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01 Survey 1
Survey on Management Strategy of
Independent U.S. Petroleum Companies
Tadashi Maruoka, Research and Planning Department,
Petroleum Energy Center (PEC)
Hideaki Fujii, Energy Research Division, Mitsubishi Research Institute, Inc.
1. Background and Goals
The U.S. petroleum downstream markets have undergone a reshuffling in recent years.
This has been brought about by factors such as reorganization of petroleum business assets
as a result of mega-mergers between Majors, as well as additional capital investment in
refineries or consolidation of refineries in response to the trend toward stricter environmental
regulations under the Clinton administration. The Petroleum Energy Center (PEC)
previously conducted surveys on independent U.S. petroleum companies and North
American petroleum companies in fiscal year 1995 and 1997. In these surveys, strategies
are classified into merchant refinery, technical niche, asset acquisition, alliance with oil
producing countries, business diversification, and capital alliance/merger, etc.
In response to the urgent need for a contemporary reassessment of management strategy
that should take into account rapid changes in the situation surrounding the oil business after
the previous surveys, such as increasing interest in global environmental issues and
mega-mergers between Major petroleum companies, this survey seeks to illuminate the
concepts based on which U.S. independent petroleum companies have reappraised their
business models as of the year 2000. In particular, this survey focuses on the business
situation and management strategies of independent U.S. petroleum refining and marketing
companies, which are rather similar to Japanese petroleum companies in terms of capital
size and business activities.
Specifically, this survey aims to clarify how TOSCO, Valero, Ultramar Diamond Shamrock,
Lyondell-CITGO Refining, Tesoro, and (although it does not fall into the category of
“independent U.S. petroleum refining and marketing company”) Enron achieved rapid growth
from the mid-1990s onward. In addition to investigating the sources of this growth, we also
tried to clarify what sorts of adjustments in their strategy are possible.
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2. Overview
2.1 Main Survey Items
• Changes in the business environment of independent U.S. petroleum refining and
marketing companies and how they are coping with the changes
• Business management situation of six independent U.S. petroleum refining and
marketing companies (TOSCO, Valero Energy, Ultramar Diamond Shamrock,
Lyondell-CITGO Refining, Tesoro Petroleum, and Enron)
• Classification of causes of growth and management strategy of the above six
companies
• Comparison of management strategy models of the six companies and anticipated
changes in the business environment variables
2.2 Method
In addition to discussions in a working group consisting primarily of experts in fields related to
the petroleum industry, relevant documents were examined and fact-finding visits were made
(including interviews at Valero Energy, Ultramar Diamond Shamrock, Tesoro Petroleum,
Enron, and related research institutes).
3. Findings and Conclusions
Presented in the following pages.
Survey on Management Strategy of
Independent U.S. Petroleum Companies
A. Findings
1. Changes in the Business Environment of Independent U.S. Petroleum Refining and
Marketing Companies and How They are Coping with the Changes
The companies under review were classified as either “independent U.S. petroleum refining and
marketing companies” or “major U.S. petroleum companies” (Table 1). Among U.S.
independent petroleum refining and marketing companies, as defined by the survey, six were
selected for individual examinations: TOSCO, Valero, Ultramar Diamond Shamrock,
Lyondell-CITGO Refining, Tesoro, and Enron. Since the mid-1990s, these companies all
succeeded in rapidly expanding their asset bases and realizing comparatively high earnings
based on distinctive management strategies.
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Table 1 Independent U.S. Petroleum Refining and Marketing Companies Covered in
the Survey and Reclassification of Major U.S. Petroleum Companies
Leading Independent U.S. Petroleum
Refining and Marketing Companies Major U.S. Petroleum Companies
CITGO Petroleum Corporation Clark Refining and Marketing,(Premcor)Inc. Enron Corporation Fina, Inc. LYONDELL-CITGO Refining, LP Nerco, Inc. Sonat Inc. Tesoro Petroleum Corporation TOSCO Corporation Ultramar Diamond Shamrock Corporation Valero Energy Corporation The Williams Companies, Inc. There are many, in addition to the above.
Amerada Hess Corporation American Petrofina, Inc. Amoco Corporation Ashland Inc. Atlantic Richfield Co. (ARCO) BP America, Inc. Burlington Northern Inc. Burlington Resources Inc. Chevron Corporation Cities Service The Coastal Corporation Conoco E.I. du Pont de Nemours and Co. Exxon Corporation Getty Oil Gulf Oil Kerr-McGee Corporation Marathon Mobil Corporation Occidental Petroleum Corporation Oryx Energy Company Phillips Petroleum Company Shell Oil Company Standard Oil Co. (Ohio) (SOHIO) Sun Company, Inc. Superior Oil Tenneco Inc. Texaco Inc. Total Petroleum (North America) Ltd. Union Pacific Resources Group, Inc. Unocal Corporation USX Corporation
Total 34 companies.
Note: This survey defines “major U.S.. petroleum companies” as corporations active in the petroleum
refining and marketing business sector in the United States and which were enrolled in the
Financial Reporting System (FRS) during the period from 1974 to 1990. “Independent U.S.
petroleum refining and marketing companies” are corporations that were not enrolled in the FRS
between 1974 and 1990. The companies examined individually for the survey are underlined
in the list above. Note that Equilon Enterprises, LLC, which was formed in a joint venture
between Shell Oil and Texaco, and Motiva Enterprises LLC, which is the result of a joint venture
by Shell Oil, Texaco, and Saudi Aramco, are classified as major U.S. petroleum companies.
Source: Materials prepared by Mitsubishi Research Institute based on data from the U.S. Department of
Energy/Energy Information Administration (2000).
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The extent to which the major U.S. petroleum companies became less involved in the
downstream segments of the U.S. petroleum sector, with increased market competition and
stricter environmental regulations that took place during the nineties, is made clear by an
analysis of the data on the changes in U.S. refineries.
For example, in 1985 the share of total domestic refining capacity accounted for by independent
U.S. petroleum refining and marketing companies was 23.1% and that accounted for by the
major U.S. petroleum companies was 76.9%. The corresponding figures for 1999 are 43.6%
for the independents and 56.4% for the Majors, indicating that the distribution of power within
the industry had changed dramatically (Table 2).
In the area of petroleum product retail assets as well, a real shift has been taking place from the
Majors to the independents (Table 3).
In particular, Petroleum Administration for Defense District 1 (PADD I, East Coast) became the
first region in the U.S. where the independents surpassed the Majors in refining capacity. The
major reason for this is that independents, such as those covered in this survey, have been
strategically purchasing refineries from the Majors (Figure 1).
Table 2 Petroleum Refining Capacity of Independent U.S. Petroleum Refining and
Marketing Companies and Major U.S. Petroleum Companies
Independent U.S. Petroleum Refining and
Marketing Companies Major U.S. Petroleum Companies
% %
Total
1970 5,216,550 40.1 7,807,900 59.9 13,024,450
1975 4,343,590 27.7 11,342,160 72.3 15,685,750
1980 5,478,501 28.6 13,646,768 71.4 19,125,269
1985 3,522,671 23.1 11,742,500 76.9 15,265,171
1990 5,190,274 33.5 10,288,675 66.5 15,478,949
1995 5,551,310 36.2 9,802,830 63.8 15,354,140
1996 5,817,465 37.7 9,615,130 62.3 15,432,595
1997 6,541,810 41.1 9,356,570 58.9 15,898,380
1998 6,775,220 41.3 9,647,450 58.7 16,422,670
1999 7,207,620 43.6 9,333,370 56.4 16,540,990
Source: Materials prepared by Mitsubishi Research Institute based on data from Oil & Gas Journal.
Note: Refer to Table 1 for the definitions of “independent U.S. petroleum refining and marketing
companies” and “major U.S. petroleum companies.”
Table 3 Number of States with Sales Outlets of Petroleum Products
1984 1990 1997
Average for 7 FGIR Companies NA 14 24
Average for major U.S. Petroleum Companies 32 NA 23
CITGO 31 NA 48
TOSCO 0 0 37
Source: Materials prepared by Mitsubishi Research Institute based on data from the U.S. Department of
Energy/Energy Information Administration.
Notes: “FGIR” designates CITGO (a subsidiary of PDV America), Clark Refining & Marketing (currently
Premcor), Ultramar Diamond Shamrock, Koch Industries, Tesoro, TOSCO, and Valero Energy.
“major U.S. Petroleum Companies” designates companies enrolled in the FRS. “NA” stands for
“not applicable.”
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(a) Number of Refineries
(Number)
Independent U.S. Petroleum Refining and Marketing Companies
Major U.S. Petroleum Companies
(Year)
PADD I
PADD II (Number)
Major U.S.
Independent U.S.
(Year)
PADD III(Number)
Independent U.S.
Major U.S.
(Year)
PADD IV(Number)
Independent U.S.
Major U.S.
(Year)
PADD V (Number)
Independent U.S.
Major U.S.
(Year)
(b) Total Refining Capacity (c) Refining Capacity per Refinery
PADD I PADD I Independent U.S. Petroleum Refining and Marketing Companies
Major U.S. Petroleum Companies
Major U.S. Petroleum Companies
Independent U.S. Petroleum Refining and Marketing Companies
(Year) (Year)
PADD II
Major U.S.
Independent U.S.
(Year) (Year)
PADD II
Major U.S.
Independent U.S.
PADD III
Major U.S.
Independent U.S.
(Year)
PADD III
Major U.S.
Independent U.S.
(Year)
PADD IV
Major U.S.
Independent U.S.
(Year)
PADD IV
Major U.S.
Independent U.S.
(Year)
PADD V
Major U.S.
Independent U.S.
(Year)
PADD V
Major U.S.
Independent U.S.
(Year)
Figure 1 Number of Refineries, Total Refining Capacity, and
Refining Capacity per Refinery for Independent U.S.
Petroleum Companies and Major U.S. Petroleum
Companies (Broken Down by Petroleum Administration
for Defense District (PADD))
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Note: This survey defines “major U.S. petroleum companies” as corporations active in the petroleum
refining and marketing business sector in the United States and which were enrolled in the
Financial Reporting System (FRS) during the period from 1974 to 1990. “Independent U.S.
petroleum refining and marketing companies” are corporations that were not enrolled in the FRS
during that period. In addition, Equilon Enterprises, LLC and Motiva Enterprises, LLC are both
included in the major U.S. petroleum companies category.
Source: Materials prepared by Mitsubishi Research Institute’s Energy & Environment Initiative based on
data from Oil & Gas Journal.
2. Classification of Business Management Performance and Growth of Six Independent
U.S. Petroleum Refining and Marketing Companies
In order to gain an accurate picture of the actual business management status of the six
independent U.S. petroleum refining and marketing companies under review, the annual reports
(SEC Form 10-K) filed by these companies and information gathered in fact-finding visits to the
United States were analyzed and the causes for growth were identified. The extent to which
each company engaged in “selection and concentration of management resources” was
examined in detail, and each was classified into growth model categories on the basis of the
combination of management tactics employed (Table 4).
Table 4 Causes for Growth of Six Companies Covered by the Survey (1996–2000)
Causes for growth
Decisive elements influencing strategy Important management tactics
TOSCO
(1) Excellent CEO (Thomas D. O’Malley)
(2) Clearly defined business plans
(3) Clearly defined management philosophy
and the ability to implement it
(4) Strategic acquisition of assets
(5) Thoroughly “Darwinist” approach to
capitalism
(6) Superior ability to raise capital
(1) Pursuit of scale
(a) Acquiring existing assets rather than
building new ones
(b) Abandoning markets where the
company cannot become one of the top
three
(2) Formulating retail strategy based on sales
zones
(3) Giving priority to short-term rather than
long-term performance
(4) Strengthening the company’s financial
strength
(a) Giving priority to maximizing EPS
(shareholder-centered approach)
(b) Employing economists to formulate
financial and investment plans
(c) Selling non-essential and unprofitable
assets in the refining business
(d) Minimizing expenses at headquarters
(only 14 headquarters employees)
Valero
Having as core, processing of residue and
sales of high value added “niche” products,
became scale-oriented through acquisition of
assets.
(1) Diversification of feedstock from almost
residue only by increasing share of heavy
sour crudes
(2) Strategic acquisition of refineries equipped
with sophisticated secondary units
(3) Participation in the retail markets of
petroleum products (since June 2000)
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Causes for growth
Decisive elements influencing strategy Important management tactics
Ultramar
Diamond
Shamrock
(1) Pursuit of both “economies of scale” and
“economies of scope” through mergers
(2) Cost cutting and selling unprofitable assets
(3) Acquisition of assets and focused capital
expenditure
(4) Decision-making capability regarding
projects aimed at increasing its own scale
(1) Geographical expansion of its markets
(West Coast , Canada, U.S. Northeast,
central Texas)
(2) Concentration of management resources in
central U.S. through acquisition of Total
Petroleum
(3) Sale of pipeline interests, closure of Alma
refinery, sale of unprofitable assets
(especially former D/S and Total)
(4) Scale-orientation through plans of joint
venture with competitors (Diamond 66, etc.,
presently a failure)
Lyondell-CITGO
Refining
Margin is assured by stable supply of crude oil
and stable sales of petroleum products are
assured.
(1) Assurance of a stable crude oil procurement
system through an agreement with
Petróleos de Venezuela S.A. (PDVSA)
(2) Assurance of a stable marketing system of
petroleum products through an agreement
with CITGO
Tesoro
(1) Moving away from “vertically integrated
operations”
(2) Strategic acquisition of refineries according
to regional and product niches
(3) Expanding the retail network
(1) Withdrawal from upstream operations and
specialization in downstream operations
(1999)
(2) Aggressive investment to improve
secondary units and purchase of a refinery
in Hawaii from BHP in order to increase
production capacity of premium products of
gasoline and middle distillates, mainly jet
fuel.
(3) Targeting Alaska, Hawaii, and the West
Coast region as its market
(4) Alliance with Wal-Mart to establish and
operate gas stations in 11 states in the
western U.S. (January 2000)
Enron
(1) Expansion of its network from the starting
point of wholesale business
(2) Business expansion based on a new
concept of “Energy Major” (moving away
from the conventional energy company
model)
(1) Knowledge intensive business model
(dependent on income from services)
(2) Online network integration (Enron Online)
(3) Realization of profits as a pioneer in
non-price-competitive businesses (working
to create new markets and deregulations in
overseas markets)
(4) Project (business segment) oriented internal
corporate organization
Source: Materials prepared by Mitsubishi Research Institute’s Energy & Environment Initiative (MIRIEEI).
By classifying the combinations of tactics chosen by the companies during the period covered
by this survey, we can say that TOSCO and Ultramar Diamond Shamrock are oriented toward a
management strategy emphasizing expansion, while Valero and Tesoro are struggling to decide
whether to pursue specialization (concentration) or expansion (Figure 2).
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Legend: EXVI: Movement away from “vertical integration” SAL: Strategic alliances OAL: Alliances with oil producing countries M: Mergers SA: Strategic asset acquisition PN: Product niches AN: Regional niches CL: Cost leadership
Bold lines indicate the tactics utilized by the company in question. Lines linking circles indicate combinations of tactics.
Tosco
Specialization (Concentration)
Expansion
Valero
Specialization (Concentration)
Expansion
Ultramar Diamond Shamrock
Specialization (Concentration)
Lyondell-Citgo Refining
Expansion
Specialization (Concentration)
Expansion
Tesoro
Specialization (Concentration)
Expansion
Source: Materials prepared by Mitsubishi Research Institute’s Energy & Environment Initiative.
Figure 2 Combinations of Strategies Selected by Five Independent
U.S. Petroleum Refining and Marketing Companies
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The petroleum industry in the United States is undergoing a process of dynamic structural
change marked by a shift from integration to disintegration (segmentation), followed by
reintegration (Figure 3).
Online Services
Vert
ical In
tegra
tion
Structural Change
Segmentation
Exploration and
Production
Refining
Transportand
Distribution
Wholesale
Retail
Disintegration
Reintegration
Commercial Investment
En
ron’s
Ne
two
rk
Outsourcing,Risk Management, etc.
Emissions
Natural Gas
Electricity
Climate
Coal
Paper and Wood Pulp
Source: Mitsubishi Research Institute
Figure 3 Characteristics of Enron’s Management Strategy
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3. Comparison of Management Strategy Models of Independent U.S. Petroleum
Refining and Marketing Companies and Anticipated Business Environment Change
Variables
A study was made on anticipated business environment variables likely to affect the
management strategies of independent U.S. petroleum refining and marketing companies in the
years ahead. Whether or not the independent U.S. petroleum refining and marketing
companies will be able to achieve sustainable growth will depend largely on whether each
company’s growth model can appropriately and strategically deal with three key business
environment variables: (1) large-scale mergers and liquidation of assets, (2) environmental
regulations, and (3) crude oil prices and margins (Figure 4). A key factor will be the direction
taken by the independent U.S. petroleum refining and marketing companies in short-term
business orientation and management strategy. This section discusses qualitatively the
possibilities of directions of each of the above-mentioned business environment variables as of
the beginning of 2001.
Source: Mitsubishi Research Institute
Effects of structural changes in the U.S. petroleum downstreammarkets
Temporary is the rapid growth during a
period of asset transfers associated with withdrawal of capital by the Major U.S. petroleum companies from U.S.
downstream sector, a process of concentration and liquidation
Sustainable growth
Slow growth/decline
Rapid growth of
independent U.S. petroleum refining
and marketing companies
Figure 4 “Sustainable Growth” by Independent U.S. Petroleum
Refining and Marketing Companies
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B. Implications
We believe that the prominent independent U.S. petroleum refining and marketing companies
examined in this survey will continue to compete in terms of cost while focusing their
management strategies on realizing economies of scale and economies of scope. However, it
is quite possible that in the process their essence will change in a dynamic way. This is
inevitable because under the principle of market competition, those companies that compete
successfully in terms of cost will remain, while those that fail will be forced to withdraw from the
market.
Figure 5 illustrates transitions in the groupings by type of U.S. petroleum companies over a
period of 20 years. It is clear that over this 20-year period the prevailing business model in the
U.S. petroleum industry has been shifting from that of vertical integration to a disintegrated or
segmented one. Nevertheless, this can also be seen as a part of longer term, continuously
dynamic process. The probability that the U.S. petroleum industry will continue to experience
repeated cycles of integration followed by disintegration (segmentation), followed by
reintegration is high. It is also quite likely that the main players in the industry 20 years from
now will be quite different in substance. Except for Lyondell-CITGO Refining, all of the
independent U.S. petroleum refining and marketing companies examined in this survey have
decision-making capabilities in place to allow for quick response to such changes.
On the other hand, an examination of the petroleum downstream markets from the viewpoint of
supply stability shows that there is room for further evaluation on the trend toward business
segmentation in the competitive market of the United States. For example, when downstream
business is unprofitable, it may be acceptable for a vertically integrated enterprise to continue to
operate downstream since the loss could be covered by the upstream profit. On the other
hand, for companies specializing in the downstream segments based on a cost leadership
strategy, such an approach may not be acceptable in some regions.
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Source: Materials prepared by Mitsubishi Research Institute based on data from Performance Profiles of Major Energy Producers 1999, published by the U.S. Energy Information Administration.
1979 1990 1999
Vertically Integrated Enterprises Vertically Integrated Enterprises
Enterprises Specializing in Upstream Operations
Enterprises Specializing in Upstream Operations
Vertically Integrated Enterprises
Enterprises Specializing in Upstream Operations
Enterprises Specializing in Petroleum Refining and Marketing
Energy Services Enterprises
Figure 5 Transition in Groupings by Type of U.S. Petroleum
Companies (Companies Enrolled in FRS)
Copyright 2001 Petroleum Energy Center. All rights reserved.