After 125 Years, What's Next for Big Oil?

By Arthur O'Donnell, Editorial Director, Energy Central

I come from an oil town. Not one of those dusty boom-and-bust drilling patches like Crawford, Texas, or McKittrick, California; my hometown of Bayonne, New Jersey, is an urban port that saw its first petroleum refinery built in 1875, with a direct pipeline connection from the Tidewater Oil producing fields to the processing plant.

For over two decades at the start of the past century, Bayonne hosted the world's largest refinery, part of John D. Rockefeller's Standard Oil empire, until it was supplanted by Baton Rouge's massive refinery complex in the 1920s. One of the earliest motion pictures created by Thomas Edison's nascent film company was a 98-second documentation of the July 5, 1900, fire at Standard Oil that burned for three days after lightning struck one of the holding tanks at Constable Hook in Bayonne.

The port town's proximity to rail lines and the major metropolitan centers of New York City, Newark and environs, and its longstanding role as port-of-call for the U.S. Navy, gave the local oil industry both ready access to commercial markets and a seemingly never-ending stream of federal contracts to ship, receive and refine fuels for the naval fleet. The largely European immigrant population provided an abundance of workers. Even during the Great Depression, the work was steady and the pay was good.

Once, during the year that I learned the word “ecology” and what it meant, I made a nasty comment about the acrid refinery smell. “That’s the smell of jobs,” my older sister responded.

Oil and blood mix in Bayonne. Before she married, my mother worked for “The Texas”—also known as Texaco—as a receptionist, then stenographer and typist. Her father had been a crane operator on the docks, unloading fuel and refinery materials.

Even after she had left the company to raise her brood, she enjoyed such company perks as tickets to the Texaco Star Theater radio broadcasts in New York in 1941 and 1942. After the war, Texaco Star Theater provided the vehicle for the new phenomenon of television as the commercial sponsor of the hugely popular Milton Berle show from 1948 through 1953. Even though Buick automobiles later became the show’s sponsor, people still tend to associate Texaco with Berle. It could be because of the catchy jingles that heralded Uncle Miltie’s weekly entrance on stage in some outlandish costume to perform an equally outrageous skit.

“We are the men from Texaco,” sang a merry troupe of uniformed service-station attendants each week. “We work from Maine to Mexico.” Also, “You can trust your car to the man who wears the star; the big, bright Texaco star.”

Like Bayonne, Texaco’s roots in the oil industry go deep. In fact, this month, the corporation now called ChevronTexaco celebrated its 125th anniversary, tracing its genesis to the Pacific Coast Oil Company in 1879. Pacific Coast was one of the many smaller firms eventually rolled up into the Standard Oil behemoth, and a part of what became Standard Oil of California (Socal), after the corporate holding company lost the federal government’s landmark anti-trust case. The Texas Fuel Company, later Texaco, was founded in 1902 and opened its first auto service station in Houston in 1911.

Separately, the firms were members of an exclusive club of oil producers called the Seven Sisters and extended their operations throughout the world. A joint venture between Socal and Texaco in the 1930s eventually became the Saudi Arabian giant Aramco. Consolidation among the sisters accelerated in the1980s and since: in 1984 Texaco bought Getty Oil, while Socal merged with Gulf Oil to become Chevron Corp. Then in 2001, Chevron and Texaco merged to become the second largest U.S. oil company, with over $133 billion in annual sales and a market capitalization of around $115 billion.

Oil is still the firm’s lifeblood and is tied to its destiny. Superimpose a chart of ChevronTexaco’s (trading symbol CVX) stock prices with one depicting world oil prices and you’ll see a remarkable similarity. From the mid-30’s stock prices of a year ago, CVX this week hit $53.43 per share (there was a 2/1 stock split in September, as well). NYMEX oil futures contracts for December hover at $53.33/barrel.

Like virtually all other petroleum companies, ChevronTexaco sees a rosy financial present but an uncertain economic future. Extreme prices and profits now may translate into lower sales of its key products and increased demands from government and consumers, just as the twin energy crises of the 1970s caused oil to lose its hold as the dominant fuel for domestic electric power generation and home heating.

Like its cohorts, some people within ChevronTexaco envision a time in which oil might not be the dominant fuel source for transportation. There are still plenty of other markets for petroleum products, from fuels and lubricants to fertilizers and construction compounds. Bayonne no longer hosts any ChevronTexaco offices, but an asphalt manufacturing plant is just a short boat-ride away at Perth Amboy, N.J.

The future direction, however, is somewhat less clear than a quart of virgin Havoline-brand motor oil. These days, the firm has great expectations for a credit card with the ChevronTexaco logo as a future revenue generator.

ChevronTexaco is also deeply involved in non-oil energy, from coal gasification to cogeneration to energy efficiency and renewable resources. Nearly 50 power projects around the world burn natural gas and other fuels to provide 3,500 MW of electric capacity. Over 70 commercial gasification plants convert coal, petroleum coke and refinery residues into environmentally acceptable fuels. The company has even entered a joint venture with BP (formerly British Petroleum) for a 22.5 MW merchant wind farm in the Netherlands.

Among the newest corporate subsidiaries is Chevron Energy Solutions, the San Francisco-based energy services provider that targets such public-sector institutions as schools and government agencies for energy efficiency and renewable power installations. Energy Solutions was formed after Chevron purchased PG&E Energy Services, the unregulated retail marketing of Pacific Gas & Electric Corporation, in 2000.

Jim Davis, president of Chevron Energy Solutions, told me that the unit brings in over $200 million each year in revenues and is tiny but a profitable contributor to CVX’s bottom line. “We’re probably within the rounding error,” he joked.

The firm relies on “performance contracts” with its clients, using the money that is saved by conservation and efficiency measures to pay for the installations and its fees. Contracting with federal agencies has been a big component of its business, despite the on-again, off-again availability of federal procurement contracts for energy efficiency. Prior to the sunset of the previous government procurement laws, Energy Solutions booked over $100 million in federal contracts, including a $30 million deal for steam system decentralization at the Piccatiny Arsenal—an historic N.J. armory that dates back to Revolutionary War times. The entire package at three military bases is expected to save taxpayers up to $150 million.

Restoration of the procurement process, incorporated into a recent military installation authorization bill, portends even more opportunities, said Davis. “As soon as President Bush signs the bill, we’re back in business,” he said.

Earlier this month, Energy Solutions also announced a $6 million contract to conduct efficiency and install solar photovoltaics at the West Sacramento processing center for the United States Postal Service. The improvements, according to the company, will reduce annual electricity purchases by more than $615,000 and power consumption by the facility by one-third, or about 5.5 million kilowatt-hours per year. They also will lower natural gas use by about 43,000 therms per year. Together these reductions translate to avoided local electric utility emissions of about 3,900 tons of carbon dioxide annually, the equivalent of planting 1,100 acres of trees.

“Virtually everything we do is good for the environment,” Davis said in explaining the mission of Chevron Energy Solutions. “We use energy efficiency to reduce electricity consumption, and because we deal with the public sector, the savings go directly to taxpayers.”

Energy Solutions also works closely with other ChevronTexaco enterprises, Davis said. For instance, the unit advises oil-processing plants on how to be more efficient energy users. A refinery in Indonesia was plagued by near-daily power outages from lightning storms, until Energy Solutions applied “power quality” technologies to its operations. Another corporate subsidiary, ChevronTexaco Technology Ventures, invests in and develops emerging tech for renewables, advanced batteries, hydrogen fuel cells, and the like. Energy Solutions helps Ventures direct its projects into commercially viable products, Davis said. One example is the corporation’s 20 percent stake in Energy Conversion Devices and the UniSolar affiliate that makes thin-film solar PV. “We provide real commercial feedback and when technologies are commercially viable, we are a channel to the market,” Davis added.

The Bottom Line: ChevronTexaco has tied its future to efficiency, clean fuels, cogeneration and renewables. Among the four remaining “big sisters” of the oil business, it joins Shell and BP as leaders in developing new, non-oil energy technologies (ExxonMobil appears to be the laggard of the bunch).

BP has spent over $500 million for PV developments worldwide in the past two years and reports a 17 percent global market share for solar technology production. Shell has made a $1 billion commitment to renewables, with over 250 MW of wind capacity installed and a 13 percent market share for solar PV. Both companies are pioneers in the trading of greenhouse gas emission offsets and have espoused emission reduction targets that exceed Kyoto Protocols for their global operations.

Right now, these types of ventures are the tips of the tails of Big Oil, but someday—not 125 years into the future but probably a lot sooner—they might be wagging the dogs. “I believe petroleum products will always be part of the energy equation,” Chevron Energy Solutions' Jim Davis concluded. “But a critical part of the equation will also be energy conservation and efficiency. Someday renewables will take a bigger percentage of the power market. We want to be in more things than just exploring for fuel, petroleum products and refining.”

Arthur O’Donnell is Energy Central’s Editorial Director. The Business Electric is found exclusively on Energy Central.

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