractors are paid for all their costs. The longer the project takes, the more revenue the engineering and consulting contractor makes. Although time and material contracts include not-to-exceed ceilings, the large number of change orders often results in costs that are difficult, if not impossible to control.

In 1997, environmental managers at a large firm manufacturing aromatic derivatives took a new direction. They used a performance based contract to outsource the management of more than 35 groundwater remediation and monitoring sites to an environmental contractor. The new contract provided incentives for creativity and expertise, made costs more predictable and improved regulatory compliance.

The contract defined the long-term goal of reducing or eliminating the need for operating remedial systems and provided contractors with financial incentives for meeting or beating annual and three-year budgets. Cost overruns or reductions were assigned based on an agreed upon percentage split of risk between the environmental contractor and the owner. In order to provide an objective measure of overall program performance improvement, an operational efficiency rating program was implemented.

The contractor achieved significant savings by optimizing operating conditions at each site and reducing liabilities through an integrated management program. After reviewing site remediation strategies, many pump-and-treat remediation systems were replaced with passive cleanup strategies, such as product containment, biological in-place treatment and natural

The costs of remediation are inherently difficult to estimate, due to the uncertainties associated with the impact of complex residuals on human health and the environment, particularly when groundwater is impacted.
attenuation, which achieved the same goals at a lower cost. This was due to the fact that the older systems were ineffective and were no longer achieving any gains. The monitoring of passive systems showed both that there was no further deterioration, as well as site improvement. Thus, equal gains were achieved for less money.

The productive use of personnel was also increased by assigning part-time employees to other facilities and utilizing their skills more effectively. When employees were given a larger responsibility for identifying process modifications that could save money, they came up with ideas to increase plant processing flow rates at some of the facilities and ideas to maximize operation efficiencies.

During the first year of outsourced operations, the maintenance and monitoring program reduced environmental liability management costs for the chemical manufacturer by more than $1 million. The new treatment strategies more efficiently moved projects toward system shutdown with long-term monitoring to ensure remediation goals continued to be maintained.

Cost capping insurance

A major financial issue for companies is the contingency reserve for environmental remediation liabilities. The reserve, required by the U.S. Securities and Exchange Commission, is an estimate of ongoing and future remediation expenses. The reserve has a notorious reputation among investors for being inaccurate, making it difficult for companies to gain credibility for any changes they may wish to make. Today, many environmental managers seek to cap or eliminate environmental liabilities to reduce investor-perceived risk associated with company balance sheets.

Environmental managers of a large chemical manufacturing firm discovered that the size of its reserve had resulted in negative financial impacts on the company. Although the estimates had been made in the 1980s when regulations, technology and contracting methods were considerably different than they are today, reducing the reserve estimates would be difficult to justify in the eyes of pessimistic investors. The negative financial impacts had resulted in:

  • A diversion of management resources away from the core business;

  • Investors' reluctance to purchase stock, keeping the price depressed;

  • Keeping the company undervalued; and

  • Reducing the firm's flexibility in making acquisitions, therefore limiting its growth potential.

Environmental managers introduced corporate executives to the strategy of using cost-capping liability insurance policies as a credible reason for reducing the size of the company's liability reserve. This type of insurance is a form of remediation stop-loss coverage for unanticipated cost increases incurred during site cleanup. It protects the insured from financial loss arising from exceeding anticipated remediation costs. Typically, the insurance company establishes a 10 percent deductible on the anticipated costs. The remediation cost estimates are then reviewed by an internal expert and, on occasion, by a third-party. The cost of the insurance (rate) is based on the company's reputation and prior remediation history.

The new insurance policy enabled the company to justify a reduction in its environmental liability reserves. The company gained the financial flexibility to make acquisitions and expand. It made four acquisitions in the months following the insurance announcement and continues to make strategic acquisitions.

The day the insurance package was announced, the price of company shares jumped 1.6 percent (the overall stock market declined 2.1 percent that day) and almost doubled within nine months, outperforming the Standard & Poor's 500 by about 28 percent during the same period.

Benefits

Knowing the true cost of EHS programs has resulted in innovative methods to reduce costs and improve profits. New generation environmental managers understand that EHS issues are business issues. They are reaching beyond compliance requirements and taking innovative measures to improve every aspect of a company's operations and achieve operational excellence.

The benefits of their programs go beyond financial rewards. They improve the quality of a company's internal environment. Employees have a safer and more enjoyable place to work; accidents and incidents are reduced; equipment and processes are optimized; production efficiencies are improved and resource utilization is enhanced. As the quality of the business improves, it will attract more quality employees and garner the support of the community.

Key issues

Environmental managers who want these results have several important issues facing them. They include:

  • Business integration. How do you integrate environmental excellence into all business functions and processes? Effective mainstreaming of environmental activities relies on aligning desired business outcomes with desired environmental performance;

  • Lean operations. How do you align environmental initiatives with business efforts to control costs, develop new products, improve quality and enhance resource yields and efficiencies? As "environment" touches all aspects of corporate activity, environmental managers are often in a unique position to identify hidden costs, use broker knowledge and help the company do more with less; and

  • Corrporate strategy. How do you create strategic opportunities for the company and mitigate risk? By focusing solely on regulatory compliance, managers can miss major opportunities to influence product designs, product mix, capital projects, risk management strategies and numerous other strategic business issues.

The stakes are high, and companies that can successfully integrate environmental excellence into their business success criteria are likely to win big. Here are some examples of

The reduction of accidents had become an increasing focus of environmental managers.
strategies used by the new generation of environmental managers to add business value to their companies.

Post construction remediation strategies

Historically, up to 75 percent of total cleanup costs at groundwater remediation sites have been allocated to post-construction, including maintenance, monitoring and analysis. Yet less than 10 percent has been invested in strategic thinking activities, such as the planning and design of these project.

Site owners are increasingly rethinking their post-construction remediation strategies to reduce costs and speed site closure. Factors encouraging this shift include:

  • Increased public and political pressure to accelerate the rate of site closures;

  • Greater regulatory flexibility resulting from widespread acceptance of risk-based cleanup standards;

  • Better understanding of the inherent limitations of some common engineered remediation technologies, especially pump-and treat systems; and

  • The growing number of companies seeking to cap or eliminate environmental liabilities to improve their balances sheets.

Environmental managers are using two key post-construction strategies to achieve site closure. The first is applying updated remediation technologies. The second is changing Records of Decision obtained under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly referred to as Superfund, to provide more cost-effective and productive solutions. Companies remediating sites under the CERCLA program are required to submit detailed site assessments and cleanup plans to the U.S. Environmental Protection Agency (EPA). Approvals of these plans are called Records of Decision.

For example, under a state voluntary action program, a major railroad company opted to remediate a site where hydrocarbon residuals were migrating toward a nearby river. The company hired an environmental construction and engineering contractor to install a pump-and-treat remediation system, consisting of six monitoring wells, each with four injection points. The system cost more than $300,000 a year to operate.

A few years later, the contractor reevaluated the system's effectiveness. After examining system records and the site data, the contractor calculated that the pump-and-treat system could be turned off and replaced with passive recovery skimmers and monitored natural attenuation.

The savings in annual costs this change has generated have amounted to more than $1 million. For the first three years, monitoring occurred quarterly, showing excellent results. Today, monitoring occurs bi-annually, achieving further cost reductions.

Improved health and safety procedures

The high price of business interruptions on company profitability and public perception cannot be underestimated. An example involves Chevron Corp.'s Richmond, Calif. petroleum refinery unit that remained shut down for more than six months, due to a March 1999 fire in a hydrocracking unit. The cause was traced to a leak in the unit's piping system. The fire caused a loss of hundreds of millions of dollars in business interruption, repairs and an approximately 70 percent decrease in gasoline production over a six month period.3 Adding insult to injury, the public blamed the refinery for a coincidental rise in gasoline prices in California.

As a result, the reduction of accidents has become an increasing focus of environmental managers. To obtain that goal, the refinery's environmental managers are going beyond the U.S.Occupational Safety and Health Administration's requirements to adopt more stringent health and safety policies to decrease accidents. Improvements have dramatically increased profitability and production efficiencies, as well as boosted morale.

In another case that occurred 11 years ago, a major commodity and specialty chemical supplier performed a major review of the internal costs and effects of environmental releases. The review led to an adoption of the Chemical Manufacturer's Association's Responsible Careª program. The program sets management and performance goals for process safety, emergency response and pollution prevention.

As a result, the company has not had a major business interruption for seven years. Other benefits included a 70 percent reduction of emissions of chemical substances on the EPA's Toxic Release Inventory, and a 35 percent reduction in health and safety incidents. As plant operations and efficiency improved, so did the company's profits and competitive position.

Environmental management information systems (EMIS)

Environmental managers are installing environmental management information systems (EMIS) to track, manage and automate their environmental activities and information. Improved automation and information management can lead to the following benefits:

  • Improved (and more cost effective) business processes that make work easier and more efficient, while improving access to information for effective decision-making;

  • Environmental managers become familiar with and tap into accounting and financial data (often housed in other department's information systems), allowing them to see true environmental costs, as well as new opportunities. This helps managers effectively track the progress of environmental projects across various departments; and

  • Documentation of systems in place helps retain institutional memory and avoids loss of knowledge when companies lose key personnel, downsize or have high personnel turnovers.

Some environmental managers are finding they particularly increase business value when they develop systems that simultaneously address operational needs and environmental health and safety (EHS) requirements. For example, developing a software tool to help automate the management of change (MOC) process can be a lifesaver for operations managers, while also ensuring that EHS concerns are identified and addressed before process modifications are made. This provides value to operational efficiency, as well as EHS benefits and cost savings.

One of the world's largest chemical producers came up with an innovative way to evaluate the costs and benefits of such a system by installing a pilot EMIS in four plants and putting together EMIS evaluation teams made up of employees from all departments. The cost of the pilot system was less than $500,000.

Three months after the installation, pilot users held a workshop to identify and quantify possible savings associated with EMIS use in three EHS areas: direct cost savings, reductions in staffing and time and risk reduction. They identified opportunities for improvement, such as analyzing work flows, identifying incentive programs and developing knowledge bases and new tools.

Total savings estimates resulting from the use of the EMIS system were double that of the initial estimate. Payback on investment was conservatively estimated at nine months. These results convinced the company to approve full implementation of an EMIS throughout its North American facilities. Employee involvement and enthusiasm for the pilot system provided further impetus for its adoption and made implementation in other facilities much easier.

Measuring greenhouse gas emissions

Environmental managers in globally-based corporations are not waiting for legislation and regulations requiring reductions in emissions of greenhouse gases, such as sulfur dioxide and methane. They are taking steps now to inventory emissions from their global facilities, with a view toward collecting comprehensive data and establishing baseline figures for emissions.

Typical program goals include:

  • Developing the best possible location estimates of greenhouse gas emissions for operations in 1996;

  • Developing, testing and documenting data collection tools to tally greenhouse gas emissions in subsequent years; and

  • Applying lessons learned to the eventual collection of other EHS performance indicators.

The valuable information this gains will place these organizations in a leadership position to help resolve the significant problems in measuring and managing greenhouse gases and, potentially, to influence future regulation. They will be able to provide valuable understanding of the risks, impacts and economic burdens of any proposed restrictions. They can devise least-cost strategies for mitigating the risks associated with climate change, while maintaining productivity and growth.

Reductions in CO2 emissions

Environmental managers are taking steps to reduce carbon dioxide (CO2) emissions (one of the major contributors to greenhouse gases) by participating in EPA's ClimateWise program. The program helps industrial "partners" to quantify CO2 and other emissions associated with energy conservation and pollution initiatives. One manufacturing facility embarked on a three-year energy efficiency system upgrade program, identifying such energy reduction measures as high efficiency motors, compressed air system modifications, lighting upgrades and cooling system optimization.

These measures are predicted to annually save the company $226,000 in operating expenses, and reduce CO2 emissions by approximately 1,500 metric tons over the project life cycle.

Conclusion

New-generation environmental managers are finding that creating business value improves profits and their position in the global marketplace. The five major keys to creating business value are:

  • Reduce costs with least-cost remediation and compliance strategies, better business processes, cost-effective waste treatment and recycling;

  • Increase productivity with management tools, information technologies, effective resource allocation and outsourcing non-core functions;

  • Ensure compliance by streamlining compliance functions with EMIS systems, negotiating reasonable permit requirements and changing Records of Decision, as well as supporting industry regulatory advocates;

  • Eliminate liabilities by transferring liabilities for tax advantages, redeveloping contaminated properties and using cost-capping insurance; and

  • Integrate operations by linking all EHS functions across the organization, comprehensive full-cost accounting and focusing on alignment with core business goals.

Footnotes

1Heller, Miriam, David Shields and Beth Beloff, "Environmental Accounting Case Study: Amoco Yorktown Refinery," Green Ledgers: Case Studies in Corporate Environmental Accounting, World Resources Institute, May 1995, pp. 47-80.

2Brommelsiek, William A., "Management of Environmental Performance in Support of Business Performance," Natural Gas Industry Environmental Conference, pp. 1-10.

3 "Chevron Refinery Processing Unit Remains Shut Down," Chevron Corp. press release, March 31, 1999.

"Chevron Applies for Variance to Sell Conventional Gasoline in California Due to Richmond Refinery Production Problem," Chevron Corp. press release, July 13, 1999.

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This article appeared in the March 2000 issue of Environmental Protection magazine, Vol 11, No. 3, p. 79.

This article originally appeared in the 03/01/2000 issue of Environmental Protection.

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