Remaking Big Oil The Desperate Rush To Slash Costs

Employees of Amoco Corp. were still reeling from the wrenching 1992 shakeup that led to 8,500 job losses when word of another corporate restructuring began circulating in March. For months, tensions and anxiety grew as executives worked on the details. "There was self-doubt, paranoia--nobody got anything done," recalls one senior official.

Not surprisingly, it was a glum, stony-faced group of Amoco workers who assembled on July 21 to hear Chairman H. Laurance Fuller spell out the $28 billion oil giant's latest overhaul. Working the crowd patiently and in shirtsleeves for 90 minutes, he explained that an additional 4,500 staff jobs will be cut by 1996, bringing total employment down by 25% since 1992. Further, the chairman told employees, the company's three operating units--oil and gas exploration and production, refining and marketing, and chemicals--will be split into 17 business groups that will be held highly accountable for performance. The goal: an annual cost savings of $1.2 billion. One plaintive staffer asked when the chopping and changing would end. Fuller's response: "Probably never."

CONTINUAL OVERHAUL. It's a message resonating throughout Big Oil. Not since the throes of the merger-and-acquisition craze a decade ago has the oil industry been in such ferment. Constant restructurings--layoffs, asset sales and swaps, write-downs on oil and gas properties, outsourcing service functions--are fast becoming a regular occurrence.

On top of Amoco's $256 million second-quarter hit to earnings, Mobil, Texaco, and ARCO wrote off a combined $588 million from recent restructurings, contributing to a sharp fall across the industry in second-quarter profits. Return on equity for the Big Six U.S. companies--Exxon, Mobil, Texaco, Chevron, Amoco, and ARCO--has slipped from 14.8% in 1988 to 12.9% last year, figures Kidder, Peabody & Co. analyst Bernard J. Picchi. And in the past few months, the six have announced that they will lop off some 13,000 jobs. Moreover, says Texaco Inc. CEO Alfred C. DeCrane Jr., who just announced plans to cut 2,500 jobs, or 8% of the workforce over the next year, "the conditions in which we operate will remain tough."

For shareholders, the moves are good news. In fact, companies as diverse as British Petroleum PLC and Amoco itself have seen their share prices recently hit all-time highs. "The industry is getting itself in good competitive shape," argues Fuller. And nascent economic recoveries in Europe and Japan are likely to buck up demand, though analysts argue that overabundant supplies will prevent a major oil-price surge.

Simply put, Big Oil has finally discovered what dozens of other industries now accept as a fact of life: They can forget about returning to the bloated, more-is-better management practices of the past. "As major corporations, we have to reinvent the way we do our work," says Shell Oil Co. President Philip J. Carroll. "We face a challenge that goes far beyond the current realities of the oil business."

Unless Big Oil gets lean enough to profitably hunt for increasingly hard-to-find reservoirs and respond to massive price swings, earnings will seesaw wildly. It was just such a fall in oil and gas prices early in the second quarter of 1994 that helped pummel profits. The industry now is restructuring for an oil price of $18 to $20 per barrel--or lower.

Nor is there a reprieve at the gasoline pump. Worldwide demand over the next five years may grow at no more than 1.8% annually, or about the same as recent years, says analyst Picchi. Why? In part, it's due to growing use of more energy-efficient cars and other equipment.

What's more, tough competition will make it difficult to boost prices, while stiff environmental regulations will add hugely to future refinery outlays. The National Petroleum Council reckons that in the U.S. alone, the industry will need to spend $151 billion by 2010 to upgrade refineries.

For most of Big Oil, the slashing of '94 is at least the second big overhaul of the young decade. Chevron Corp. has taken $1.2 billion in annual costs out of its system, while BP expects to add $1 billion in asset sales this year to the $2.5 billion already dumped since 1992. There's been some payoff, too: The cost of replacing each barrel of oil reserves dropped to $4.20 per barrel in the U.S. from $4.93 in 1993, estimates Andersen Consulting's Victor A. Burk.

But it's clearly not enough. For much of the past decade, the industry has been exhausting its reserves of oil and gas far faster than it has been replacing them. By Burk's estimates, over the past five years in the U.S., Big Oil has found less than two-thirds of the energy supplies it has been using up. The trick now is to husband the financial savings from cutbacks in the U.S. for a big exploration push abroad.

MAD DASH. As if in lockstep, Big Oil is raising cash to shift as much as two-thirds of exploration and production budgets overseas. After selling its chemical unit for $800 million in April, Texaco in early July announced plans to sell or swap half of its 600 underperforming U.S. oil fields. Texaco's new action: a big Russian oil field above the Arctic Circle and China's Tarim Basin.

ARCO has accelerated its pullback from its core Alaskan operation and cut its oil-exploration operations in the Lower 48. By 1996, ARCO hopes to be saving $400 million, while amassing a war chest to seek petroleum and gas in Asia and South America. Meanwhile, Unocal Corp. may sell its 69 oil and gas fields in California.

But can the mad dash overseas pick up the slack? True, there's huge potential: 20 billion barrels in China's Tarim Basin, 2 billion in Russia's Timan Pechora. But just as clearly, there are big risks. Witness Chevron's fitful progress in the Tengiz Field in Kazakhstan, or Amoco and BP's torturous negotiations in Azerbaijan. Oil near the Arctic Circle in Russia also poses huge drilling and transporting--to say nothing of political--challenges. Amoco's Fuller warns not to expect bottom-line contributions from new fields before the turn of the century.

But such doubts aren't daunting most of the industry's executives. Texaco's DeCrane insists the international push is vital: "We get paid to take risks. This is necessary to keep filling our inventory, but you don't want to be helter-skelter around the world."

Given the rundown of assets in the U.S., the huge overseas bets had better pay off. Otherwise, Big Oil will be locked in an ugly vicious cycle, where cost-cutting never overtakes the downturn in revenue growth. For anxious oil workers, the uncertainty is likely to linger for years.


On July 21 announced its second large shake-up in two years. On top of 8,500 workers laid off since 1992, 4,500 will go by 1996--an overall cut of 25%. The latest overhaul caused a $256 million hit to second-quarter earnings. The expected payback: $1.2 billion in annual savings.


Is now starting its third wave of layoffs. By 1995, 3,300 jobs, or 13% of the company's workforce, will be eliminated. The strategy: Massive cuts in the U.S., with increased spending overseas.


On June 28 announced a consolidation of its U.S. production unit. Exxon has cut operating costs by $1.6 billion since fiscal 1992 and sold $1 billion in refineries, oil fields and other assets in each of the past three years.


Restructuring continued in late June with a $315 million write-off of domestic gas fields plus other cutbacks. The goal: to add $1 billion to profits.


In early July announced a $300 million plan to sell or swap half of its 600 domestic oil fields and reduce employment by 2,500. It is refocusing on overseas exploration.

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