The Energy To Grow

By David J. O'Reilly, Chairman of the Board and Chief Executive Officer
Chevron Corporation

Annual Meeting of Stockholders

San Ramon, California

Also see a press release regarding this speech.

Thank you for that report, Jim. And thanks to Dick Matzke for the update of the Caspian. When viewed together, those projects certainly paint a very positive picture. As Jim's presentation illustrated, Chevron's worldwide portfolio is strong and contains significant growth opportunities in all aspects of our business.

Today, I want to talk about how we're going to make Chevron even stronger in the future. I'll talk briefly about: the business environment, our business objectives and our priorities for the future.

Business Environment

Let's begin with the business environment.

Anyone who follows Chevron knows that we operate in a cyclical industry that changes frequently as world events affect oil supply and demand.

On this chart, you can see that crude oil prices have been extremely volatile over the last 15 years. In the last two years, we've seen prices hit a low of around $11 per barrel in 1998 and a peak of $34 in March of this year.

At this time last year, OPEC had just agreed to reduce production, following a prolonged period of extremely low prices. Prices rose steadily last year until March's peak.

OPEC's decision last month to increase production by 1.7 millions barrels per day has brought down the price of crude to about $26 per barrel. It's worth noting that OPEC has stated a commitment to maintaining the current pricing level.

Despite the recent volatility, we believe that the outlook for energy demand for the coming decade is good.

Economies are recovering worldwide, with gross domestic product growth approaching pre-1998 levels. Most of the Asian economies have resumed economic growth and energy demand has been increasing.

We are bullish about the outlook for energy demand. Growing economies need supplies of clean, affordable energy. Chevron is well positioned to help meet that need.


Our objective is to be No. 1 in Total Stockholder Return (TSR) for the years 2000 to 2004. Given the increased level of competition, this is an aggressive goal, but it's one Chevron has achieved before, and it's one I am confident Chevron can achieve again.

We're focusing heavily on two things: First, we aim to grow earnings faster than our competitors -- approximately 15 percent per year over the next three years. Secondly, we want to ensure that we provide an adequate return on the funds we invest in the business. We have committed to achieve a minimum of 12 percent return on capital employed.

As you can see from this chart, no one is off to a good in start in terms of Total Stockholder Return in the year 2000. This is how we stacked up versus our new competitors at the end of the first quarter. Most stock prices have experienced a difficult start to the new millennium, but it is early yet.

I'm convinced that by focusing on the right business drivers we will be successful. So, I'd like to turn to those now.

Chevron's Priorities for the Future

Chevron's strategy for improving performance and outperforming our competitors involves four priorities:

  • operational excellence
  • cost reduction
  • capital stewardship
  • profitable growth

All of these priorities are driven by organizational capability.

Operational Excellence

First and foremost, we want to achieve operational excellence. This means the safety, reliability, and efficiency of every aspect of Chevron's worldwide operations.

Dick Matzke already mentioned it, but it bears repeating. Our people in Tengiz worked over 7 million work hours without a lost-time incident. That's what we're striving for: zero injuries, incident-free operations, employees going home safe to their families at the end of the day.

Equally as important is the reliability and efficiency of all our operations, making sure that all of plants are running and running well.

Operational excellence is essential to meeting our earnings growth goals. This is an area in which we need to do better. And we will -- by ensuring that the appropriate processes are in place and that every employee is fully engaged.

Cost Reduction

The second priority I'd like to discuss is cost reduction.

Chevron has a strong track record in this area. Since 1991, we've reduced our per-barrel operating expense by 26 percent. That's almost $2 a barrel.

The good news is that we know we can find new ways to reduce costs because we've found them before. Over the last seven years, we've reduced our annual energy costs by $200 million, achieving an additional $26 million savings in 1999.

Under our Global Procurement initiative, we're reducing costs by leveraging companywide buying power. We saved about $100 million in 1999, and I believe we can double that this year.

Through the Chevron Retailer Alliance, we're using the Internet to reduce costs and improve relations with our nationwide network of retailers.

Reducing costs has been very important in helping us achieve financial goals in the past, and it will extremely important in meeting our TSR objective.

Capital Stewardship

In addition to cost reduction, we plan to be very good at capital stewardship.

Chevron will invest more than $25 billion in our business over the next five years and it's important that we make the right decisions about how we spend every single dollar.

In short, our strategy is to select high-return investments and execute them safer, faster and with lower costs than our competitors. The stakes are enormous, and how well we execute will have significant impact on our bottom line.

We have numerous experiences to draw from where capital stewardship has led to some very meaningful results on large-capital projects of huge importance to the company:

In the North Sea, our Britannia project won an award for efficiency in large-scale construction and was brought in nearly 20 percent under budget.

In Saudi Arabia, a $650 million project using our Aromax technology was safely started up ahead of schedule and under budget.

And in the deepwater Angola, the Kuito project was brought onstream faster and at less cost than the industry average.

Profitable Growth

Profitable growth is another priority for Chevron, and our approach is two-fold:

First, we plan to organically grow our basic businesses.

Probably the best example we have is in our international upstream where we've been able to achieve annual volume growth rates of about 8 percent or more during the last decade. And as Jim mentioned earlier, we've been able to grow our U.S. gasoline and retail business at about 5 percent a year even though the market's been growing at a slower rate.

Our second strategy to generate profitable growth involves selectively growing our other businesses.

We're breaking into new areas and new kinds of business on our own and also through alliances and partnerships. Jim highlighted several projects that support this objective:

  • Dynegy's merger with Illinova,
  • our Chemical Co.'s joint venture with Phillips,
  • our strategic acquisitions in Thailand and Argentina,
  • our efforts to increase our presence in future energy industries like gas to liquids.
  • and leveraging e-business technology to not only reduce costs but also improve profitability.

Organizational Capability

Finally, there's organizational capability, and it's really the driver for the other four priorities. This is the people side of the equation, and quite frankly, none of our priorities are possible without it.

Organizational capability is all about our know-how and the competencies and skills of capable people. True capability comes from integrating people, skills, and processes to create competitive advantage for Chevron.

It's our intent to be recognized for the unique way we combine people, technology and partnerships to achieve results. Through our people we can achieve operational excellence, reduce costs, leverage our capital investments and build profitable growth.

I am proud to say that in all of our efforts we'll continue to be guided by our values found in The Chevron Way. Here, you see our Mission: To create superior value for our stockholders, customers, partners and employees. But the Chevron Way is more than that. It's our respect for people, diversity, and concern for our neighbors and the environment.

These are the values that guide us around the world. Communities, business partners and the host countries where we do business understand that. I truly believe Chevron's reputation is a competitive advantage.

I'd like to close with some thoughts about the value of energy.

Energy is essential to driving the economies of the world. It sustains societies, gives us our mobility and improves people's lives in developing countries.

Oil and energy helped drive the economic expansion of the last 10 years, and it will help power the new century.

Experts see demand for all kinds of energy growing steadily over the next 20 years, so we're going to need more oil and natural gas.

We're very optimistic about the future of energy. I trust that you share our enthusiasm about the opportunities before us.

We're confident that Chevron has the assets, the potential and the strategies to be a top performer in the future.

Updated: April 2000