Chevron Corporation (CVX)

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The Chevron Corporation (NYSE: CVX) is the second largest energy company in the U.S. (behind Exxon Mobil) and is one of the six supermajor oil companies. With operations in 180 countries,^[1] it has a strong network of retail gas stations including Chevron, Texaco, and Caltex.^[2] As a vertically integrated oil company, Chevron's operations span from oil production to mining and petrochemical manufacturing.

Chevron is subject to strict environmental restrictions and has faced costly litigation for contamination of the environment. For example, it is involved in an ongoing class action lawsuit for contamination of the Ecuadorian Amazon rainforest, and the plaintiffs have claimed damages exceeding $27 billion.^[3] Chevron has also faced major challenges due to political instability in Nigeria, the largest oil exporter in Africa.

After the BP (BP) Deepwater Horizon oil spill, President Obama imposed a six month moratorium on deepwater oil drilling in the Gulf of Mexico. The six month moratorium limits Chevron's production capacity in the Gulf of Mexico since it can no longer operate oil rigs at depths of more than 500 feet. Other countries are following the lead of the United States; Norway, for example, has put a temporary halt to new deep-water exploration.^[4]

Chevron's long-term business model is threatened by the rise of renewable energy, especially as governments worldwide offer grants and subsidies to renewable energy companies. However, Chevron is one of the few oil majors that has embraced the possibility of a renewable future, and it is actively involved in pursuing alternative energy solutions.

Company Overview

Chevron is one of the largest integrated energy companies in the world, with operations in 180 countries.^[5] As a vertically integrated corporation, Chevron operates across the entire supply chain – from exploration and production to refining, marketing, and transportation of petroleum products. The company is also involved in the production of chemicals, generation of power, and mining of coal and other minerals.

Business Segments

Chevron's upstream operations consist of exploring for, developing, and producing crude oil and natural gas. Downstream operations include refining of crude oil, marketing, and transportation of finished petroleum products.

Crude Oil Production and Exploration

One of Chevron's primary operations is exploring for and producing crude oil. Chevron's producing areas include Angola, Australia, Azerbaijan, Bangladesh, Denmark, Indonesia, Kazakhstan, Nigeria, the Partitioned Neutral Zone between Kuwait and Saudi Arabia, Thailand, the United Kingdom, the United States, Venezuela, and recently, China.^[7] Exploration areas include offshore areas in western Africa, northwestern Australia, Brazil and Canada, the Gulf of Thailand, the U.K. Atlantic Margin and the U.S. Gulf of Mexico.^[7] Chevron's upstream activities in the United States are concentrated in California, the Gulf of Mexico, Louisiana, Texas, New Mexico, the Rocky Mountains and Alaska.

Chevron acquired three oil and gas exploration areas in the South China Sea from Devon Energy (DVN).^[4] Chevron is returning to the South China Sea after leaving it a decade ago when it failed to find significant oil reserves there.^[4] Interest in the South China Sea was reignited when Husky Energy (TSE:HSE) discovered an estimated four trillion to six trillion cubic feet of recoverable gas reserves.^[4] Husky has since drilled more successful wells and is planning to pump the first gas in 2013. Cnooc (China National Offshore Oil Corp.) estimates the area holds 22 billion barrels of oil equivalent.^[4] Water depths in the block, located 150 miles south of Hong Kong, range from 650 feet to more than 6,500 feet across an area spanning nearly about 2,700 square miles.^[4]

Gasoline and Refineries

Chevron’s global refining system can process more than 2 million barrels of crude oil per day.^[8] The system is anchored by seven core refineries located in key areas that make up more than 75 percent of the company’s total fuel-refining capacity.^[8] These core refineries are located in Singapore, Thailand, South Korea, Richmond and El Segundo, California, Pascagoula, Mississippi, and Pembroke, United Kingdom.^[8]

Chevron’s vast production and refining base is supported by a strong marketing network of retail gas stations spread across 90 countries, marketing petroleum products under the brands “Chevron,” “Texaco” and “Caltex” throughout the world.^[2] The company supplies directly or through retailers and marketers approximately 9,700 Chevron- and Texaco-branded motor vehicle retail outlets, primarily in the mid-Atlantic, southern and western United States. Approximately 500 of these outlets are company-owned or -leased stations.^[9] Outside the United States, Chevron supplies directly or through retailers and marketers approximately 15,300 branded service stations, including affiliates.^[9] Additionally, Chevron markets aviation fuel at more than 1,000 airports.^[9]

Natural Gas

Chevron is involved in every aspect of natural gas activities, including production, liquefaction, shipping, regasification, pipelines, marketing, power generation, and gas-to-liquid technology.^[7] Outside the United States, all of Chevron's natural gas sales are in Australia, Bangladesh, Kazakhstan, Indonesia, Latin America, the Philippines, Thailand, and the United Kingdom.

Chemicals

Chevron's chemical operations include the manufacture and marketing of commodity petrochemicals, plastics for industrial uses, and fuel and lubricant oil additives. The company owns and operates facilities in Brazil, France, Japan, the Netherlands, Singapore and the United States and has equity interests in facilities in India and Mexico. Oronite, a subsidiary of Chevron, provides additives for lubricating oil in most engine applications, such as passenger car, heavy-duty diesel, marine, locomotive and motorcycle engines, and additives for fuels to improve engine performance and extend engine life.^[9]

Mining

Chevron’s U.S.-based mining company produces and markets coal and molybdenum. The company owns and operates two surface coal mines in New Mexico and Wyoming and one underground coal mine in Alabama. The company also owns a 50 percent interest in Youngs Creek Mining Company LLC, a joint venture to develop a coal mine in northern Wyoming.^[10] In addition to the coal operations, Chevron owns and operates the Questa molybdenum mine in New Mexico. At year-end 2008, Chevron controlled approximately 53 million pounds of proven molybdenum reserves at Questa.^[10]

Power Generation

Chevron’s power generation business operates commercial power projects and has equity stakes in 13 power assets through joint ventures in the United States and Asia.^[10] The company manages the production of more than 2,300 megawatts of electricity at 11 facilities it owns through joint ventures.^[10] A number of the facilities produce steam for use in upstream operations to facilitate production of heavy oil. Additionally, Chevron has major geothermal operations in Indonesia and the Philippines and is investigating advanced solar technologies for use in oil field operations as part of its renewable energy strategy.^[10]

Geographic Segments

• Asia - 32% of oil production (770,000 barrels of oil per day)
• U.S. and Canada - 32% of oil production (745,000 barrels of oil per day)
• Africa - 18% of oil production (433,000 barrels of oil per day)
• Europe - 8% of oil production (179,000 barrels of oil per day)
• South America - 5% of oil production (115,000 barrels of oil per day)
• Australia - 5% of oil production (108,000 barrels of oil per day)

Trends and Forces

Environmental Concerns and Litigation

As one of the world's largest oil producers, Chevron faces litigation for pollution and contamination of the environment.

Ecuador

Chevron is being sued on behalf of 30,000 Amazon-basin residents in Ecuador on claims that Texaco Inc., which Chevron acquired in 2001, dumped more than 18 billion gallons of toxic waste from oil drilling in the jungle from 1964 to at least 1990.^[3]

In 1977, Ecuador’s state-owned oil company, Petroecuador, took a 62.5% stake in the field in question, though Texaco continued to operate it.^[11] In 1992 Petroecuador took over the whole operation and Texaco withdrew from Ecuador. Texaco agreed with the Ecuadoran government that it would clean up 161 pits, or its share of the total, at a cost of $40 million.^[11] The work was done by 1998 and the Ecuadorian government signed an agreement releasing Texaco from any further liability.^[11] Nonetheless, a class-action lawsuit was filed against Chevron under a 2003 Ecuadoran law.^[11] The case began in 1993 in New York and now is being handled in a court in Lago Agrio, Ecuador.^[3] The litigation holds Chevron responsible for 1,400 deaths from cancers caused by the pollution and for environmental clean-up costs.^[11]

On February 14, 2011, the Ecuadorian court rendered a judgment of $18 billion.^[12] In the two weeks before the judgment, Chevron raised claims of civil racketeering against the plaintiffs and their lawyers and convinced Manhattan federal district court judge Lewis Kaplan to restrain them from enforcing an Ecuador judgment. While it was making these tactical maneuvers in federal court, Chevron at the same time prevailed on international arbitrators to order Ecuador not to advance enforcement. It remains to be seen whether Chevron will pay enormous fines to the Ecuadorian government.

California

In 2008 Chevron leaked a gasoline additive into San Juan Capistrano's water supply. Chevron will repay the California city at least $1.5 million.^[13] The settlement also states that Chevron could pay an additional $1.6 million in a series of payments. Chevron is frequently involved in this kind of litigation regarding environmental damage or contamination.

The BP (BP) oil spill and the six month moratorium on offshore drilling in the Gulf of Mexico limit Chevron's production capacity in the region

On April 20, 2010, a fire aboard a BP (BP) oil rig owned by Transocean (RIG) (the Deepwater Horizon) led to an explosion which caused an oil leak that has become the worst environmental disaster in U.S. history. As a result, President Obama has imposed a six month moratorium on deepwater oil drilling in the Gulf of Mexico. Chevron has protested the moratorium, arguing that not all offshore drilling companies should be held responsible for the BP (BP) disaster. The six month moratorium limits Chevron's production capacity in the Gulf of Mexico since it can no longer operate oil rigs at depths of more than 500 feet. President Obama has also put on hold plans to expand drilling off the coast of Alaska. Other countries are following the lead of the United States; Norway, for example, has put a temporary halt to new deep-water exploration.^[4]

Chevron shares fell nearly 10% in the two months since the BP disaster, compared to a drop in BP's market valuation of 46%.^[4] BP (BP) has been criticized by some industry experts for using a risky well design that could have made it easier for natural gas to enter the well and eventually cause the explosion. Chevron claims to use a safer well design for its deepwater oil wells.

Despite Chevron's efforts to distance itself from BP (BP), it is facing criticism for a recent incident in which a Chevron pipeline in Utah leaked 33,000 gallons of crude oil into a Salt Lake City creek that threatened to contaminate the Great Salt Lake.^[4] Within two days Chevron repaired the ruptured pipeline and was instructed to pay the local government over $50,000 in environmental remediation costs^[14], but the incident has shaken confidence in Chevron's safety practices, similar to how confidence in BP's safety practices have been questioned by the Deepwater Horizon incident.^[4]

Chevron is concerned about the continued delays in the permitting process in the Gulf of Mexico, which could potentially force Chevron to reduce its annual production growth forecast. Chevron estimated that 300,000 barrels of oil a day of total Gulf production have already been lost.

Chevron is streamlining downstream operations and investing in the more profitable upstream business

Due to slim refining margins, Chevron is investing more in its upstream business than in its downstream business. Chevron's 2011 capital expenditure budget of $26 billion, which represents an increase of 20% over 2010, is divided between the upstream business (87% of the budget) and the downstream business (11% of the budget). Chevron is focusing more heavily on the more profitable upstream business, which includes oil exploration and production.^[15]

Chevron is also planning to cut 2,000 jobs (12% of its downstream staff) to reduce its operating costs.^[16] As a result of the jobs cuts, Chevron expects to incur up to $200 million in severance costs. Chevron plans to reduce its refining business to 40 markets (instead of 93 in 2009) and reduce the number of filling stations from 3,200 to 1,900.^[16]

One example of Chevron's downsizing of its downstream business was its October 2010 announcement that Chevron Pipe Line Co., a Chevron subsidiary, sold its 23.44% stake in Colonial Pipeline Co. Colonial Pipeline owns and operates a 5,500 mile petroleum pipeline in the United States that transports 100 million gallons of gasoline, kerosene, diesel fuel, home heating oil and aviation fuels daily from supply centers on the Gulf Coast to the Eastern Seaboard.^[17]

Chevron is refocusing its resources on the upstream business, especially in Asian markets and in natural gas production. Between 2010 and 2012, Chevron plans to begin 25 new upstream projects with an investment of at least $1 billion.^[16] Chevron announced that it expects natural gas to represent 41% of total volumes by 2017, up from the current share of 31%.^[16]

In the U.S., Chevron is also expanding its upstream operations. In November 2010, Chevron announced that it would acquire Atlas Energy for $3.2 billion in cash and pro forma debt of $1.1 billion. The acquisition will provide Chevron with natural gas resources in southwestern Pennsylvania's Marcellus Shale. Atlas Energy owns an estimated nine trillion cubic feet of natural gas resources, which includes approximately 850 billion cubic feet of proved natural gas reserves with approximately 80 million cubic feet of daily natural gas production.^[18]

Consumer demand for oil drives Chevron's sales

The U.S. Energy Information Administration reported that consumption in 2008 of refined products in the United States declined by nearly 6 percent from the 2007 average, representing the largest annual decline since 1980.^[19] In 2008 world oil consumption of liquid fuels was 85.45 million barrels per day (bbl/d).^[20] World oil consumption was forecast in April 2009 by the EIA to fall by 1.35 million bbl/d in 2009.^[21] This decline, following record-high retail gas prices and crude oil prices during the first half of the year is tied to the 2007 Credit Crunch and 2008 Financial Crisis.

A decline in oil prices has a negative impact on the company’s revenues. Chevron's revenue depends on how much oil it can sell and at what price. When the demand for crude oil fell in the second half of 2008, oil prices fell from a record high of about $147 per barrel to around $50 a barrel in the first quarter of 2009.^[22] This weakened demand has not only reduced the amount of oil Chevron can sell but it has also reduced the profit margin it earns on each barrel of oil. Although Chevron's refining and chemical operations improve their bottom-line when the price of oil decreases, as a whole, Chevron benefits when oil prices increase.

Political instability in Nigeria threatens Chevron's operations there

Nigeria is Africa’s largest oil producer and the fifth largest source of U.S. oil imports. Royal Dutch Shell (RDS'A), Exxon Mobil (XOM), Total S.A. (TOT), ENI S.p.A. (E), and Chevron operate joint ventures with Nigerian National Petroleum Corp. that produce more than 90% of Nigeria’s oil. However, Nigeria is a politically unstable country, and this has disrupted Chevron's operations there in recent years. Attacks by militant groups in the Niger River delta cut Nigeria’s oil production by more than 28% from 2006 to 2009.^[23]

In December 2010, the Niger Delta Liberation Force claimed responsibility for attacks on three oil flow stations in Nigeria’s Delta State belonging to Chevron and ENI S.p.A. (E). Chevron resumed flows through its Dibi-Abiteye pipeline in the southern Niger River delta in January 2011, a month after it was breached by militants.

The Rise of Renewable Energy

Alternative energy is still some years off from widespread adoption; alternative energy challenges like low production volume, low production efficiency, and lack of infrastructure (some new fuels require distribution infrastructure separate from existing oil pipelines) all have yet to be overcome. However, if and when energy sources such as solar or wind end up taking off, the negative impact on the oil and gas industry will be immense. Chevron is one of the few oil majors (BP and Total S.A. being the others) that has embraced the possibility of a renewable future, and it is actively involved in pursuing alternative energy solutions. For example, the company announced that it has completed phase one of a $70 million solar installation for the Contra Costa Community College District - the largest such installation at any institute of higher education in North America. By its completion, the solar installation will generate around four million kilowatt-hours of electricity per year, supplying enough power for half the campus's needs.^[24] Chevron is also in a group of investors that in May 2008 put $115 million into BrightSource Energy, a firm specializing in utilities-scale solar thermal technology.^[25]

However, the fall in oil prices has put the economics of renewable energy into question. With energy once again cheap and plentiful, the imperative to develop renewable energy has weakened. On the other hand, concern over global climate change has continued to rise, increasing government support for renewable energy grants and subsidies.

Competition

Chevron competes with other major petroleum producers. The six major oil producers are BP (BP), ChevronTexaco (CVX), Total (TOT), ConocoPhillips (COP), Exxon Mobil (XOM) and Royal Dutch Shell (RDS'A).

• BP (BP) is one of the six major oil producers. As of April 2009, BP operates in 29 countries including Mexico, Russia, Algeria, and many others in the Middle East and Africa.^[26] BP has also created a separate business that specializes in alternative, renewable forms of energy known as BP Alternative.^[27]
• Total S.A. (TOT): Along with oil exploration and production activities, the company's upstream business segment consists of integrated Liquid Natural Gas operations, from liquefaction to gasification, as well as a power generation business and stakes in multiple photovoltaic developers. Total's French origins give the company an advantage over many western oil majors, as it has larger reserve and production bases in young, high-yield regions like Africa and the Middle East, and Total is one of the few companies that has operations in Iran.
• CONOCOPHILLIPS (COP) is a vertically integrated petroleum company with operations in more than 40 countries.^[28]
• Exxon Mobil (XOM) is the largest of the vertically integrated oil majors, as well as the largest publicly-traded corporation in the world by market cap and revenue.^[29] The company was valued at over $500 billion at its peak, and had a 2008 net income of $45.2 billion, the highest in the world's corporate history.^[30] Of any of the oil majors, ExxonMobil has consistently produced the highest revenue, income, and returns on capital employed (38.53%).^[31]
• Royal Dutch Shell (RDS'A) (Shell) is one of the largest private sector energy companies in the world. The company is engaged in the exploration and production of oil and gas, refining and marketing of liquefied natural gas as well as manufacturing, marketing, and shipping of oil products and petrochemicals. The company also deals in renewable/alternative sources of energy including wind and solar energy. It operates primarily in Europe and the US.
• ENI S.p.A. (E) is the sixth-largest vertically integrated oil company in the world by market cap. In addition to oil production, Eni is also a major natural gas and electric utilities company, and operates in the oilfield services industry through its stake in Saipem S.p.A.
• Occidental Petroleum (OXY) is one of the largest oil and gas companies in the U.S. with operations mainly in the U.S, the Middle East, and Latin America. Occidental is only involved in exploration and production of oil and gas reserves.
• Repsol YPF (REP-MC) is an international energy company with operations in over 30 countries. It is primarily involved in oil and liquefied natural gas exploration, refinement and distribution.
• Saudi Aramco is the state-owned oil company of Saudi Arabia. It is a fully integrated petroleum company with operations in exploration and production, refining and marketing, and petrochemical manufacturing.

References

1. ↑ North America Exploration & Production: A Year of Opportunity
2. ↑ ^{2.0 2.1} CVX 10-k 2009, Business Overview, p. 25
3. ↑ ^{3.0 3.1 3.2} Chevron Toxico: Chevron Must Clarify Risk in Ecuador Suit, Cuomo Says, May 6, 2009
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9} Wall Street Journal: "Chevron, Devon in Deal" Sept. 8, 2010
5. ↑ North America Exploration & Production: A Year of Opportunity
6. ↑ CVX 10-K 2009 Item 1, p. 25
7. ↑ ^{7.0 7.1 7.2}
8. ↑ ^{8.0 8.1 8.2} Chevron 2008 Annual Report Supplement, p. 46
9. ↑ ^{9.0 9.1 9.2 9.3} CVX 10-k 2008 Item 1, p. 26
10. ↑ ^{10.0 10.1 10.2 10.3 10.4} CVX 10-k 2008 "Other Businesses, p. 28
11. ↑ ^{11.0 11.1 11.2 11.3 11.4} The Economist: Ecuador, Chevron and pollution
12. ↑ Law.com: "Analyzing Chevron's Endgame in Ecuador" March 3, 2011
13. ↑ San Juan Capistrano Patch: "Chevron to Pay San Juan Capistrano $1.5 Million by April 7"
14. ↑ Salt Lake Tribune: "Salt Lake County sends Chevron a bill for oil spill" July 17, 2010
15. ↑ Everything Gold: "Chevron (NYSE:CVX) Releases 2011 Capex Budget"
16. ↑ ^{16.0 16.1 16.2 16.3} Zacks Investment Research: "Chevron To Trim Downstream Biz" 10 March 2010.
17. ↑ BusinessWire: "Chevron Sells Minority Interest in Colonial Pipeline" Oct. 11, 2010
18. ↑ Chevron Investor Relations: "Chevron Announces Agreement to Acquire Atlas Energy" November 9, 2010
19. ↑ Chevron Supplement to the 2008 Annual Report, p. 45
20. ↑ Energy Information Agency - World Liquid Fuels Consumption
21. ↑ Energy Information Administration - Short-Term Energy and Summer Fuels Outlook
22. ↑ BBC News: Oil price goes below $50 a barrel
23. ↑ Bloomberg: "Chevron Resumes Nigera Pipeline Flows After Attack Last Month" January 14, 2011
24. ↑ Chevron Energy Solutions Completes First Phase of North America's Largest Solar Power Project in Higher Education
25. ↑ CNet: BrightSource Energy lands $115 million for solar 'power tower'
26. ↑ BP Annual Review 2008
27. ↑ BP alternative: About Us
28. ↑ COP 2007 10-K
29. ↑ Social Picks - Index of Market Cap Leaders by Nation Posts Decline
30. ↑ France 24 - Exxon claims world's highest annual profits for 2008
31. ↑ Yahoo! Finance - XOM: Key Statistics