Strategic Analysis of Oil Industry – Case Study of Chevron

Strategic Analysis of Oil Industry – Case Study of Chevron

Introduction

Central to the achievement of sustainable organisational development are strategies. Sustainable competitive advantage is the ultimate goal of strategising. Amongst the motivations to strategise are to grow fast ahead of the competitors, grow in the line with the industry or to simply catch up and defend an existing status. Materialisation of these strategies, however, is hindered by different challenges, threats and risks experienced by the industry down to organisations in the process of pursuing these strategies. The global petroleum industry, which includes the global processes of exploration, extraction, refining, transporting and marketing petroleum products, is not an exemption. Strategies unique to the petroleum industry include upstream, downstream, pipeline, marine and service and supply.

Super majors -- to which Chevron Corporation belongs -- combine two or more of these strategies. Headquartered in San Ramon, California, Chevron Corporation, on the other hand, refers to an American multinational energy corporation. Simply Chevron, the corporation is involved in every aspect of oil, gas and geothermal industries. Chevron explores and produces, refines, markets and transports petrol products as well as manufactures chemical and generates power. While the company is currently in the process of alternative energy sources, it already has fuel, convenient stores, lubricants and fuel additives brands. With this, it is the goal of the report to discuss the strategies that Chevron implemented and is planning to implement.

Chevron’s Strategies

Market penetration

Penetrating the global market was made possible by the quality core businesses such as exploration and production (oil and natural gas), manufacturing, products and transportation (refining operations, global trading, gasoline and refined products, pipelines, lubricants, fleets and fuel additives) and other business services which include chemicals, coal and rare earth metals, power and innovative technologies. As one of the six largest oil companies worldwide, Chevron is operating in more than 180 countries and employing approximately 58,000 employees and about 4,000 service station employees.

While the headquarters is in California, Chevron has a strong presence in Texas, London, Singapore, Mexico and Moscow. Chevron supplied retail outlets in six continents while also investing in 13 power generating facilities in the US and in Asia. Chevron also recognizes the growing demand in China and India. Nevertheless, the market share of Chevron is lower in some countries considering the presence of competition such as Shell.

More specifically, Chevron has a network of about 1,200 Caltex-branded service stations in 13 countries in Africa and Middle East. In the Asia Pacific, there are more than 2,200 Caltex-branded retail outlets in 10 countries. Australia alone has about 1,800 Caltex service stations. In Europe, approximately 1,200 Texaco-branded service stations serving consumers in 3 countries.

Market development

Chevron has three broad brands as Techron, Caltex and Taxaco. Further, Chevron has four marketing brands known worldwide: fuel, convenience stores, lubricants and fuel additives. Aside from the three brands, Standard Oil of California (Social) became Chevron after the merger in the 1980s and Union Oil Company of California (Unocal) became a wholly owned subsidiary through a merger in August 10, 2005 (Blum, 2005). Moreover, there are four sub-brands of convenient stores namely Star Mart, Extra Mile, Redwood Market and Town Pantry. For lubricants, the sub-brands comprised Delo which is being sold in Caltex and Chevron stations, Havoline which is currently available in Caltex and Texaco, Revtex which is being sold by Caltex stations and Ursa which is available in Texaco. There are two fuel additives that Chevron sells: Techron and Clean System 3. Techron was made available in 2005 in Chevron and Texaco stations and in Caltex stations in 2006. Clean System 3 was phased out in 2005 in favour of Techron.

Techron, specifically, is produced by Oronite which is a subsidiary company of Chevron. Oronite develops, manufactures and markets performance-enhancement additives such as lubricating oils and fuels. Oronite is involved in three main businesses namely lubricating oil additives, fuel additives and components and chemicals.        

Product development

To continue, Techron is dubbed as the Chevron difference since the corporation is a pioneer in offering oil and fuel additive, making Chevron as a global leader in the additive business as well. Globally, more than 98% of all Chevron, Texaco and Caltex gasoline's are sold with Techron. Techron produces lower emissions, higher performance and cleaner engines. In 2004, Chevron with Techron was the first gasoline that met the rigorous top tier fuel standard set by BMW, GM. Honda and Toyota. In 2009, Chevron began applying Techron technology to diesel fuel through launching Techron D in select markets.  

Other than this, in 2010, Chevron was able to produce 2.763 million barrels of net-oil equivalent per day which is 2% higher than in the previous year. About 75% of the total volume occurred outside the United States. At the end of 2010, the corporation had a global refining capacity of more than 2 million barrels of oil per day.

Diversification

Other than the already diversified brand portfolio, Chevron is also concentrating on alternative fuels. Chevron is currently developing technology for alternative energy such as fuel cells, photovoltaic, advanced batteries and hydrogen fuel for transport and power. Chevron strongly believes that non-food biofuels will have an important role in diversifying the energy supply in the US hence is currently developing non-food biofuels. Nevertheless, Chevron had already developed and launched the B5 Biodiesel Blend which combines 5% biodiesel volume and 95% petroleum diesel in 2007. On lieu with this, the corporation had announced in 2009 the discovery of five natural gas reserves in the Carnarvon Basin, offshore Western Australia as well as offshore the Republic of the Congo.

Upstream vs. Downstream Strategies

What can significantly affect the cost basis of Chevron are the economic changes. For instance, Chevron’s refining operations is subjected to volatility. This is more so since the global industries including the oil industry is currently overcoming the aftermath of the 2008 global financial crisis. While the operation involves dealing with various international and local laws, guidelines and standards, different acts of violence can also threaten the bottom line profitability of Chevron.

To offset the adversities of the macro environment, Chevron is currently dealing with big projects that can offer attractive financial returns. In 2007 to 2008, about 75% of the investment budget has been invested in upstream oil and gas exploration and production projects. For instance, the Gorgon LNG Project in Australia maintains a crude oil field on Barrow Island in an environmentally responsible way which is Chevron’s way of addressing global climate change (Geo Expo, 2011). Other than this, Chevron is keen and experienced in handling many technical and operational details in a safe and cost-effective manner for more than 130 years now.

Chevron, further, has a reliable refining and marketing networks like Oronite which can be further develop to broaden fuel additive brands. Chevron is maximising Oronite by further developing renewable transportation fuels from non-food sources. This is crucial since other supermajors are also currently developing additives that can enhance driving performances, for instance which are offered in lower prices (Kaplan, 2010).

Because Chevron’s earnings are being realized in the chemical business which is not a core business, Chevron can also develop this area. While the demand for a core business which is refined product is declining, the demand for such in China is expected to rise sharply in the coming decades. Over the next 10 years, about 60% of the global petrochemical demand will occur in the Asian markets and with more than 1/3 in China alone. The rest will be evident in Indian and Pakistani markets.   

Opportunities	Weight	Rating	Weighted Score
1) Greening the entire operation	0.07	4	0.28
2) Development of fuel additive brands	0.09	4	0.36
3) Increasing market share in other developing countries	0.03	2	0.06
4) Development in non-core businesses	0.09	4	0.36
5) Strengthening research and development in alternative sources	0.03	3	0.09
6) Development of renewable energy resources	0.06	3	0.18
7) Efficient utilization of energy	0.04	2	0.12
8) Steady stream of cash flows	0.04	2	0.12
9) Increasing demand in the Chinese market	0.07	4	0.28
10) Provision for mergers, acquisitions, joint ventures and subsidiary	0.04	2	0.08

 

Threats	Weight	Rating	Weighted Score
1) Subject to volatility	0.06	3	0.18
2) Global financial crisis of 2008	0.04	2	0.08
3) Environmental concerns	0.04	1	0.04
4) Tight competition w/ other super majors	0.08	4	0.32
5) Economy brand's) development strategies of competitors	0.09	3	0.27
6) Risks of doing business internationally	0.03	2	0.06
7) Declining refined product demand	0.06	3	0.18
8) Geo-political instability including terrorism	0.04	2	0.08
TOTAL	1.00		3.14

Conclusion

Based on external factor evaluation of Chevron, specific opportunity factors are development in non-core businesses and fuel additive brands both at 0.36 36 as well as greening the entire operation and increasing presence in the Chinese market by 0.28%. On the other end of the spectrum, key threats to Chevron are tight competition with other super majors (0.32) economy brand development of other key players (0.27), declining refined product demand (0.18) and subject to volatility rates (0.18). Nevertheless, Chevron is still in strong competitive responsiveness with 3.14 total weighted score.

References

Blum, J. (2005). Shareholders Vote in Favor of Unocal Acquisition. Washington Post.

Chevron. (2011). Company Profile. Retrieved on 23 May 2011, from chevron.com.

Chevron. (2011). Leading the Way. Retrieved on 23 May 2011, from chevron.com.

Geo Expo. (2011). The King of Giant Fields.

Kaplan, T. (2010). Chevron to Buy Atlas Energy for $4.3 Billion. Washington Post.