strategic-management

290 LINDA HERKENHOFF
Chevron replaced, through exploration, more resources than any other of the Big Five,
but it has done so with the lowest exploration cost in the industry. Being able to find new
resources at a comparatively low cost is an important skill, especially when commodity
prices are falling.
Chevron’s upstream earnings of $21.7 billion translate to earnings per barrel of
$22.85. Chevron’s competitive position moved up to second in both 2007 and 2008 relative
to the Big Five. The 2008 ROCE results of 36.6 percent look promising for Chevron to
maintain this competitive position in 2009.
Competitive data for 2008 indicates that Royal Dutch Shell achieved the highest average
capital employed; ExxonMobil had the highest return on average capital employed.
Although Chevron had impressive reported earnings figures, it was not the top contender.
ExxonMobil had the highest reported net income, followed by Royal Dutch Shell and then BP.
The Obama administration wants to increase renewable energy supplies and reduce carbon
emissions. But the Big Five have mixed responses to Washington. Shell announced it
would freeze investments in wind, solar, and hydrogen power and instead is focusing on
biofuels. BP is cutting back on its renewable program. ExxonMobil announced in the last
quarter of 2008 that it will invest more than $1 billion in three refineries in the United States
and Europe to increase the supply of cleaner burning diesel by about 6 million gallons per day.
Chevron spent about $3.2 billion on renewables since 2002 and plans to spend another
$2.7 billion over the next three years. In total, the Big Five spent about $5 billion in the last
15 years to develop renewable energy. This represents about 10 percent of the approximate
$50 billion contributed by other investors. Although the Big Five consider renewables an
important investment for the future, renewable energy is not a mainstream business for them.
Conclusion
Forty-five percent of Chevron’s planned 2009 spending will be in OECD (Organization for
Economic Co-operation and Development) countries. In 2008, Chevron exited 20 markets and
will continue with planned market exits in 2009. These future exits will result in a projected
workforce reduction of 1,500 employees, a reduction in operating expense by $300 MM per
year, and a reduction in capital employed by nearly $1 billion. The announced 2009 projected
capital and exploratory expenditures will total $22.8 billion, including $1.8 billion of affiliate
expenditures. The production from new capital projects is anticipated to increase from
153,000 barrels per day in 2008 to 650,000 barrels per day in 2010.
Nine new projects greater than $200 MM (net Chevron share) are planned to come
online in 2009, followed by another eight in 2010. LNG accounts for about 35 percent volume
of the 2008 portfolio and should be considered as an important player in Chevron’s future. In
downstream the continuing focus will be on improving refinery reliability. Downstream will
account for approximately $4.3 billion of the capital and exploratory program in 2009.
Chevron hopes to take advantage of opportunities in Iraq beginning with a review of
the Iraqis’ bidding guidelines for upcoming oil leases, to be released in the second quarter
of 2009. Note that Iraq does not have an OPEC quota and thus is allowed to produce oil at
will as it struggles to rebuild its oil industry. However, the four focus areas for exploration
capital dollars in 2009 will include the Gulf of Mexico, Northwest Australia, West Africa
deepwater, and the Gulf of Thailand. But the bottom line is that Chevron will continue to
face increasing geopolitical risk as it expands its dependence on non–North American properties
for its reserves. To date it seems that Chevron has proved to be good at managing
these risks to retain commercial opportunities.
Chevron plans continued investments in renewable energy technologies, with an objective
of capturing profitable positions in important renewable sources of energy. Chevron will
continue to invest in the next generation of energy sources and support the transition to a lowcarbon
economy. Alternative energy production is growing but currently represents just 2
percent of global energy production, so the world will need fossil fuels for years to come,
even if demand slows. In fact, the U.S. Energy Information Administration and the
International Energy Agency (a cooperation grouping of most of the OECD members) suggest
that by 2030 the world could be consuming about 57,000 gallons of oil per second.