Building On Success

By Kenneth T. Derr, Chairman of the Board
Chevron Corporation

Annual Meeting of Stockholders

New Orleans, Louisiana

Also see a press release regarding this speech.

Good morning ladies and gentlemen. It's a pleasure to welcome you to our 1998 Annual Meeting.

We are happy to be here in New Orleans. I conducted my first Annual Meeting here in 1989 as Chevron's new Chairman.

New Orleans and the Gulf of Mexico area are important to Chevron -- and have been for a long time.

We're the number 2 gasoline marketer in Louisiana and Mississippi. In addition, we have a major refinery nearby at Pascagoula, Mississippi, and three chemical plants in the area -- at Pascagoula, St. James and Belle Chasse.

However, Chevron may be best known for exploration and production in this area. We've been a major presence in the Gulf of Mexico for more than 50 years.

Today, although Chevron explores for -- and produces -- oil and natural gas in 23 countries, about 18 percent of our total oil and equivalent gas production comes from the gulf.

The Gulf of Mexico has long been a major contributor to Chevron's financial health and remains our single-largest producer of cash. Over the past seven years, our North American exploration and production operations have delivered $7 billion in cash to the corporation. Much of that has come from the gulf.

Chevron is the top leaseholder and producer in shallow waters of the gulf. Even though this is a mature area, new technology is helping us find more oil.

In fact, just last week we announced the discovery of a significant new natural gas trend offshore Mississippi. The Viosca Knoll Carbonate Trend is noteworthy for two reasons -- first, because of its large size, and second, because it is the first offshore natural gas discovery made in this particular geologic zone. It's probable that there are other, yet-undiscovered reserves in the area.

However, it's the deepwater area of the gulf that is causing the greatest excitement. This area now is one of the world's great frontiers and is luring companies from around the world. We feel it has the potential to yield giant oil fields in the 500 to 700-million-barrel range.

Chevron holds an excellent position in deepwater leases. In 1990, we had just 16. Now we have 427.

Finally, we have two deepwater projects under construction that Vice Chairman Jim Sullivan will tell you more about.

And so -- it is terrific to have an Annual Meeting in any area that is so important to our company's past and future.

Last year was the most successful year in Chevron's 118-year history. Net income was $3.256 billion -- up an impressive 25 percent over 1996. And we reached our $3 billion earnings goal one year ahead of schedule.

Our Return on Capital Employed was 14.7 percent. 1997 was the second straight year that we topped our goal of 12 percent.

Most of our businesses had excellent financial results last year. Almost every segment played a part in our success. And we plan to build on these many success stories. This is the theme we selected for our 1997 Annual Report.

Now . . . let me describe a few of our special success stories. A star performer in 1997 was Chevron Products Company -- our U.S. refining and marketing company -- which had its best year since 1988. It earned $645 million, more than double the 1996 results.

The company kept its focus on three key things -- emphasizing the value of the Chevron's brand, reducing costs and maintaining incident-free operations. Those -- combined with higher gasoline prices and improved sales margins -- produced excellent results.

The good showing of our international exploration and production operations received a major boost from our Tengiz Field in the Republic of Kazakhstan. 1997 was our most successful year to date at Tengiz -- with production averaging 155,000 barrels a day. Chevron's share of earnings from the joint venture was more than $160 million.

This giant field has enormous potential -- 6 to 9 billion barrels of recoverable oil. This chart shows you how production has climbed steadily each year over the past five years.

And on March 18, the field set a production record of 195,000 barrels of oil a day. By 2000, it should reach 250,000 barrels a day. Our longer-range goal is more than 700,000 barrels a day.

The key to unlocking the full potential of Tengiz is building a major export pipeline. Chevron holds a 15 percent interest in the Caspian Pipeline Consortium, which will build a 900-mile pipeline to the Black Sea port of Novorossiysk. At present, the pipeline is set for completion by late 2000.

Not only did our exploration and production units worldwide contribute financially, they also set production records in many areas and made major additions to Chevron's oil and gas reserves.

At nearly 1.5 million barrels a day, overall production was the highest in 12 years.

Chevron replaced 142 percent of the oil and gas it produced -- excluding sales and acquisitions. That made 1997 the fifth straight year that replacement topped production. As you can see, over the past five years, Chevron has had the best reserves-replacement rate among its peer competitors.

At year-end our worldwide proved reserves stood at nearly 6.2 billion barrels of oil and equivalent gas.

A major source of our increased production and added reserves is West Africa. We're particularly excited about the deepwater areas offshore Angola and the Republic of Congo.

We made two new giant discoveries last year in deepwater Block 14 offshore Angola -- Kuito and Landana. Kuito could hold 500 million to 1 billion barrels of oil, and appraisal work continues on Landana. These may well be the largest new oil discoveries for your company in years.

We also made discoveries in the same geologic trend in our concession offshore the Republic of Congo.

Our outstanding financial returns also have been helped by lower operating costs. Reducing costs has been a major part of our overall strategy for several years, and since 1991, we've cut our annual operating expense by $1.8 billion.

1997 was a breakthrough year. After three years when our unit per-barrel costs stayed relatively flat, we cut them last year by 7 percent. Overall, we sliced some $400 million from our cost structure. Our new goal is a further 40-cent-per-barrel reduction over the next couple of years.

But success isn't built just on lower costs. Success is built on growth. I think we've struck a good balance, and we'll continue to focus on both cost reduction and growth.

A fundamental driver of this company is to provide you a total return that's higher than any of our key competitors. Total stockholder return is the combination of stock-price appreciation, plus dividends.

1997 also produced excellent results, with our total return being 22.1 percent. As you can see, for the past nine years -- 1989 through 1997 -- we hold that top spot among our peer competitors, with a total return of 19.2 percent. Competition in this industry is very tough, but we're fully committed to the goal of continuing to be number 1.

All in all, 1997 was a year for records and superlatives. Earlier this year, we were able to increase our dividend -- the 11th straight year of dividend increases.

But . . . one thing I've learned over my years is that the oil business is an industry of ups and downs. There always have been cycles of good and not-so-good years, and I think there always will be.

Unfortunately -- after two great years, our first quarter results were disappointing.

Our net income was $500 million or 77 cents a share -- a decline of about 40 percent from 1997's first quarter.

Operating earnings -- excluding special items -- were $436 million, down 46 percent from last year's first quarter.

The main reasons for this drop in earnings were the sharply lower prices for crude oil and natural gas. Foreign currency losses and planned maintenance at two of our major U.S. refineries also took their toll.

As I discussed earlier -- we continue to focus on reducing our costs, which is more important now than ever during this time of low crude oil prices. In the first quarter this year, crude oil prices were about $7 a barrel lower than in 1997. Natural gas prices were down 68 cents per thousand cubic feet. Operating expenses were down to $5.52 a barrel this past quarter -- a drop of 41 cents from a year ago.

Our worldwide exploration and production earnings were particularly hard hit by the price drop. Earnings were $665 million in last year's first quarter, compared with $261 million this year -- a difference of about 61 percent.

On the positive side, our international liquids production continues to grow. During the first three months of 1998, production increased 2 percent over last year's first quarter -- to a total of 746,000 barrels a day. Worldwide production was more than a million barrels a day.

In spite of the low crude oil prices, we're continuing to be very active in all areas of our business. I believe that Chevron has better long-term growth opportunities than any of our competitors.

Now, I'd like to turn the mike over to Vice Chairman, Jim Sullivan, who is going to take you on a tour of the highlights of our worldwide operations and show you many of these growth areas.

(Mr. Sullivan speaks. Mr. Derr returns to the podium)

Thank you, Jim.

I hope that after that tour -- fast as it was -- you're as excited about Chevron's opportunities as I am.

Even though crude oil prices started down late in 1997, we had enough confidence in Chevron's opportunities to set the largest capital and exploratory budget in our history -- $6.3 billion.

And although prices continued to slide during the first quarter -- I don't think we'll be making any significant changes in our planned spending, and we're moving ahead with our many very attractive opportunities.

I don't think the current situation represents a structural change in oil prices. Rather, we believe this is one of the industry's periodic downturns. As you can see in this chart, oil prices do tend to go up and down.

Prices have improved some in the last month, and I think they'll be back over $18 a barrel in the next few months.

Our plans call for spending nearly $4 billion on exploration and production projects worldwide. About $1.5 billion of that will go to U.S. projects, focusing primarily on the deepwater areas in the Gulf of Mexico.

We also plan to invest about $1.1 billion in our worldwide refining and marketing operations, with more than half earmarked for the United States.

Finally, about $800 million will go for worldwide chemicals projects.

No matter where we operate, Chevron conducts its business according to a set of values and principles called The Chevron Way.

Our special five-year program, "Protecting People and the Environment," is a part of The Chevron Way. It emphasizes that our goal is to be the industry leader in safety and health -- and to be recognized worldwide for environmental excellence.

We've made great improvements in our safety program. We've cut our employee incident rate nearly in half since 1993. In human terms -- which is what really counts -- that means that last year there were about 665 Chevron employees who did not get hurt, compared with our incident rate in 1993. Our goal is to have the best safety record in the industry.

In 1997, we met another important goal when we succeeded in implementing the "Protecting People and the Environment" program at nearly every one of our locations around the world.

This program has established a systematic approach for improving Chevron's health, safety and environmental performance. It defines 10 key areas of performance, which are supported by 102 specific management practices. And each of these practices is integrated into local management systems. I don't think any other major oil company has a process comparable to ours.

Chevron has received many awards for its environmental excellence. One of the most recent is from the Bureau of Land Management. We were awarded the 1997 National Health of the Land award for our operations in part of Louisiana's Delta National Wildlife Refuge.

We know that 1998 is going to be a difficult year. But I remain confident in Chevron's future. One of the reasons that I'm confident, is that Chevron has such a solid foundation on which to build success. Not only do we have outstanding opportunities around the world . . . but we also have a committed team of very talented and hard-working employees.

I'm very proud of our employees . . . of what they've accomplished . . . and of what they will accomplish in the future. I try to take every opportunity that I can to thank them.

This is a good time to introduce you to several of Chevron's truly outstanding employees. Their remarkable efforts have earned them the Chairman's Award. Will you please stand and be recognized.

They all deserve our thanks and a generous round of applause. Thanks to all of you.

I'd also like to thank all of you here today for your attention . . . and I thank all Chevron's stockholders for their terrific support. Thank you.

I will now entertain a motion for adjournment.

All in favor say "aye."

The meeting is adjourned. Thank you all for coming.

Updated: April 1998