Derr, Kenneth T.

(1936-)
Chevron Corporation

Overview

Kenneth T. Derr holds the distinction of being the youngest man ever named CEO of Chevron, a position he assumed in January 1989. The position represented a culmination for Derr, who had spent his entire career with the organization. During his 40 years with Chevron, he served for 11 years as chairman of the board and chief executive officer. He is credited with successfully restructuring the company toward a strong investor focus, increasing employee involvement, and facilitating more efficient operations. He also steered Chevron through its transition to an international corporation.

Personal Life

Kenneth T. Derr was born in Wilkes–Barre, Pennsylvania, in 1936. He graduated from Cornell University with degrees in mechanical engineering (BME in 1959) and business administration (MBA in 1960). Following graduation, he joined Chevron and then assumed a series of positions of increasing responsibility.

Derr is a former chairman of the American Petroleum Institute, a trustee emeritus of Cornell University and a member of the Business Council and the Council on Foreign Relations. His community projects included helping to save San Francisco's cable cars and assisting inner–city residents establish a minority–owned Chevron service station.

Aside from his executive responsibilities at Chevron, he has also been a director of AT&T Corp., Citicorp, and Potlatch Corporation. His other memberships include theSan Francisco Golf Club, Orinda Country Club, and the Pacific Union Club. He married Donna Mettler on September 12, 1959, and they have three children.

Career Details

Derr joined Chevron Corporation (formerly Standard Oil Company of California) in San Francisco in 1960. He was elected vice president in 1972 and president in 1979. In 1981, he was elected to be a director of the corporation.

In 1984, Derr headed the company's program to implement the merger of Chevron and Gulf Oil Corporation. During this period, he was noted for providing what was then considered to be an innovative approach, as he utilized the efforts of multiple teams that included hundreds of the company's employees. The Wall Street Journal described his approach as a "textbook example of the integration of operations." The following year, he was elected vice chairman of the corporation. Finally, he became chairman of the board and chief executive officer on January 1, 1989.

When Derr took over as CEO in 1989, he placed a sign on his desk that said "Better than the Best." It reflected Derr's goal to make Chevron the most profitable major oil company in the United States in the following five years. He would face some challenges in meeting that goal. By the time he assumed the position, the company had become the oil industry's highest cost producer because of its acquisition of Gulf Oil, as well as steeply falling energy prices and substantial overhead.

In 1990 Chevron was selling approximately $32 billion worth of oil, but the company was also buying twice as many barrels as it was producing, making it the biggest U.S. importer of oil. The spike in oil prices resulting from the unstable situation in the Middle East—which would culminate in the Gulf War in 1991—increased the need for action. Derr decided on a strategy of growth to attain increased profitability. He also worked to make Chevron a global corporation, which would relieve the company of the stringent domestic environmental restrictions that limit productivity. To bring this about, he sold nearly two–thirds of the company's oil and gas properties throughout the United States. These were small wells that generated only 10 percent of production. Also, he nearly doubled spending on overseas exploration. Derr cut the company's work force by 20,000 employees (from 75,000 to 55,000). His plan also included selling $5 billion in non–strategic assets and upgrading the refineries.

Another situation he faced soon after he became CEO was a possible takeover engineered by Pennzoil. Derr frequently took Pennzoil to court in an effort to avert the takeover. Still, Chevron managed to post the best earnings growth in the industry in the first half of 1991. Optimistic, Derr expected to see a decade of stable oil prices at the time of a world oil glut. However, the Middle East situation became particularly troublesome. Only 21 months into Derr's tenure as CEO, Iraq president Saddam Hussein entered Kuwait and an oil embargo went into effect.

Derr realized he would have to take some steps to keep moving in the direction he had charted. Right after Hussein's army entered Kuwait, Derr committed an extra $100 million to Chevron's U.S. budget to maximize oil production. Derr's plan was to have Chevron drill approximately 130 more oil wells in existing fields to produce 40,000 additional barrels of crude oil per day. He also tried to set up a joint venture with the Soviet Union to develop the Tengiz field in the northeast Caspian Sea, which would produce high–sulfur crude. The result was worth any risks involved, the company believed.

Chronology: Kenneth T. Derr

1939: Born.

1960: Graduated from Cornell University with two degrees.

1960: Began 40–year career with Chevron.

1972: Elected vice president of Chevron.

1979: Elected president of Chevron.

1984: Helped implement merger of Chevron and Gulf Oil.

1985: Elected vice chairman of Chevron.

1989: Named chairman and CEO of Chevron.

1999: Retired from Chevron.

2000: Received API Gold Medal for Distinguished Achievement.

Chevron did not want to involve other oil companies as partners in the Tengiz venture, as it needed as much crude as the field could yield. It was certainly a risky move financially: Chevron's initial investment was estimated at hundreds of millions of dollars, and the cost was expected to reach more than $1 billion over the following decade. What made it even riskier was the fact that Tengiz would not generate any immediate high financial returns. But Chevron was looking well beyond the 10–year mark. It envisioned the field yielding the world's cheapest oil over its 50 years of projected life. For the immediate future, Chevron was looking to get 25,000 barrels a day in the first year and up to 100,000 within five years.

At the same time, Chevron was involved in offshore drilling with its Port Arguello field, off of the Santa Barbara coast in California. It was the largest domestic discovery in recent years, and it was estimated that it could produce 75,000 to 100,000 barrels a day within a year. Chevron has already written off $445 million in expenses on the field. But after the field was drilled and ready, Chevron was forced to wait for tanker permits from the California Coastal Commission, a situation that resulted from the infamous Exxon Valdez spill. Originally, Chevron did have the permits, but they were rescinded after the spill.

The challenges didn't stop Derr. By 1993, Chevron had posted revenues of $37.1 billion, making it the world's fifth largest oil company. By 1995, foreign revenues accounted for $10.2 billion, or 28 percent of total sales (up from 18 percent of sales in 1989). Return on shareholders' equity was 18.9 percent in the mid–1990s.

In 1996, Derr said his top priority was to outperform Chevron's top competitors: Amoco, Exxon, Arco, Mobil, and Texaco. He also wanted to provide the best stockholder return. To do this he had to find efficient and cost–effective ways to operate. This included reducing per–barrel costs to $6.26. To achieve his goals, Derr set some specific strategies in place. By implementing these plans, Derr essentially reengineered how the company operated. The first strategy involved building a committed team, as Derr felt that employee commitment was crucial to putting his company in front of the competition. As part of the strategy, Derr sought to establish communication and mutual trust among employees and management, as well as shared objectives, open feedback, and a focus on areas needing improvement.

As his second strategy, Derr sought to continue exploration and production growth internationally, including in Angola, Nigeria, Zaire, Australia, and the North Sea. He also wanted to boost Chevron production in Minas Field in Indonesia to more than 208,000 barrels per day. Chevron would also increase production in the Tengiz Field, which became a joint venture of Chevron and the Republic of Kazakhstan. As part of that particular enterprise, Derr wanted to establish a new export system that would help increase production to 700,000 barrels per day. He also wanted the company to gain a stronger position in the Middle East. By that time, Chevron was providing assistance to Burgan Field in Kuwait, the second largest oil field in the world.

The focus of the third strategy was on generating $1 billion in cash annually from U.S. exploration and production operations. To do this, Derr would cut costs wherever possible and focus on the company's 400 fields in California, Texas, the Rocky Mountains, and the Gulf of Mexico.

The fourth strategy involved having Chevron achieve the top financial performance in U.S. refining and marketing. This involved preventing costly incidents at facilities and continuing to focus on productivity gains and continued cost reductions. In implementing this strategy, Chevron invested in nearly $1 billion in new facilities in Richmond and El Segundo, California, to improve efficiencies and make formulated fuels that improve air quality.

The fifth strategy involved reducing costs across all activities. This included reducing the cost of goods and services by working efficiently with fewer suppliers. Derr's sixth strategy was to keep Chevron's environmental record high by performing self–audits that would ensure compliance with Environmental Protection Agency (EPA) guidelines. By doing this, Derr could help his company avoid costly and unnecessary fines. Chevron was also spending at least $1.5 billion on global environmental protection measures.

Although lauded for his managerial innovations and his effectiveness as corporate leader, Derr often found himself at the receiving end of criticism from various quarters, essentially taking the brunt for the oil industry at large. In 1996, when giving a lecture, Derr felt compelled to answer some of the criticism. Public resentment toward oil companies and CEOs had recently increased. This was during a period when the trend of corporate downsizing and restructuring had become firmly entrenched, and the public felt that CEOs were cutting jobs while accepting large salary increases. During his lecture, Derr told the audience that such restructuring was "necessary to allow American companies to fully become global competitors."

In 1999, before he retired, Derr found himself on the receiving end of pies thrown by members of the Ecotopia Cell of the Biotic Baking Brigade (BBB). The act, which took place outside of the Galileo Academy of Science and Technology where Derr was giving a speech, was a symbolic gesture to protest Chevron's policies. The BBB felt that the company engaged in destruction of indigenous cultures and ecosystems, did not address the issue of global warming, committed labor violations, and was one of the worst polluters in California. The last criticism had some merit. In a study done by the EPA around that time, Chevron's Richmond, California, plant was designated as the nation's biggest toxic waste producer, releasing about a million pounds of toxins into the air.

Derr retired from Chevron in 1999. The following year, he received the American Petroleum Institute's (API) highest award, the Gold Medal for Distinguished Achievement. He was cited for his "extraordinary service to the oil and natural gas industry, as well as to his community and the nation." Derr, the API said, brought "change and innovation to every aspect of his work." Derr had been a member of the API board of directors and played a large role in shaping institute policies, positions, and programs by serving on the senior–level management and executive committees, as well as the committees on public policy and program and budget. Following his retirement from Chevron, he became an honorary member of the institute's board.

Social and Economic Impact

During his tenure as CEO of Chevron, Derr provided the company with innovative, effective leadership that produced quantifiable results. Under his direction, Chevron's market capitalization quadrupled. He also profoundly reengineered Chevron's corporate culture by decentralizing management and increasing employee work force and by diversifying the work force.

Derr also took some risks while at the helm, and they paid off. He developed the partnership in the Tengiz field, and he enabled Chevron to re–enter Bahrain, Kuwait, Saudi Arabia, and Venezuela. He also moved the company into new areas including Argentina, Azerbaijan, China, and Thailand. As an advocate of Africa–America trade, he made Chevron a prominent business partner in Africa. Derr also promoted free–market economics.

Despite criticism aimed at his record, Derr was a strong supporter of public health and education and human rights. During the first Bush administration, he was a member of the Commission on Environmental Quality. During the Clinton administration, he was a member of the Council on Sustainable Development.

Sources of Information

Contact at: Chevron Corporation
575 Market St.
San Francisco, CA 94105
Business Phone: (415)894–7700
URL: http://www.chevron.com

Bibliography

BBB Press Release. "Chevron CEO Creamed by Pies." Activism News Bulletin, 11 March 1999.

Community News. "Ken Derr Receives API Medal for Distinguished Service." Chevron, 13 November 2000. Available at http://www.chevron.com/community/whats_new_stories/derr_api_award.shtml.

Darryl Geddes. "Chevron CEO Defends Image of Corporations." Cornell Chronicle, 25 April 1996. Available at http://www.news.cornell.edu/Chronicle/96/4.25.96/chevron.html.

Linsenmeyer, Adrienne. "Chevron's Oil Crisis." Financial World, 30 October 1990.

Sparks, Debra, and Brooke H. Grabarek. "1994 CEO of the year silver award winners." Financial World, 29 March 1994.