Caltex Petroleum Corporation

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Caltex Petroleum Corporation

P.O. Box 619500
Dallas, Texas 75261–9500
U.S.A.
(972) 830-3929
Fax: (972) 830-3034

Joint Venture of Texaco, Inc. and Chevron Corporation Incorporated: 1936
Employees: 7,300
Sales: $15 billion (1995)
SICs: 2911 Petroleum Refining

Caltex Petroleum Corporation is the world’s largest and most successful joint venture in business history. The company’s revenues are larger than such well-known oil firms as Unocal, Phillips, and USX-Marathon, and its assets are greater than its closest rival, the huge Royal Dutch/Shell Group. Formed by Chevron Corporation and Texaco, Inc. in 1936, the company refines, produces and markets a wide array of petroleum and convenience products. Caltex Petroleum holds equity interests in 14 fuel refineries, 17 lubricant blending plants, six grease plants, two lubricant refineries, and 526 ocean depots and terminals. In addition to its thousands of branded retail outlets and gas stations, Caltex also provides fueling services at 38 airports and 103 saltwater ports in 22 countries around the world. The company has a major presence in East Africa, South Africa, East Asia, China, the Middle East, Southeast Asia, and the South Pacific, and is the only international petroleum firm that operates in all major Asian markets. With a well-trained and highly efficient international work force of approximately 7,300, more than 98 percent of the company’s employees are nationals of the countries within which the various oil refining, marketing, and producing facilities operate.

Early History

Caltex, an abbreviation for the California Texas Oil Company, was formed during the height of the Great Depression in 1936. With businesses going bankrupt throughout the United States and the petroleum drilling and refining industry in particular losing large amounts of revenue from decreasing demands for gas and oil, management at Chevron (known at the time as Standard Oil of California) and Texaco decided to combine their resources and develop their promising overseas operations. Chevron needed new markets for its recently discovered, extensive Middle Eastern oil reserves, while Texaco needed large amounts of crude oil for its burgeoning overseas refining facilities and its ever-increasing number of gas stations. The joint venture was a success from the very beginning, especially with the growing production of oil from its refineries in the Middle East and Asia.

From its inception, Caltex focused on developing overseas opportunities for oil refining and marketing its products. One of the company’s most important discoveries occurred just before World War II, when engineers found the vast Duri oil field in the dense and difficult terrain of the central Sumatran rain forests. The company wasted no time in signing a contract with the Indonesian government and immediately constructed a drilling rig to extract the oil. However, before the company could begin to reap profits from its most significant discovery to date, the Japanese invaded the country and confiscated all of the Caltex drilling equipment. Unfortunately for Caltex, the Japanese conquest of a large portion of Asia resulted in a forced takeover of almost all its equipment and facilities, as these resources were needed to fuel Japan’s wartime military. When the United States entered World War II after the Japanese attack on Pearl Harbor, management at Caltex were hopeful that the company would eventually reclaim its refinery and drilling operations.

After World War II ended in victory for America and its allies, Caltex management decided to reinvigorate its operations by adopting a unique strategic approach for the development of new markets. Originally an extremely bold and unprecedented alliance between two of the most successful companies in the industry, Caltex proposed to draw on the expertise and capabilities of these two leading petroleum enterprises in a way never done before. In order to restart its business after much of it was destroyed during the war, Caltex drew on the resources of Chevron and Texaco to raise capital more efficiently, apply the appropriate technology to increase the capacity of its drilling operations, and organize comprehensive support services to initiate and maintain new major projects. One of the most successful advertising campaigns in the company’s history was created during this time, emphasizing Caltex’s ability as a joint venture to offer its business partners and customers a range and depth of products no single firm would be able to match.

During the late 1940s, and throughout the decade of the 1950s, Caltex reaped the rewards of its new strategic approach. Focusing on emerging markets in Asia, the company began to create a reputation for itself as a creative, efficient, pragmatic and—most important—culturally sensitive international organization.

When Caltex was forced to relinquish its Duri oil field in central Sumatra during World War II, the Japanese appropriated one of the company’s drilling rigs and accidentally discovered the much larger Minas oil field close by. After the war Caltex reclaimed both the Duri and Minas oil fields, and restarted its crude oil drilling, but implemented a far-reaching policy of hiring local workers to operate the rigs and supervise their output. This hiring policy, which became a company standard, had the effect of attracting individuals who would ultimately be placed in major positions of authority within Caltex. By the end of the 1950s, Caltex had played a significant part in helping Japan build its petroleum industry after the massive destruction caused by World War II, and in the same way had guided South Korea’s petroleum industry after the Korean War.

Growth and Expansion during the 1960s and 1970s

With its South Korean affiliate, Caltex had already established a major presence in the country during the 1950s. In collaboration with Koa Oil Company and Nippon Oil Company from Japan, Caltex and South Korean engineers designed and constructed the largest tanker and oil holding facility in the world. By the end of the 1960s, Caltex had also assisted its affiliate in developing Korea’s second refinery, located at Yocheon. At the same time, Caltex also duplicated its own joint venture structure and began to enlist and contract companies that were willing to engage in joint venture partnerships within such countries as Australia, New Zealand, and the Philippines.

With its growing presence throughout Asia, Caltex was well positioned to take advantage of one of the century’s most important developments in the petroleum refining industry. During the 1960s and 1970s, as the economies became more prosperous and as the per capita income began to rise in the developing nations of Asia, oil consumption increased dramatically in the region. This typically occurred when the per capita income, adjusted for purchasing strength, reached the equivalent of US$1,000. Japan reached this milestone during the early 1950s, while South Korea and Hong Kong surpassed it during the mid-1960s. For example, most people in South Korea and China had been using either wood, dung, or charcoal for heating purposes. However, as the per capita income increased, people shifted away from these traditional sources of fuel to kerosene. The result was an explosive demand for oil, and Caltex was there to provide it.

During the same period, there was an enormous increase in motorized vehicles, particularly small automobiles, delivery trucks, and scooters. In order to meet this rising demand from motorized consumers for petroleum products in the Asia-Pacific region, Caltex initiated a full-service fueling and automotive care retail chain. Caltex service stations were opened in Hong Kong, Japan, South Korea, Australia, Singapore, and the Philippines. By the end of the 1970s, Caltex’s retail chain had developed into a combination service station/convenience store concept similar to those operating in the United States.

The 1980s Bring Rewards of Strategic Planning and Hard Work

The decade of the 1980s saw the rise of Caltex to a preeminent position in the petroleum industry across the Asia-Pacific region. During the early 1980s, Caltex reached an agreement with the Chinese government to develop a network of service stations through numerous joint ventures in the Shenzhen Special Economic Zone, an area designated by the socialist leaders of the country as a focal point of foreign investment and free market economy. In Korea, the demand for oil was growing at an incredible 18 percent annually, and with equity interests in Samnam Petrochemical Company, Hoyu Tanker Company, and more that 1,500 service stations, Caltex was well poised to sell gasoline, diesel lubricants, and kerosene to consumers. In Hong Kong, Caltex was operating over 50 service stations, three marine stations, over 100 dealerships and car service centers, and an aviation refueling facility at the city’s International Airport. In Singapore, the company constructed a lube oil blending plant, while also providing aviation fuel services at Changi International Airport. In Taiwan, Caltex opened a chain of retail outlets selling refined petroleum products, while in Japan the company and its affiliate Nippon Oil Company had opened a vast network of more than 6,000 service stations.

Company Perspectives:

“We are committed to delivering superb service and top quality products, and we will rely on our tradition of innovation to do more than satisfy customers; we intend to win their loyalty. Our core beliefs of people, service and value are the foundation of a new Caltex—a service-driven, innovative marketer that consistently meets or exceeds the expectations of its retail, industrial and commercial customers. This is the spirit by which we live, work and measure our performance.”

Caltex was not only interested in expanding its holdings and market share in East Asia. Management made the strategic decision to expand its activities to Africa, where joint ventures were established by the company in Egypt, Kenya and South Africa to operate oil refineries, lube oil blending plants, grease manufacturing plants, a network of service stations, and aviation services at Cairo, Nairobi, Mombasa, Johannesburg, and Cape Town airports. Caltex also arranged joint ventures in India and Pakistan, where the company operated lube oil blending plants, oil refineries, and service stations. Another region of interest encompassed the Middle East, where Caltex once again entered into various joint ventures for oil refining, lube oil and grease manufacturing, gas processing plants, and such specialty product sales as marine lubricants and asphalts.

Perhaps the most revealing story of the company’s determination to succeed during this time occurred in the Philippines. When the political situation in the country grew more turbulent, and many companies began to withdraw their operations and close their facilities in the face of apparent anti-American sentiment, Caltex stood firm and weathered the storm, as did its arch-rival, the Dutch/Shell Group. This steadfastness of the two companies resulted in a total dominance of the petroleum market within the country. By the end of the decade, Caltex was operating a Philippine oil refinery, lube oil blending plant, grease manufacturing facility, aviation services at Manila International Airport, and over 700 retail outlets selling a wide variety of products that included gasoline, kerosene, diesel fuel and lubricants.

The 1990s and Beyond

Anticipating that Asia will account for approximately two-thirds of the net growth in demand for oil up to and beyond the year 2000, Caltex continued its remarkably successful expansion. In Shanghai, China, the company started a joint venture lubricants blending plant, as well as a large retail network in Guangdong Province. In 1994, Caltex opened an office in Hanoi and in Ho Chi Minh City, Vietnam, and arranged a joint venture for the nationwide distribution of its lubricants. The company ventured into Cambodia, where a network of service stations were opened in Phnom Penh, and a marine terminal opened in Sihanoukville. By the mid-1990s, Caltex had opened its first service station in Laos.

Contributing to Caltex’s success in South Korea is its unique position as the only occidental company to own a portion of a refinery in the country. The Honam Oil Refinery, which has captured over 30 percent of the market for refined petroleum products, is owned jointly by Caltex and the Lucky Goldstar Group. In a stroke of fortune for Caltex, the South Korean government passed legislation prohibiting any new foreign petroleum company from entering the nation’s rapidly growing, and extremely lucrative market. In Singapore, Caltex reached an agreement with the Singapore Refining Company to upgrade and expand its facilities. By the mid-1990s, Caltex had reached a production volume of 720,000 barrels of crude oil per day at the Minas oil field in Sumatra, approximately half of the total crude production of Indonesia. In Thailand, Caltex’s application to build a $1.7 billion oil refinery was approved by the government and the company entered into a joint venture with the Petroleum Authority of Thailand. Named the Star Petroleum Refining Company and located in Map Ta Phut, Thailand, the new facility quickly garnered a reputation as one of the world’s most technological sophisticated and efficient refineries.

In early 1994, management at Caltex, in close consultation with parent companies Texaco and Chevron, decided to invest approximately $6 billion through the year 2000 in order to upgrade and improve capacity at its Asian refineries. With six percent annual economic growth in the Asia-Pacific region, and regional demand for crude oil having increased more than 4.5 percent per year from 1988 to 1994, more than double the rate of the rest of the world, Caltex regarded its investment as a necessary step for its crude output to keep pace with the fastest-growing market for petroleum products. Accordingly, Caltex expanded its presence in Vietnam by purchasing nearly 500,000 barrels of Bach Ho oil field crude from Vietnam for use in its ever-expanding refinery in Singapore. Other major expansion moves included an agreement with the government of Oman to engage in establishing joint venture operations for the purpose of building oil refineries in India, South Korea, and Oman, and an agreement with Lebanon to expand the country’s refinery in Tripoli.

In 1988 Caltex’s net income, split between Texaco and Chevron, provided the parent firms with 18 percent and 13 percent, respectively, of their total earnings. By 1993, the 50/50 split had increased dramatically to 34 percent for Texaco and 28 percent for Chevron. More recently, in order to maintain its level of capital spending, Caltex has reduced its dividends by 17 percent to both Texaco and Chevron due to a slight dip in the price of oil worldwide.

Texaco and Chevron, publicly held companies, would find it difficult for any reason to implement such a drastic reduction in dividends to its shareholders, but Caltex does not have to worry about the stock market. Indeed, Texaco and Chevron appear more than willing to forgo short-term profit for long-term gain.