Chevron Texaco - Business Report

ChevronTexaco Corporation

ChevronTexaco Corporation is the creation of the 2001 merger of California-based Chevron Corporation, one of the many progeny of the Standard Oil Trust, and Texaco Inc., a company whose history traces back to the early boom years of the Texas oil industry. The two firms' histories previously began to intertwine in the 1930s with the formation of the Caltex and Aramco ventures in the Middle East. ChevronTexaco began its existence as the number two U.S.-based integrated oil company (behind Exxon Mobil Corporation) and number four in the world, behind Exxon Mobil, BP p.l.c., and Royal Dutch/Shell Group. The company had some 11.5 billion barrels of oil and gas reserves and had daily production of 2.7 million barrels. Major producing areas included the Gulf of Mexico, California, Texas, Canada, Kazakhstan, Argentina, Angola, Nigeria, Republic of Congo, Venezuela, Australia, Indonesia, Thailand, China, Papua New Guinea, the North Sea, and the Middle East. On the downstream side, ChevronTexaco operated 22 refineries around the world and more than 25,000 service stations on six continents under such brands as Chevron, Texaco, Caltex, Delo, and Havoline. Within the United States, the company's marketing operations were strongest in the western, southwestern, and southern regions of the country. Among the company's other operations and interests were a 50 percent interest in Chevron Phillips Chemical Company LLC, a major petrochemical manufacturer (the other 50 percent was held by Phillips Petroleum Corporation); equity interests in 47 power projects worldwide; and a 27 percent stake in Dynegy, Inc., a marketer and trader of energy products, including electricity, natural gas, and coal.

The Chevron side of the corporation grew from its modest California origins in the late 19th century 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-to-late 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 oceangoing 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 Standard's own eastern oil 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 such as 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