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Chevron's goal is to exceed the performance of its strongest competitors with a total stockholder return averaging at least 15 percent a year--an aggressive target because worldwide petroleum demand is increasing only 2 percent annually. This goal demands an entrepreneurial spirit, and it signals a need for greater innovation, creativity, and flexibility.
One of the many progeny of the Standard Oil Trust, Chevron Corporation has grown from its modest California origins to become a major power in the international oil market. Its dramatic discoveries in Saudi Arabia gave Chevron a strong position in the world's largest oil region and helped fuel 20 years of record earnings in the postwar era. The rise of the Organization of Petroleum Exporting Countries (OPEC) in the early 1970s deprived Chevron of its comfortable Middle East position, causing considerable anxiety and a determined search for new domestic oil resources at a company long dependent on foreign supplies. The firm's 1984 purchase of Gulf Corporation at $13.2 billion, the largest industrial transaction to that date, more than doubled Chevron's oil and gas reserves but failed to bring its profit record back to pre-1973 levels of performance. By the mid-1990s, however, Chevron was posting strong earnings, a result of higher gasoline prices and the company's restructuring and cost-cutting efforts.
Company Origins
Chevron's oldest direct ancestor is the Pacific Coast Oil Company, founded in 1879 by Frederick Taylor and a group of investors. Several years before, Taylor, like many other Californians, had begun prospecting for oil in the rugged canyons north of Los Angeles; unlike most prospectors, Taylor found what he was looking for, and his Pico Well #4 was soon the state's most productive. Following its incorporation, Pacific Coast developed a method for refining the heavy California oil into an acceptable grade of kerosene, then the most popular lighting source, and the company's fortunes prospered. By the turn of the century Pacific had assembled a team of producing wells in the area of Newhall, California, and built a refinery at Alameda Point across the San Francisco Bay from San Francisco. It also owned both railroad tank cars and the George Loomis, an ocean-going tanker, to transport its crude from the field to the refinery.
One of Pacific Coast's best customers was Standard Oil Company of Iowa, a marketing subsidiary of the New Jersey-headquartered Standard Oil Trust. Iowa Standard had been active in northern California since 1885, selling both Eastern oil of Standard's own and also large quantities of kerosene purchased from Pacific Coast and the other local oil companies. The West Coast was important to Standard Oil Company of New Jersey not only as a market in itself but also as a source of crude for sale to its Asian subsidiaries. Jersey Standard thus became increasingly attracted to the area and in the late 1890s tried to buy Union Oil Company, the state leader. The attempt failed, but in 1900 Pacific Coast agreed to sell its stock to Jersey Standard for $761,000 with the understanding that Pacific Coast would produce, refine, and distribute oil for marketing and sale by Iowa Standard representatives. W.H. Tilford and H.M. Tilford, two brothers who were longtime employees of Standard Oil, assumed the leadership of Iowa Standard and Pacific Coast, respectively.
Drawing on Jersey Standard's strength, Pacific Coast immediately built the state's largest refinery at Point Richmond on San Francisco Bay and a set of pipelines to bring oil from its San Joaquin Valley wells to the refinery. Its crude production rose steeply over the next decade, yielding 2.6 million barrels a year by 1911, or 20 times the total for 1900. The bulk of Pacific Coast's holdings were in the Coalinga and Midway fields in the southern half of California, with wells rich enough to supply Iowa Standard with an increasing volume of crude but never enough to satisfy its many marketing outlets. Indeed, even in 1911 Pacific Coast was producing a mere 2.3 percent of the state's crude, forcing partner Iowa Standard to buy most of its crude from outside suppliers like Union Oil and Puente Oil.
By that date, however, Pacific Coast and Iowa Standard were no longer operating as separate companies. In 1906 Jersey Standard had brought together its two West Coast subsidiaries into a single entity called Standard Oil Company (California), generally known thereafter as Socal. Jersey Standard recognized the future importance of the West and quickly increased the new company's capital from $1 million to $25 million. Socal added a second refinery at El Segundo, near Los Angeles, and vigorously pursued the growing markets for kerosene and gasoline in both the western United States and Asia. Able to realize considerable transportation savings by using West Coast oil for the Pacific markets of its parent company, Socal was soon selling as much as 80 percent of its kerosene overseas. Socal's head chemist, Eric A. Starke, was chiefly responsible for several breakthroughs in the refining of California's heavy crude into usable kerosene, and by 1911, Socal was the state leader in kerosene production.
The early strengths of Socal lay in refining and marketing. Its large, efficient refineries used approximately 20 percent of California's entire crude production, much more than Socal's own wells could supply. To keep the refineries and pipelines full, Socal bought crude from Union Oil and in return handled a portion of the marketing and sale of Union kerosene and naphtha. In the sale of kerosene and gasoline, Socal maintained a near-total control of the market in 1906, supplying 95 percent of the kerosene and 85 percent of the gasoline and naphtha purchased in its marketing area of California, Arizona, Nevada, Oregon, Washington, Hawaii, and Alaska, although its share dipped somewhat in the next five years. When necessary, Socal used its dominant position to inhibit competition by deep price cutting. By the time of the dissolution of the Standard Oil Trust in 1911, Socal, like many of the Standard subsidiaries, had become the overwhelming leader in the refining and marketing of oil in its region while lagging somewhat in the production of crude.
From 1911 to World War II: Growth as an Independent Company
In 11 short years the strength of Standard Oil and a vigorous Western economy combined to increase Socal's net book value from a few million dollars in 1900 to $39 million. It was in 1911, however, that Jersey Standard, the holding company for Socal and the entire Standard Oil family, was ordered dissolved by the U.S. Supreme Court in order to break its monopolistic hold on the oil industry. As one of 34 independent units carved out of the former parent company, Standard Oil Company (California) would have to do without Standard's financial backing, but the new competitor hardly faced the world unarmed. Socal kept its dominant marketing and refining position, its extensive network of critical pipelines, a modest but growing fleet of oil tankers, its many oil wells, and, most helpfully, some $14 million in retained earnings. The latter proved useful in Socal's subsequent rapid expansion, as did California's growing popularity among Americans looking for a fresh start in life. The state population shot up quickly, and most of the new residents found that they depended on the automobile--and, hence, on gasoline&mdashø navigate the state's many highway miles.
The years leading up to World War I saw a marked increase in Socal's production of crude. From a base of about 3 percent of the state's production in the early part of the century, Socal rode a series of successful oil strikes to a remarkable 26 percent of nationwide crude production in 1919. As the national production leader, Socal found itself in a predicament that would be repeated throughout its history--an excess of crude and a shortage of outlets for it. For most of the other leading international oil companies, the situation was reversed, crude generally being in short supply in a world increasingly dependent on oil. Particularly in the aftermath of World War I--of which the British diplomat George Curzon said "the Allies floated to victory on a wave of oil"--there was much anxiety in the United States about a possible shortage of domestic crude supplies. A number of the major oil companies began exploring more vigorously around the world. Socal took its part in these efforts but with a notable lack of success--37 straight dry holes in six different countries. More internationally oriented firms like Jersey Standard and Mobil soon secured footholds in what was to become the future center of world oil production, the Middle East, while Socal, with many directors skeptical about overseas drilling, remained content with its California supplies and burgeoning retail business.
In the late 1920s Socal's posture changed. At that time Gulf Corporation was unable to interest its fellow partners in Iraq Petroleum Company in the oil rights to Bahrain, a small group of islands off the coast of Saudi Arabia. Iraq Petroleum was then the chief cartel of oil companies operating in the Middle East, and its members were restricted by the Red Line Agreement of 1928 from engaging in oil development independently of the entire group. Gulf was therefore unable to proceed with its Bahrain concession and sold its rights for $50,000 to Socal, which was prodded by Maurice Lombardi and William Berg, two members of its board of directors. This venture proved successful. In 1930 Socal geologists struck oil in Bahrain, and within a few years, the California company had joined the ranks of international marketers of oil.
Bahrain's real importance, however, lay in its proximity to the vast fields of neighboring Saudi Arabia. The richest of all oil reserves lay beneath an inhospitable desert and until the early 1930s was left alone by the oil prospectors. But at that time, encouraged by the initial successes at Bahrain, Saudi Arabia's King Ibn Saud hired a U.S. geologist to study his country's potential oil reserves. The geologist, Karl Twitchell, liked what he saw and tried on behalf of the king to sell the concession to a number of U.S. oil companies. None was interested except the now-adventurous Socal, which in 1933 won a modest bidding war and obtained drilling rights for a £5,000 annual fee and a loan of £50,000. After initial exploration revealed the fantastic extent of Arabian oil, Socal executives realized that the company would need access to markets far larger than its own meager foreign holdings, and in 1936 Socal sold 50 percent of its drilling rights in Saudi Arabia and Bahrain to the Texas Company, later Texaco, the only other major oil company not bound by the Red Line Agreement. Once the oil started flowing in 1939, King Saud was so pleased with his partners and the profits they generated for his impoverished country that he increased the size of their concession to 440,000 square miles, an area the size of Texas, Louisiana, Oklahoma, and New Mexico combined.
Postwar Expansion
Socal and the Texas Company agreed to market their products under the brand name Caltex and developed excellent representation in both Europe and the Far East, especially in Japan. The new partners realized soon after the end of World War II, however, that the Saudi oil fields were too big even for the both of them, and to raise further capital they sold 40 percent of the recently formed Arabian American Oil Company (Aramco) for $450 million, leaving the two original partners with 30 percent each. With its crude supply secure for the foreseeable future, Socal was able to market oil around the world, as well as in North America's fastest-growing demographic region, California and the Pacific Coast. As later Chairman R. Gwin Follis put it, Saudi Arabia was a "jackpot beyond belief," supplying Caltex markets overseas with unlimited amounts of low-priced, high-grade oil. By the mid-195Os Socal was getting one-third of its crude production out of Aramco and, more significantly, calculated that Saudi Arabia accounted for two-thirds of its reserve supply. Other important fields had been discovered in Sumatra and Venezuela, but Socal was particularly dependent on its Aramco concession for crude.
On the domestic scene, Socal by 1949 had grown into one of the few American companies with $1 billion in assets. No longer the number-one domestic crude producer, Socal was still among the leaders and had recently made plentiful strikes in Louisiana and Texas, as well as in its native California. In addition to its original refineries at Point Richmond and El Segundo, Socal had added new facilities in Bakersfield, California, and in Salt Lake City, Utah. Socal's marketing territory included at least some representation in 15 Western states and a recent, limited foray into the northeastern United States, mainly as an outlet for some of its cheap Middle Eastern oil. The heart of Socal territory was still west of the Rocky Mountains, where the company continued to control about 28 percent of the retail market during the postwar years, a far cry from the 90 percent it owned at the turn of the century but still easily a dominant share in the nation's leading automotive region.
In the two decades following the war the U.S. economy became completely dependent upon oil. As both a cause and an effect of this trend, the world was awash in oil. The Middle East, Latin America, and Southeast Asia all contributed mightily to a prolonged glut, which steadily lowered the price of oil in real dollars. The enormous growth in world consumption assured Socal of a progressive rise in sales and a concomitant increase in profits at an annual rate of about 5.5 percent. By 1957, for example, Socal was selling $1.7 billion worth of oil products annually and ranked as the world's seventh-largest oil concern. Its California base offered Socal a number of advantages in the prevailing buyer's market. By drawing upon its own local wells for the bulk of its U.S. sales, Socal was able to keep its transportation costs lower than most of its competitors, and California's zooming population and automobile-oriented economy afforded an ideal marketplace. As a result, Socal consistently had one of the best profit ratios among all oil companies during the 1950s and 1960s.
California crude production had begun to slow, however, and along with the rest of the world Socal grew ever more dependent on Middle Eastern oil for its overall health. The rich Bay Marchand strike off the Louisiana coast helped stem the tide temporarily. By 1961 Socal was drawing 27.9 million barrels per year from Marchand and had bought Standard Oil Company of Kentucky to market its gasoline in the southeastern United States. But the added domestic production only masked Socal's increasing reliance on Saudi Arabian oil, which by 1971 provided more than three-quarters of Socal's proven reserves. As long as the Middle Eastern countries remained cooperative, such an imbalance was not of great concern, and by vigorously selling its cheap Middle Eastern oil in Europe and Asia, Socal was able to rack up a perfect record of profit increases every year in the 1960s. By 1970, 20 percent of Socal's $4 billion in sales was generated in the Far East, with Japan again providing the lion's share of that figure. The firm's European gas stations, owned jointly with Texaco until 1967, numbered 8,000.
Challenge of OPEC beginning in the 1970s
The world oil picture had changed fundamentally by 1970, however. The 20-year oil surplus had given way in the face of rampant consumption to a general and increasing shortage, a shift soon taken advantage of by OPEC members. In 1973 and 1974 OPEC effectively took control of oil at its source and engineered a fourfold increase in the base price of oil. Socal was now able to rely on its Saudi partner for only a tiny price advantage over the general rate and it was no longer in legal control of sufficient crude to supply its worldwide or domestic demand. The sudden shift in oil politics revealed a number of Socal shortcomings. Though it had 17,000 gas stations in 39 U.S. states, Socal was not a skilled marketer either in the United States or in Europe, where its former partner, Texaco, had supplied local marketing savvy. In its home state of California, for example, Socal's market share was 16 percent and continuing to drop and Socal had missed out on both the North Sea and Alaskan oil discoveries of the late 1960s.
Socal responded to these problems by merging all of its domestic marketing into a single unit, Chevron USA, and began cutting employment, at first gradually and later more deeply. Also, Socal stepped up its domestic exploration efforts while moving into alternative sources of energy, such as shale, coal, and uranium. In 1981 the company made a $4 billion bid for AMAX Inc., a leader in coal and metal mining but had to settle for a 20 percent stake. In 1984 Standard Oil Company (California) changed its name to Chevron Corporation. Also in 1984, after a decade of sporadic attempts to lessen its dependence on the volatile Middle East, Chevron Corporation met its short-term oil needs in a more direct fashion: it bought Gulf Corporation.
The $13.2 billion purchase, at that time the largest in the history of U.S. business, more than doubled Chevron's proven reserves and created a new giant in the U.S. oil industry, with Chevron now the leading domestic retailer of gasoline and, briefly, the second-largest oil company by assets. Certain factors made the move appear ill-timed, however. Oil prices had peaked around 1980 and begun a long slide that continued until the Gulf War of 1990, which meant that Chevron had saddled itself with a $12 billion debt at a time of shrinking sales. As a result, it was not easy for Chevron to sell off assets as quickly as desired, both to reduce debt and to eliminate the many areas of overlap created by the merger. Chevron eventually rid itself of Gulf's Canadian operations and all of Gulf's gas stations in the northeastern and southeastern United States, paring 16,000 jobs in the meantime, but oil analysts pointed to such key figures as profit per employee and return of capital as evidence of Chevron's continued poor performance.
Developments in the 1990s
In the early 1990s Chevron began publicizing its environmental programs, a response in part to public pressure on all oil companies for more responsible environmental policies. From 1989 to 1993 Chevron Shipping Company had the best overall safety record among major oil companies. In 1993, while transporting nearly 625 million barrels of crude oil, Chevron Shipping spilled an amount equaling less than four barrels. During this same period, Chevron utilities supervisor Pete Duda recognized an opportunity to convert an abandoned wastewater treatment pond into a 90-acre wetland. Fresh water and new vegetation were added to the site, and by 1994 the area was attracting a variety of birds and other wildlife, as well as the attention of the National Audubon Society, National Geographic, and the California Department of Fish and Game. The conversion saved Chevron millions, as conventional closure of the site would have cost about $20 million.
Financially the company began the 1990s with less than glowing returns. Chevron's 1989 results were poor, and in that year's annual report, Chairman Kenneth Derr announced a program to upgrade the company's efficiency and outlined as well a five-year goal: "a return on stockholders' investment that exceeds the performance of our strongest competitors." The company also took important new initiatives. In 1993 Chevron entered into a partnership with the Republic of Kazakhstan to develop the Tengiz oil field, one of the largest ever discovered in the area.
In 1994, five years after Derr's announcement, Chevron had met its goal for stockholders, largely through restructuring and efforts to cut costs and improve efficiency. From 1989 to 1993 Chevron cut operating costs by more than $1 per barrel and the company's stock rose to a 18.9 percent return, compared with an average of 13.2 percent return for its competitors. The company celebrated this achievement by giving 42,000 of its employees a one-time bonus of 5 percent of their base pay.
After meeting its five-year goal, Chevron continued its cost-cutting and efficiency efforts. In December 1995 the company announced a restructuring of its U.S. gasoline marketing. It combined regional offices, consolidated support functions, and refocused the marketing unit toward service and sales growth. One example of the company's new efforts toward marketing was a joint initiative with McDonald's Corp.. In April 1997, as a response to "one-stop shopping" marketing trends, Chevron and McDonald's together opened a new gas station and food facility in Lakewood, California. The two companies shared the space and customers could order food and pump gas at the same time. They could pay for the order with a Chevron card. More Chevron/McDonald's facilities were planned for California and elsewhere in the United States.
Chevron also cut its refining capacity, where margins were especially low in the early 1990s. Capacity dropped by 407,000 barrels a day from 1992 to 1995. The company helped reduce its refining capacity by selling its Port Arthur, Texas, refinery in February 1995. The company controlled 10.2 percent of U.S. refining capacity in 1992 but just 7.5 percent by 1995. These measures seemed to improve the company's fortunes, as its earnings jumped in 1996 to more than $2.6 billion, an all-time high. Stockholder return for the year was 28.5 percent. High gasoline prices also contributed to Chevron's huge profits. The company was able to take advantage of high crude prices by increasing production at their Kazakhstan and West African facilities.
Principal Subsidiaries: Chevron Canada Limited; Chevron Canada Resources; Chevron Chemical Company; Chevron Information Technology Company; Chevron International Oil Company, Inc.; Chevron Land and Development Company; Chevron Overseas Petroleum Inc.; Chevron Petroleum Technology Company; Chevron Pipe Line Company; Chevron Research and Technology Company; Chevron Shipping Company; Chevron U.S.A. Production Company; Chevron U.S.A. Products Company; Gulf Oil (Great Britain) Limited; The Pittsburg & Midway Coal Mining Co.; Warren Petroleum Company.
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