Reasons For Optimism: Chevron's Worldwide Operations

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

Annual Meeting of Stockholders

San Francisco, California

Thank you, Ken . . . and good morning and welcome everyone.

As Ken said, I'm going to give you an overview of Chevron's worldwide operations. Oil companies traditionally divide their business into upstream and downstream activities. Generally speaking, upstream is everything that happens before the oil or gas is ready to be shipped -- exploration and production. Downstream is everything that happens afterward -- transportation, refining, marketing.

For the past several years, Dennis Bonney and I have divided this report. Dennis took the upstream, and I did the downstream. But Dennis retired as Vice Chairman in December after 35 years of service, and he's now much more concerned with family and volunteer activities. (Dennis, please stand up and give a wave.)

So . . . I'm flying solo. Speaking of which, during the past month, I've logged more than 28,000 miles visiting Chevron operations in 8 countries on 4 continents.

Some people may still think of Chevron as a West Coast company. If you have any doubts that this is a global operation, let me assure you that it is.

This slowly turning globe shows you where we do business . . . in about 95 countries. The yellow dots show our upstream operations in 25 countries, the red dots show our downstream activities in more than 60 countries and the green dots indicate other important operations -- such as chemicals, coal, shipping and pipelines.

But let's stop the globe in the United States while I give you the highlights of our U.S. refining and marketing operations.

However, still thinking internationally, Chevron Products Company dropped the "U.S.A." from its name following changes that formed a global lubricants business, an international technology marketing group . . . and a better integrated crude oil supply and trading function.

By the way, how many of you have seen our award-winning TV commercials featuring talking cars? They tell the story of Chevron's gasolines with our additive, Techron -- gasolines unsurpassed at reducing emissions and protecting vehicle performance.

If you didn't get a chance to visit the lobby display before the meeting, try to stop at booth afterward. You also can pick up a label pin of one of the automotive actors in our commercials and an activity book that will help keep kids entertained on trips. And starting May 24th, you'll be able to buy toy cars at your service stations.

One of the marketing highlights of the year was signing an alliance with McDonald's in 12 Western and Southwestern states. We're now operating 19 sites similar to this one in Shreveport, Louisiana, and many more are planned.

In California, we're now using a new gasoline. By June first, all gasoline must meet the state's new standards -- the nation's toughest. Chevron has been gearing up for this for a long time, investing more than $1 billion to upgrade and modify refineries. I'm sure many of you are buying this new product at your local Chevron station.

These new fuels are more complex and cost more to make. In fact, the state estimates the added cost at 5 to 15 cents a gallon.

However, these cleaner-burning fuels cut exhaust emissions 15 percent. That's like taking 3 and a half million cars off California's roads.

Outside North America, most of Chevron's downstream operations are through Caltex. We own half of this highly successful company, which operates in more than 60 countries. Many of the Caltex operations are in the fast-growing Asia/Pacific area, where demand for petroleum products is growing 4 to 6 percent a year -- more than twice the rate in the U.S.

Last month, Caltex completed the $2 billion sale of one of its refining affiliates in Japan. Chevron received a dividend of $550 million and will report a gain of $325 million in our second quarter earnings.

Caltex also is in the midst of an aggressive plan to invest $8 billion over five years to build, expand and upgrade facilities and to move into frontier markets. The new facilities include the Star Refinery in Thailand, which is scheduled to start operations next month.

Early this fall, Caltex also will roll out a bold new image for its more than 4,200 branded service stations. This prototype station in the Philippines is already selling gasoline.

Now, let's turn our attention to Chevron's worldwide exploration and production activities . . . and let's turn the globe around to South America.

In one of Chevron's most innovative new ventures, we have formed an alliance with Venezuela to operate the Boscan oil field. Our expertise in heavy oil production, our past experience and our environmental record were key selling points.

Crossing the Atlantic to Great Britain -- another locale I visited -- Chevron's North Sea activities continue to grow. Our new Alba Field, which started-up in 1994, is producing 80,000 barrels today and will produce more than 100,000 barrels a day by the end of the year. Next on line will be the giant Britannia gas field, which lies beneath Alba. First production is scheduled for late 1998.

Moving again . . . West Africa is one of the places I visited last month. I was in Angola, where production reached a record high of 420,000 barrels a day last year, and we agreed on a 450,000 barrel-a-day goal by year-end. This also is an area with many new, exciting prospects.

Just north -- and on the same geologic trend -- one of our newest and largest discoveries lies offshore Congo. In fact, the N'Kossa Field is scheduled to start up next month with initial production of 50,000 barrels a day. Late last year, another prospect -- Moho -- was discovered just 9 miles west, and it may be significantly larger.

Still farther north . . . in Nigeria, crude oil production continues strong. In addition, work is progressing on the Escravos Gas Project. When Phase 1 is on line next year, the project will sell 170 million cubic feet of natural gas a day and 7,000 barrels of gas liquids a day.

Traveling east, we come to Kazakhstan, which I also visited. Among other things, I was there to help celebrate the third anniversary of our joint venture to develop Tengiz, one of the world's largest oil fields.

Recently, we've had extremely good news from Tengiz. First, production averaged 83,000 barrels a day during the first quarter and reached 100,000 barrels a day in March. This made a positive contribution to our first quarter earnings.

Then in late April, we signed a joint protocol for a 15 percent interest in a pipeline consortium to carry crude oil from the field to the Black Sea port of Novorossiysk. This will enable us to expand the field's production.

This is a major milestone. We've worked for a long time to reach an agreement on expanding this pipeline system, which will help unlock the rich petroleum resources of the region. We still have lots of details to attend to during the next few months, but we are very optimistic.

The potential of this field is enormous. It holds an estimated 6 to 9 billion barrels of recoverable oil.

But now -- the turning globe brings us to Indonesia. I did not have time to visit there. But Ken did. He went last summer to help commemorate the 1 billionth barrel of oil produced from the giant Duri Field. It's estimated that there are still 2 billion barrels to go.

Indonesia has been an area of importance for Chevron for decades, and today accounts for about 17 percent of our net liquids production.

Offshore China, two new fields have started production bringing Chevron's total to four, and daily production to 120,000 barrels.

Down Under, Australia, continues as an area of lively discovery and development. Appraisal drilling continues on the huge Gorgon gas field. It may be developed as a stand-alone project or an expansion of the North West Shelf Project. That project is a highly successful liquefied natural gas plant, the largest commercial venture ever undertaken in Australia.

In Papua New Guinea, we're developing two new fields and exploring nearby areas. Drilling continues in the Kutubu fields to maintain production levels.

Returning to North America, work on the massive platform that will tap the Hibernia Field offshore Canada's east coast continues on schedule. First oil is expected late next year.

Well, we've made it around the world and returned to the United States.

Over the past few years, our strategies have called for an increasing emphasis on our international upstream activities. However, we need to remember that more than one-third of our net liquids production still comes from the U.S. In spite of the fact that the U.S. is a mature exploration and production region . . . and in spite of government restrictions . . . there still are exciting new prospects.

The Gulf of Mexico remains one of our more attractive areas. Chevron's shallow-water holdings are the largest in the Gulf. By the way, we define "shallow" as less than 600 feet.

Some of the most productive shallow-water areas are in the Norphlet Trend, which stretches some 80 miles from Mississippi to Florida. In fact, we've just finished testing the third successful well in the Destin Dome area offshore Florida, and we're proceeding with development plans.

The frontier area isn't that far away -- as the crow flies. However, as the fish swims it's a long way -- mostly down. Some of our greatest U.S. opportunities are in the deep waters of the Gulf. Our first project -- Green Canyon 205 -- is in water one-half mile deep.

Last year, we also participated in three other deep-water wildcats, two of which were successful. One -- Gemini -- is being tested. Early results are very encouraging. Chevron holds a 40 percent interest in this discovery.

Encouraged by these successes, Chevron placed nearly 10 percent of the bids in a record-breaking Gulf of Mexico lease sale held just a couple of weeks ago. We spent $41 million and acquired 114 new leases. These will give us great opportunities for future growth.

I'll just mention one more attractive U.S. area -- the Pakenham gas field in West Texas. We acquired this field just two years ago. We drilled 26 wells last year and plan another 30 this year. We're projecting daily net production of 70 million cubic feet a day by 1999.

Well that finishes our worldwide -- or should I say, whirlwind -- tour of Chevron's downstream and upstream operations. I didn't have time to mention all the significant projects, but you can find more information in our Annual Report.

However, I can't conclude without a few words about two other Chevron companies.

One is Chevron Chemical Company, which had outstanding financial results last year with record revenue, earnings and cash flow. The chemical business is highly cyclical, and Chevron took full advantage of the top of the cycle. Demand for most petrochemicals outpaced supplies.

Chevron is expanding three of its plants. In Texas, at Port Arthur and Cedar Bayou, and in Ohio at our Marietta facility.

The company continues to improve its efficiency, and last year consolidated two of its three divisions. It also created a new international group to pursue growth ventures.

Finally, I'd like to highlight the outstanding safety performance of our shipping company, which has earned its reputation as the safest, best-maintained and most efficient fleet. Last year, Chevron-owned and chartered tankers carried 540 million barrels of oil. And spilled less than one and a half barrels.

Let me put that into perspective. That would be like going to your local Chevron station and filling a 20-gallon gas tank 500 times. And spilling just one drop. Very impressive.

That remarkable accomplishment -- like all the others I've mentioned today -- is possible only because of Chevron's employees. I'd like to thank them for another outstanding year of hard work. Not just hard work -- excellent work.

I'd like to thank all Chevron's stockholders for their continuing support.

And -- finally -- I'd like to thank all of you for your attention today.

Now, I'll turn the mike back to Ken for a few additional comments.

Back to Ken Derr's speech

Updated: May 1996