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Chevron pulls back.

After more than a century, the oil giant cuts back and hopes for better times

After more than a hundred years in Alaska, Chevron rode quietly into the sunset, joining the growing list of frustrated oil companies that have decided their future does not lie in the frigid northland. Chevron hasn't entirely abandoned Alaska, but the closing of the company's exploration and land office in August climaxed years of statewide operational and employment cutbacks and marked the end of an era in Alaska's petroleum industry.

Alaska's oldest oil company, Chevron (formerly Standard of California) was here even before the Great Alaska Gold Rush of 1898, developing markets for products such as Pearl Oil, a kerosene used to light lamps. When gold fever struck, Chevron's stern-wheeler Oil City delivered goods to miners along the Yukon River from Dawson City to the Klondike. According to one account, the first cargo consisted of 29,000 cases of Pearl Oil, 3,000 boxes of candles and six tons of lamps and lanterns.

As a young geologist doing field work on the North Slope in the early 1960s, Roger Herrera, now a retired BP Exploration (Alaska) executive, remembers how popular Chevron's fuel containers were in the Alaska Bush.

Says Herrera, "My first impressions of Alaska were considerably influenced by those wooden boxes with the Chevron decal. They were all over Alaska. I would salvage them to make a table in my tent or chair or wood for burning. They were used for everything. The utility of Chevron was impressed on me for that reason. They did a lot of marketing."

Over the years, Chevron extended its product distribution line to every corner of Alaska, including Anchorage, Juneau, Fairbanks, Kodiak, Dutch Harbor, Valdez, Nome and Bethel. The company launched an aggressive petroleum exploration program and built a refinery. For years, it operated Alaska's first major oil field at Swanson River on the Kenai Peninsula. It was once the largest holder of oil and gas leases in the state.

The turning point for Chevron came in 1986, shortly after the company purchased Gulf Oil and began merging staff and reorganizing its U.S. domestic operations. Chevron's decision to cut back in Alaska was influenced largely by a sudden collapse in world oil prices.

Chevron gave up its marketing facilities around the state, as well as its operatorships or holdings in the Swanson River, Beluga and offshore fields in the Cook Inlet. Last year, the company shut down its Nikiski refinery. In October, Chevron was still waiting for final government approvals on the sale of its interest in the Kenai Pipeline.

Chevron still maintains 17 service stations and a tank farm in Anchorage, as well as tiny working interests in the Prudhoe Bay and Kuparuk fields and a larger interest in Milne Point field. Over the past seven years, however, staff at the company's Anchorage headquarters decreased from about 150 to 4.

Painful Reality

Tom Cook, Chevron's long-time exploration representative, and Jack Thoeni, the company's Anchorage area supervisor, were among the last to depart Chevron headquarters at 3001 C Street. Rather than leave the state, Cook and Thoeni took early retirement.

Says Cook, "I think the reality is that we're going through a very painful time that's not unique to Chevron. Look at all the other companies -- they're tightening up for a number of reasons. The reality is we haven't had the hoped-for success here, and we're not getting access to some areas we have an interest in."

Adds Thoeni, "The low point for me was watching all the decrease in activity in Alaska and throughout the United States. People believe that when there's a need (for oil) you can just go out and find it and start using it right away. That's a real misconception."

While the closing of Chevron's headquarters came as no real surprise, it served to remind the skeptics just how shaky the U.S. oil industry is, as attention is focused on more fertile grounds and friendlier governments overseas. Like other companies that have gone sour on Alaska, the final straw for Chevron was exploration, particularly in Bristol Bay and the highly prospective coastal plain of the Arctic National Wildlife Refuge (ANWR).

Chevron is the only company to have drilled an exploratory well on the 1.5-million ANWR coastal plain, considered by many petroleum geologists to contain the last major oil reserve in North America. Under a special arrangement with Congress, Chevron was permitted to drill KIC No. 1 on land owned by Arctic Slope Regional Corp., a Native company with whom Chevron has had a long association.

Data from the KIC well remains a guarded secret, but it's believed Chevron drilled the well to position itself for a federal lease sale to provide the company with the big oil revenues it was never lucky enough to net from Prudhoe Bay. Under pressure from national environmental groups, Congress has balked at opening the federal portion of the coastal plain to exploration and development.

"I guess my biggest disappointment is seeing that we haven't been successful in getting access to this area. I think it's very important to Chevron as well as industry," says Cook. He adds, "I can guarantee you that the company is not going to spend the millions it takes to do additional exploration unless there is some light at the end of the tunnel about favorable congressional action." Chevron also was left holding the bag on $19 million worth of federal oil and gas leases in Bristol Bay after Congress imposed a moratorium on drilling in the bay, ostensibly to protect the world's largest salmon fishery from oil spills.

Says Cook, "Bristol Bay has always been a frustration. It's been opposed by every governor in Alaska and now by our congressional delegation -- without any real factual basis for their opposition. It's real clear that we can operate out there safely without harming the fisheries. I guess we've come to the conclusion that with our delegation walking on the issue, it's hopeless." While Cook agrees that taxes and mushrooming government regulations have served to discourage activity in Alaska, he says Alaska just hasn't lived up to its billing on the exploration front, particularly in offshore areas of the outer continental shelf where there were extensive drilling during the late 1970s and early 1980s.

Explains Cook, "What the state needs is a whopping discovery in a new frontier area to open up some enthusiasm to spend a little money here. The business is predicated on risk. Industry doesn't go to the bank and borrow money or to Wall Street to raise money for exploratory ventures. That's paid for out of your cash flow. And when (oil) prices go down, your cash flow goes down, and one of the first things you cut is exploration."

Short on Luck

Chevron's general lack of luck on the exploration front was painfully illustrated this fall when competitor Arco Alaska, the most successful explorer in the state, hit it big on a prospect in the eastern Beaufort Sea that Chevron was supposed to have drilled.

Unable to secure partners to share drilling costs Chevron had dropped plans to explore its West Maktar prospect. The job was handed to BP Exploration which, in turn, passed the baton to Arco when its exploration budget was cut. Arco renamed the prospect "Kuvlum" and began drilling operations in mid-August. Two months later, the company announced the biggest oil strike ever on Alaska's outer continental shelf.

Over a 12-year period, Chevron spent an estimated $400 million to $500 million on North Slope wildcat wells drilled on Native lands alone, under its working agreement with Arctic Slope Regional Corp.

Says Herrera, "Chevron was a major player in Alaska, but its problem is that it took a lot of risks that didn't pay off. I think Chevron played the game quite well. But it did not find that significant oil field which would assure its future. That's not necessarily the lack of skill, it's the lack of luck." Cook points out industry's problem in Alaska is compounded by the fact Prudhoe Bay oil production is on the decline. He adds, "We've produced over 60 percent of it. And you've got to ask yourself what is there to take its place. Even if Congress opened ANWR and Bristol Bay the same day, it can't make up the shortfall."

Like other oil companies, Chevron has turned its eyes and investment capital to what it believes to be more promising oil ventures overseas. Earlier this year, Chevron signed a 50-50 joint venture with the Republic of Kazakhstan in the former Soviet Union to develop the Tengiz and Korolev oilfields on the northeastern coast of the Caspian Sea. The fields are said to contain more crude oil than Prudhoe Bay, North America's largest and most productive reservoir.

Says Cook, "You're looking at management that's been totally frustrated by the lack of access not only to areas here in Alaska but virtually to all of the (U.S.) outer continental shelf, where a large part of the potential is. Management is not going to stay here when they see opportunities and welcome arms overseas."

Nevertheless, Thoeni sees a time when Chevron and other oil companies could return to Alaska. He says, "We're disappointed to see what has happened industrywide up here, and we'd like to see more activity. I think that will return when the economic climate is better."

Cook adds that if Congress opens Bristol Bay or the ANWR coastal plain to exploration, "I think we would participate in exploration in those areas. I don't think the company has written off Alaska by any means. We're just going through some gut-wrenching retrenchment. Hopefully, times will get better."
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Title Annotation:Chevron Corp. reasseses management strategy forcing a pull out in Alaska
Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Dec 1, 1992
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