Downstream: Expanding Business Boundaries

By James N. Sullivan, Vice Chairman of the Board
Chevron Corporation

Annual Meeting of Stockholders

San Ramon, California

Also see a press release regarding this speech.

I have the pleasure of telling you about Chevron's worldwide refining, marketing, transportation and chemicals operations — what we call the "downstream."

Let's look at operations in the United States first. For the second straight year, refining, marketing and transportation posted strong profits. 1998 operational earnings were $633 million.

Branded gasoline sales volumes increased 5 percent in 1998, while operating expenses dropped by 25 cents a barrel. In addition, convenience store sales climbed more than 30 percent.

Chevron remains No. 1 in the United States for asphsales and No. 1 in the West for aviation fuels and diesel. Based on earnings, measured in dollars per barrel of sales, Chevron Products Co. ranks No. 1 among seven competitors.

We're addressing public concerns about the gasoline additive MTBE by supporting a "fast-track" plan to reduce and eliminate it from California gasoline. Legislation by Sen. Feinstein and Rep. Bilbray, along with the backing of Gov. Davis, can make this happen.

The retail business is extremely competitive and exciting. We're redefining our business in ways that strengthen the Chevron brand. We don't just sell gasoline. We provide convenience to motorists. Besides fuel, that can include convenience stores, take-home meals, coffee and automated teller machine services.

We have about 700 company-operated convenience stores. We're increasing the average store size, and we plan to double the number of these larger stores by 2001.

We have more than 100 co-branded sites with McDonald's, and last year we introduced Foodini's, a food market that provides freshly prepared take-home meals. There's one right down the street at the corner of Bollinger Canyon Road and San Ramon Valley Boulevard. I hope you all got your discount coupons. It'd be a great place to stop after today's meeting.

We've also agreed to update and sponsor Disneyland's Autopia, which features kid-size cars. This is in keeping with the friendly brand image of our successful toy-car ads. In fact, Disneyland will create a new video area that highlights our toy cars.

We are a major sponsor of the San Francisco Giants, and we are the only oil company with signage and promotional rights. Look for the Chevron name next April when the new stadium opens.

E-commerce — that's commerce using electronic media — is transforming business. With our new Chevron Retailer Alliance we can use the Internet to conduct transactions with dealers and jobbers and provide them with information and training. This saves time, money and paperwork.

At our U.S. refineries, our attention to safety and equipment reliability has paid off. In 1998, the cost of incidents was down $100 million a year compared with 1994. During that same period, our refineries increased gasoline yield 10 percent.

We did have a serious fire at the Richmond Refinery on March 25. Fortunately, it was quickly contained, and there were no injuries. We apologize for this incident. We're carefully investigating the cause and remain committed to safe and environmentally responsible operations.

In September, our Pascagoula, Miss., refinery was hit by Hurricane Georges, shutting down operations for more than two months. Despite this setback, U.S. refining employees recorded their safest year ever.

Our lubricants business made some strategic moves in 1998. In June, with the purchase of Amoco's lubricants business, Chevron became one of the largest North American marketers of branded finished lubricants.

In November, we formed a joint venture with Texaco combining our fuel oil and marine lubricants businesses. The new company — Fuel and Marine Marketing — will have offices in 18 countries and serve customers in more than 100 countries.

Outside the United States, refining and marketing had plenty of challenges in 1998. Weakness in Asian economies pressured Caltex, our joint venture with Texaco.

Accurately predicting an Asian recovery is no easier than predicting the price of oil. However, we're expecting a gradual increase in product demand through 2005.

Meanwhile, Caltex has taken decisive steps to reduce costs, be more competitive and, literally, be closer to the action. Its leadership team has relocated from Dallas to Singapore as part of a major reorganization that's expected to save $50 million a year.

Chevron Chemical Co. also had a tough year — but with some bright spots: We began operations of a new fuel additives plant in Singapore and are nearing completion of a petrochemical complex in Saudi Arabia.

Due to industry overcapacity and low demand, notably in Asia, earnings declined more than 30 percent.

This down period in a cyclical business is not unusual, and we have a strategy to counteract it: We've slowed our plans for international growth, and we're moving Chemical's headquarters from here in San Ramon to Houston. The relocation, along with organizational and process changes, will yield annual savings of $76 million.

We're also creating more efficient organizations elsewhere. Our pipeline company is consolidating offices into one unit in the Houston area.

We've created an integrated lab technology group that combines upstream and downstream capabilities. And we're closing our La Habra technology facilities and transferring most of the staff here to San Ramon.

In August, we announced plans to sell P&M Coal Co. and currently are considering a number of offers.

As you can see, there's plenty of change going on. Now, change can be unsettling. But it's also exciting, if you have clear goals. And we do.

Let me close on a more routine note. Our shipping company once again turned in a stellar safety performance. Chevron Shipping Co. spilled just two-and-a-half barrels of oil out of more than 575 million transported in 1998. For them, excellence is routine, and that's just fine with us.

Thank you very much. And now I'd like to turn the podium over to Dave O'Reilly.

Updated: April 1999