Technology And Innovation

– Exxon Co. A Case Study Essay, Research Paper

I. EXXON CORPORATE HISTORY

+ 1870 – Standard Oil Company formed

John D. Rockefeller first entered the oil business in 1863. Seven years later, he and others formed the first Standard Oil Company in Ohio. The “Standard” name was chosen to indicate high, uniform quality. The company was the largest refiner and marketer of kerosene in Cleveland.

+ 1882 – Standard Oil Trust formed

Early in 1882, the Standard Oil Trust was formed under the leadership of John D. Rockefeller. The Trust organized the interests of 40 separate petroleum companies into one orderly system.

+ August 5, 1882 – Standard Oil Company of New Jersey incorporated

The company’s principal facility was the Bayonne refinery, which could process 2,000 barrels of oil per day. Initial capitalization was $3 million.

+ 1888 – Anglo-American Oil Company organized

1890 – Interest acquired in Deutsch-Amerikanische Petroleum – Gesellschaft, Germany

Anglo-American was Standard’s first international venture, formed to market products, principally kerosene, in England. Two years later a 40 percent interest was acquired in DAPG, a new German company. Marketing expansion proceeded rapidly to many other countries around the world.

+ 1892 – Standard Oil Trust dissolved

Standard Oil Interests formed

The new group consisted of twenty holding/operating companies, including Jersey Standard. In 1899, Jersey became the holding company for all, with Rockefeller as President. The organization had by then expanded into an industrial consortium of more than 70 companies.

+ 1898 – Imperial interest acquired

1904 – First foreign oil production

When Imperial needed financing to expand in Canada, Anglo-American purchased a majority interest. Six years later Jersey organized its first affiliate for foreign oil production, in Rumania.

+ 1906 – U.S. Government files anti-trust suit 1911 – U.S. Court orders break-up

The court divided Jersey standard into 34 unrelated companies, seven of which kept “Standard Oil” in their name. Jersey was left with 43% of its original assets, mostly refining and marketing operations, but little production or access to former research and technical activities.

+ 1914 – Peru operations begin

1919 – 50% of Humble Oil & Refining Company purchased

After the dissolution, Jersey needed production, which led to expansion into new countries and areas. Humble in 1919 established the first broadly-based research and development department in the oil industry.

+ 1921 – Venezuela operations begin

1928 – Purchase of Creole Petroleum

Initial operations in Venezuela were greatly expanded with the purchase of Creole Petroleum’s holdings in that country.

+ 1934 – Standard-Vacuum Oil Co. formed

The new company was formed by merging the Far Eastern affiliates of Jersey and Socony-Vacuum.

+ 1959 – Domestic decentralization

1966 – Foreign decentralization

Rapid growth for many years resulted in an organization too large and complex for central

management. Beginning in 1959, Jersey’s major U.S. affiliates were consolidated into wholly-owned Humble Oil & Refining Company. Efficiency was greatly increased, and Humble became the largest U.S. producer, transported, and marketer. Foreign decentralization began in 1966, by establishing four regional organizations to coordinate the work of affiliate companies in each area. Creole, Imperial, and Humble were left as separate regions.

+ 1972 – Exxon Corporation name adopted

1975 – Venezuelan assets nationalized

The name change was needed so that the company could operate in the U.S. under a single nationwide trademark, instead of regional brands.

When Venezuela nationalized the assets of Creole Petroleum and other affiliates in 1975, the action duplicated the seizures by Bolivia in 1937, Mexico in 1938, Iran in 1951, Peru in 1968, and Iraq in two stages, 1972 and 1976.

+ 1986 – Corporation-wide reorganization

Restructuring actually began in some areas of the company in the early 1980s, but the major changes began in 1986. The objectives included: 1) re-focusing on the primary petroleum business, and closely related activities; 2) creating a streamlined, more flexible organization, better aligned with changing energy markets. The changes have resulted in improved financial returns and the ability to quickly respond to opportunities as they emerge.

+ 1989 – Imperial purchases Texaco Canada

The purchase, at a cost of $4.1 billion, was made primarily to implement Imperial’s downstream strategy of greater emphasis on transportation fuels, especially gasoline. Texaco Canada Inc. was renamed McCoU-Frontenac Inc.

II. EXXON TODAY

+ Business Objective

Exxon’s overall objective is “to remain the world’s most profitable oil company.” This objective includes excellence in the oil and gas business, and in chemicals, coal and minerals. The objective involves achieving sound financial results (profitability and enhancement of shareholder value) while providing customers with a consistently reliable supply of energy and products at competitive prices. Each key business segment is expected to be a top competitor and make an important contribution to corporate profitability.

+ Present Environment

Competitive

Unstable

Exxon’s competition comes from other private companies and from various government-owned organizations. Oil and gas supply surpluses, plus excess capacity in refining and marketing, intensify the competition. Exxon employs all methods of competition which are legal and appropriate; nevertheless the company emphasizes the highest standards of ethical behavior and quality in all its activities.

Unstable conditions are largely created by cyclic variations in supply and demand. In 1994 an upturn related to increased economic activity in most major markets stimulated growing demand for crude oil and petroleum products worldwide. Many factors may contribute to the variations, including exploration success, technology developments, general economic conditions, laws and regulations, and political situations. The political variations are perhaps most severe, such as the rise in prices after the oil embargo of 1973, the price collapse of 1986, and 1991 oil price swings related to the conflict in the Middle East

+ Future Environment

Slow Demand Growth

Shrinking Reserves

Continued Competition and Instability

Overall growth in demand is expected to be slow, although some regions such as Asia-Pacific will continue to be more rapid. If present trends are indicative of the future, crude oil reserves will probably decrease in many countries as production continues and finding new reserves becomes more difficult. Unless major discoveries are made elsewhere, control of crude production will increasingly belong to oil exporting nations where large reserves have already been found. The probability is that current competitive and unstable conditions will continue into the future. Overall, the only future certainty is change.

+ Exxon Strengths

Resource Base Functional Diversity Geographic Diversity

Technology Leadership

To prosper in a difficult present and future business environment, Exxon has some significant assets. One is a very large and growing natural resource base distributed around the world. The company’s operations are diverse, including all major functions of the petroleum business plus chemicals, coal and minerals, and other activities. Geographic diversity sustains overall profitability even though regional economies change. Numerous operations have profited from a wide range of technologies developed by Exxon research programs. Other company research has significantly lowered costs.

+ Exxon Strengths

Employees

Financial Resources

Quoting Mr. L. G. Rawl, former Chairman, Exxon Corporation,” . . . for the continued success of our worldwide operations, our most valued resource – as always – is the quality and character of the people we employ.” This quote appears on the cover of the 1989 Annual Report. In subsequent Annual Reports, and in many other statements, the high quality of its people is given as one of Exxon’s primary strengths.

The present corporate structure has enabled Exxon to maintain its position among the oil industry’s most cost-effective operations in finding, developing, and marketing petroleum. The result is very healthy financial resources, combined with the flexibility to respond advantageously to rapidly changing conditions and opportunities. Over the past ten years, internal cash generated from operations provided more than $ 1 00 billion; the amount in 1994 was $9.9 billion.

+ Business Strategies

As you may recall from the overview course, the operations of the oil business are divided into “upstream” and “downstream” sectors. Upstream includes Exploration, Land, Drilling, and Production. Transportation occurs as part of upstream operations and also in connection with Refining and Marketing in the downstream group. Some types of Land work are required downstream as well.

The business strategies used to achieve the corporation’s objective vary geographically according to market conditions and business environments. Selectivity and flexibility are two key elements incorpo-rated into the business plans. After decisions are made and plans implemented, the results air, carefully compared with expectations.

Another key element is continuous improvement of Exxon products, operations and service to customers, using advanced technology. Exxon maintains an ongoing focus on upgrading the overall assets of the corporation. In the decade of the 1980s more than $90 billion was invested in projects which met the criteria of quality, attractive returns, compatibility with overall goals, and improvement in competitive position. Other assets, which no longer satisfy those criteria, have been sold. Asset sales over the past five years average more than $1 billion per year, with $1.4 billion in 1994. Most sales have come from mature North American operations.

Overall, the best opportunities are sought to employ Exxon’s capital for maximum profitability.

+ Upstream Strategies

Exploration Opportunities

Superior Returns

New Gas Markets

Maximize Profitability of Existing Production

Upstream strategies include reserves replacement through pursuit of all attractive exploration opportunities worldwide, and development of new discoveries and other projects that will deliver superior returns even at relatively low energy prices. These strategies emphasize development and application of superior technology for exploration and production. The asset mix will be continuously upgraded. Natural gas is the fastest growing energy source, and new markets are being sought for Exxon’s large undeveloped gas reserves worldwide. Another strategy centers on maximizing the profitability of existing oil and gas production through cost reductions, increased volumes, and other improvements. Innovative approaches are sought to ensure that all operating systems are reliable, cost effective, and meet the highest environmental and safety standards.

+ Downstream Strategies

Focus on Best Markets

Emphasize Profitable Products

Optimize Raw Materials

Upgrade Refineries and Service Stations

Lower Costs

Maintain Competitive Advantage

Downstream strategies include emphasis on expanding high-potential markets where Exxon can operate competitively and profitably, such as the Asia-Pacific region, Latin America and Eastern Europe. Exxon also focuses on the more profitable transportation fuels, lubricants, and specialty products for which demand is growing. Raw materials will continue to be optimized by careful sales, purchases and trades, and the effective use of refinery upgrading process units . Both refineries and marketing facilities will continue to be upgraded to meet consumer and environmental requirements. Efforts to reduce unit operating costs and improve efficiency are on going, as is the emphasis on safe, reliable operations. Large investments in research will be made to achieve or maintain product differentiation and competitive advantage.

Exxon has several areas of competitive advantage in downstream operations. There are efficient, integrated refining facilities worldwide. The company is one of the largest manufacturers of lubricants in the world, which are some of the highest value products made from petroleum. Exxon has been a leader in converting to unleaded and reformulated gasoline s and the introduction of new retail technology such as the automated Express Pay system. Strong recognition of the Esso brand in many countries is another advantage.

+Chemicals Strategies

Strengthen and Commercialize Proprietary Technology

Expand Profitable Businesses

Lower Costs

Improve Synergy s

Upgrade Business Portfolio

Exxon is prominent in a wide range of petrochemicals. These include aromatics, ethylene and polyethylene (some of the basic building blocks of petrochemicals); a dynamic range of plastics, composites and other polymers; and specialty products such as fuel and lubricant additives, fine solvents, vinyl and oil field chemicals. Strengthening and commercializing proprietary technology enables the company to maintain or improve its competitive position. The focus is on higher value-added products combined with support services tailored to customer needs. Where there is a good match with Exxon’s strengths and skills, the company will expand profitable businesses into growing markets such as the Asia-Pacific region. When additional plant capacity is needed, low cost techniques such as “debottlenecking” will be used, whenever possible, rather than new construction. Several chemicals operations have achieved substantial savings and increased production by converting surplus refinery process units to chemicals manufacture. Lower ma unit production costs are continuously sought, while enhancing safety and reliability. Other significant benefits can be achieved by continuing to improve synergies with Exxon refining and producing operations. The company maintains an ongoing effort to upgrade its business portfolio by divesting non-strategic assets, and by selective investments, acquisitions and joint ventures.

+ Corporate Activities

Oil and Gas

Chemicals

Coal and Minerals

Public Service

Exxon Corporation concentrates on its basic businesses and is dedicated to being a leader in those businesses. Most of Exxon’s operations are related to oil and natural gas in one way or another. The company’s other basic business involves coal, copper and other minerals. Extensive research is conducted in support of principal businesses to maintain or increase competitive advantage. There are also operations in electric power generation and real estate. Additionally, Exxon sponsors a variety of programs for the benefit of communities and countries in which the company operates.

+ Exxon Worldwide

Exxon currently operates or markets products in more than 100 countries, and employs approximately 86,000 people, less than half the peak level in 198 1. About 36% are employed in the United States. Oil and gas operations account for well over one-half. The company’s operations are roughly two-thirds international and one-third in the United States with the trend toward increasing the international focus. Over 98% of the employees are citizens of the countries where they work.

+ Corporate Elements

Board of Directors

Management Committee

Compensation and Executive Development Committee

Operating Divisions and Affiliates

These corporate elements give the corporation general direction, establish policies, monitor performance, and carry out the strategies selected to meet Exxon’s objective. We’ll look at each of these elements.

+ Board of Directors

3 Inside Directors

9 Outside Directors

General Direction

Exxon currently has twelve positions on the board of directors. Three are also officers of Exxon Corporation. The first two outside directors were elected to the board in 1966. The outside directors today represent a variety of other businesses (seven), education (one), and research (one). The employee directors are Exxon’s Chairman and Chief Executive Officer, L. R. Raymond; President, C. R. Sitter, and R. E. Wilhelm, Senior Vice President.

The board of directors is responsible for giving general direction to the entire corporation.

+ Management Committee

Broad Policy Guidance

Long-Range Strategies

Operating Results

The members of the management committee are the chief executive officer, president, and the senior vice presidents. The present members are also identified in your packets.

Under the direction of the board of directors, the management committee establishes policies which give broad guidance to the entire corporation. The committee decides on long-range business strategies and develops related financial plans and budgets for capital spending. The activities of all elements of the corporation are reviewed with respect to operating results. Each member of the committee serves as a contact executive for a major corporate division or affiliate.

+ Compensation and Executive Development Committee

The same individuals who constitute the management committee also form the compensation and executive development committee. This committee deals with issues relating to human resources and the organization whereas the management committee deals with financial issues.

+ Corporate Management

Officers

Departments

The work of the two corporate committees is supported by various officers of the corporation and their departments.

+ Corporate Officers

Chief Executive Officer

President

Senior Vice Presidents

Vice Presidents

The vice presidents function either as heads of corporate departments and offices or as heads of principal corporate divisions. These individuals and their positions are identified in your material.

+ Headquarters Departments

Treasurer’s

Controller’s

Tax

Law

Corporate Planning

Public Affairs

Environment and Safety

Human Resources

Investor Relations and Office of the Secretary

Medicine and Occupational Health

These departments, each headed by a corporate vice president, support the two corporate committees in broad areas pertaining to the entire organization. All are located at corporate headquarters except for Medicine and Occupational Health, which is located in Florham Park, New Jersey. Exxon maintains an office in Washington, D.C., headed by a vice president.

+ Headquarters Location

Where is Irving, Texas?

Why Irving?

After many years in New York City, corporate headquarters was relocated to Irving, Texas, in 1990. Prior to the move, numerous locations were evaluated and the Dallas area was selected as offering the best combination of desirable factors. These included living costs, transportation, business infrastructure and climate, and the cost of doing business.

Construction started in December 1993 on a permanent headquarters office building in the Las Colinas complex in the city of Irving. The site is near Dallas/Fort Worth International airport and about ten miles from downtown Dallas. Temporary offices are located about a mile from the permanent site.

+ Operating Elements

Affiliates

Divisions

Extending from the board of directors, the management committee, and other corporate officers and departments, the worldwide operations of Exxon Corporation are carried out by various affiliates and divisions.

Within the guidelines of overall corporate strategy, the line managers of these organizations have the authority to conduct operations as required by their geographic areas or particular function.

+ Divisions of Exxon Corporation

Exxon Company, USA

Exxon Company, International

Exxon Exploration Company

Exxon Chemical Company

Exxon Coal and Minerals Company

Exxon Upstream Technical Computing Company

Exxon Computing Services Company

These are the principal divisions of Exxon Corporation, although a number of other organizations are also corporate divisions. The chief executive officers of the first five are also corporate vice presidents.

+ Affiliated Companies

Imperial Oil Limited

Exxon Production Research Company

Exxon Research and Engineering Company

Together with the above divisions these companies conduct the majority of Exxon’s operations.

III. DIVISIONS AND AFFILIATES

+ Exxon Company, U.S.A.

Headquartered in Houston, Texas, Exxon USA handles the corporation’s domestic oil and gas operations (except for exploration). There are now about 16, 100 employees.

+ Exxon Company, International

This organization has been assigned a variety of operations, working with 20 principal affiliates and more than 600 associated companies. Business is conducted in some 80 countries, in at least 20 languages, and more than 35 currencies. ECI currently employs approximately 34,200 people.

+ ECI Functions

Strategic Guidance and Stewardship

Management Development

Coordinate

Supply/Transportation

International Crude and Product Trading

From its headquarters in Florham Park, Now Jersey, Exxon Company, International conducts operations worldwide. For affiliates outside the U.S. and Canada, ECI advises on matters of policy, strategy, investment plans, technology, and management development. ECI does more than advise; the company also has stewardship of operating and financial results for affiliates outside North America. When a project involves more than one affiliate, ECI acts as coordinator.

Exxon’s national affiliates exhibit considerable variety in their character. Some are major petroleum businesses with a long history of their own. For example, affiliates in thirteen countries in the Far East, Europe, and the Caribbean have been associated with Exxon for 100 or more years. During 1993 and 1994, the affiliates in Malaysia, Singapore, Norway, Thailand, Switzerland, Hong Kong and Japan celebrated centennials.

Many Exxon operations use raw materials and products from other countries. ECI operates the complex international supply and transportation network responsible for meeting affiliates’ needs. In addition, ECI has direct operating responsibility for international crude and product trading.

+ Exxon Chemical Company

Exxon Chemical Company is composed of geographic and other divisions, plus product and industry groups. We’ll look at this organization in more detail in the section on Petrochemicals. Headquarters for the company was moved to Houston in 1991. Exxon Chemical employs approximately 15,950 people.

+ Exxon Coal and Minerals Company

From headquarters in Houston, Exxon Coal and Minerals Company handles all of the corporation’s coal and other mining operations except for Canada. Electric power generation in Hong Kong is also managed by this segment of the corporation. There are approximately 8,100 employees.

+ Exxon Upstream Technical Computing Company

Exxon Computing Services Company

In 1991, a new Exxon division was formed to consolidate operations of four Exxon upstream computer centers in the Houston area. Exxon Upstream Technical Computing Company (EUTEC) provides computer services to the corporation and its affiliates in the areas of exploration and production. There are about 280 employees.

Exxon Computing Services Company was formed in 1992 to provide cost-effective management for a major part of Exxon’s computing, networldng and telecommunications activities. Headquarters is in Houston, Texas. There are approximately 313 employees.

+ Exxon Exploration Company

This company was formed in 1992 to consolidate all of Exxon’s exploration activities worldwide, except for Canada. Headquarters is in Houston, Texas. EEC operates through four business units responsible for different geographic areas, and has about 1,600 employees.

+ Imperial Oil Limited

Imperial Oil Limited, a major Canadian company with headquarters in Toronto, is owned 69.6 percent by Exxon. This company is responsible for the corporation’s Canadian businesses, and now has approximately 8,250 employees.

+ Exxon Production Research Company

Exxon Production Research Company is an affiliated company responsible for exploration and production research, the “upstream” sector. Headquarters is located in Houston with approximately 1,000 employees.

+ Exxon Research and Engineering Company

This affiliated company handles downstream research in refining and marketing. Exxon Research

and Engineering Company also performs fundamental scientific research which may have applications upstream or downstream, and supplies engineering expertise for new plants, expansions, and other projects. ER&E conducts research in alternative fuels and chemicals. There are about 3,000 employees, with headquarters in Florham Park, New Jersey.

Together with the above divisions these companies conduct the majority of Exxon’s operations.

Research related to the company’s 100th anniversary in 1982 identified more than 4,000 entities which are presently, or have in the past, been part of Exxon.

IV. EXXON OPERATIONS – PETROLEUM

Exploration Land

Drilling

Production Transportation Refining/Gas Plants Marketing

Petrochemicals

These are the functional segments of the oil and natural gas business that we spent most of the time examining in the overview course. We’ll look at them in light of Exxon’s operations in each area.

+ Raw Materials – Hydrocarbons

First, let’s review some basic information from the overview course. The raw materials of the petroleum industry are hydrocarbons, natural substances composed of widely varying combinations of carbon and hydrogen atoms. They are formed below the earth’s surface, largely from organic material, over varying periods of time.

+ Source

Migration

Trap

Once formed, the hydrocarbons, either as liquids or gases, often migrate through the rock layers toward the earth’s surface. In some areas local conditions such as anticlines (folds in the rock layers) stop the n-migration and trap the hydrocarbons underground. In other areas migration continues until the crude oil and natural gas reach the surface.

+ The Early “Oil Business”

The human race has been using hydrocarbons for thousands of years, for a variety of purposes – lubrication, medicines, waterproofing, and many others. Until relatively recent times, supplies were largely obtained from surface oil seeps and natural gas vents, which were most probably found by accident.

EXPLORATION

Eventually attempts began to increase supplies by locating new sources of oil. Although some of the early methods are no longer in use, the objective remains the same: to discover significant quantities of economically producible hydrocarbons trapped below the earth’s surface, in order to maintain reserves for future production.

The work of modem exploration can be divided into two phases, data acquisition and data interpretation.

+ Data Acquisition

Surface Studies

Geophysical Surveys

Exploratory Drilling

These are the principal methods used today for acquiring information about areas of interest. Surface studies include examination of rocks exposed at the surface, geochemical sampling, satellite photos and other techniques. Geophysical methods include gravity, magnetic and seismic surveys. Exploratory drilling provides information from well logs, cores and production or drill stem tests.

+ Data Interpretation

Processing

Analysis

Conclusions

Data acquired from field studies and surveys is processed, often using sophisticated computers. The data are analyzed and integrated with previously acquired information of all types, including preparation or revision of various types of maps and cross sections. The work of interpretation also is frequently conducted by using complex computer systems. A summary report is usually prepared with conclusions and recommendations.

+ Jersey Standard

In its early decades Standard Oil was focused on production and downstream operations. For Jersey Standard, interest in exploration was stimulated after the court ordered breakup in 1911, since Jersey was left mostly with downstream segments and needed crude for its refineries. World War I limited the areas and the effort, but after the war Jersey’s exploration program became worldwide.

+ Exxon Exploration Organizations

Exxon Exploration

Imperial

Exxon Production Research

Today Exxon Corporation’s worldwide exploration for oil and gas takes place in twenty-eight countries on six continents plus offshore areas. The work is divided geographically between two organi-zations. Exxon Exploration Company is responsible for Exxon’s exploration work in all areas of the world except Canada which is handled by Imperial. This division of the corporation consolidates exploration operations formerly assigned to Exxon USA and ECI.

Exxon Production Research conducts the research projects needed to support and enhance the efforts of the other two companies. We’ll talk about Exxon’s exploration methods when we discuss EPR.

+ Exxon Exploration Company

In discussing Exxon’s exploration activities we’ll use geographic regions, starting with the United States. Let’s begin with Exxon USA’s predecessor, Humble Oil.

+ Humble Oil & Refining Company

Wallace E. Pratt

In 1918, Humble hired Wallace E. Pratt as the company’s first professional geologist. The following year Jersey Standard acquired 50% of Humble, including the services of Mr. Pratt. Later events proved his services to be one of the most signifi