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The Green Arm of an Oil Giant

Like many integrated oil giants, ChevronTexaco (CVX) makes the bulk of its profits by exploring for crude oil and natural gas and churning those commodities into products like gasoline. But through its subsidiary Chevron Energy Solutions, ChevronTexaco has been venturing into areas not usually associated with oil companies, such as helping a supermarket chain become more energy-efficient and developing various fuel-cell technologies.

It may seem odd for an oil company -- especially one the size of ChevronTexaco, the world's fourth largest in terms of reserves -- to be involved in green energy and managing the electricity needs of other companies. Such terrain is dominated by utilities. But ChevronTexaco, which generates much of its own energy at its oil refineries, has seen the wisdom of capitalizing on its technology and expertise in these areas, especially as support for more environmentally friendly energy options gain momentum.

Jim Davis, president of Chevron Energy Solutions (CES), recently spoke with BusinessWeek Online's Heesun Wee about the oil giant's foray into the energy-solutions business, the future of alternative-energy technologies, and when they'll become cost-competitive. (Subsequent to the interview, the chairman and chief executive of Dynegy (DYN), in which ChevronTexaco has a 26.5% equity interest, resigned. A spokeswoman for Chevron Energy Solutions says the Dynegy CEO's departure doesn't affect ChevronTexaco or CES's business strategy.) Edited excerpts from the interview follow:

Q: You built a single fuel-cell power plant in San Ramone, Calif. Who uses the electricity -- ChevronTexaco?

A: Yes, the data-applications center. It's part of our campus.

Q: Is the fuel cell connected to the power grid?

A: It actually runs in parallel to the grid. The fuel cell is powering a portion of the data center, and the other part of the data center is being powered by the grid.

Q: And the idea is that more of these fuel-cell power plants could eventually serve businesses beyond ChevronTexaco?

A: Yeah. The technology is great for remote locations that actually have access to natural gas but don't have access to the electric grid or other types of generating capacity. [A fuel-cell power plant uses the hydrogen in natural gas to generate electricity, clean water, and heat through an electrochemical process -- not a combustion process, as is the case with traditional fossil-fuel power plants.]

But right now, the technology is still expensive [compared to] traditional sources of generation.

Q: When will such technology become cost-competitive?

A: In areas that have high electric rates -- you'll see the market develop there first. Then as the cost to manufacture the fuel cells comes down, you'll be able to introduce it into more traditional low-cost power markets. So really we're probably looking at various markets opening up over the next 5 to 10 years, with maybe some global markets happening faster, where there isn't a reliable economic choice in place today.

Q: Do you think it's possible to be an integrated oil company and not be somewhat vested in new energy technologies?

A: The technologies are rapidly advancing. We're seeing a lot of investment coming from not only oil companies like ourselves but from the automobile manufacturers and Wall Street itself. There has never been so many dollars invested into advancing these new technologies.

At some point in the future, these technologies are going to become cost-competitive, and when they do, a huge market shift is going to take place.

The real hard thing, going back to one of your earlier questions, is when is it going to arrive? In the stationary power market -- which is the market that CES focuses on -- it's going to happen within the next 10 years. In the transportation market, you're probably well past 10 -- maybe a 20-year horizon, although we're seeing the hybrid [automobiles, like the Honda Insight and Toyota Prius] take out more market share.

Q: What triggered ChevronTexaco to invest more in new energy technology research?

A: Certainly the air-emission issues. Also, you've got national-security issues with our dependence on foreign oil. The interest in alternative-energy technologies is out there, and it's growing.

The single biggest impediment to introducing [new technologies is the costs of producing them]. We've got environmental benefits, and you've got reliability benefits. But at the end of the day, companies buy primarily based on economics. I'm always driving [this point home] to the energy technology companies.

Q: How does CES fit into ChevronTexaco?

A: CES, which was created in July, 2000, is a wholly owned subsidiary of ChevronTexaco. We help our customers use less energy, pay less for energy, and ensure reliable high-quality power for their operations.

Our target customers range from retailers -- grocery-store chains, large department stores, stand-alone retail stores -- to light manufacturers and all the way to heavy industrial manufacturers. We also do work in institutional markets for schools, universities, hospitals, and the federal government.

Q: Does CES contribute to ChevronTexaco's revenue?

A: We're a startup business, so we're a small part of the ChevronTexaco portfolio at this point. [CES contributes less than 2% of ChevronTexaco's revenues and other income, which was roughly $106 billion in 2001.]

Q: Why an energy-solutions focus from an oil company?

A: ChevronTexaco has been managing energy use, improving efficiency, and generating power at its own facilities for many years, so our project engineers and energy managers have decades' worth of experience in the energy-services industry.

Second, ChevronTexaco has been involved in the research and development of new energy technologies for quite some time, and CES provides the means for bringing these new technologies to the marketplace.

[Third,] CES represents a key element of ChevronTexaco's new identity as a global energy company beyond its core technologies in oil and gas. We're part of ChevronTexaco's effort to identify, develop, and commercialize new technologies, especially those that provide environmental benefits and pursue business opportunities that build new revenue streams. This is a long-term strategy designed to carry the corporation well into the future, regardless of shifts in the oil and gas industry and fluctuations in the economy.

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