Chevron Corp. and Phillips Petroleum Co. have signed a letter of intent and exclusivity agreement to form a 50-50 joint venture of their global chemical operations-totaling about $6.1 billion in assets.
The new limited liability company, yet to be named, will be based in Houston. The JV will combine the olefins, polymers, and aromatics businesses of both companies. The new firm will not include Chevron's Oronite additives business, because it does not provide "strong synergies with Phillips's operations."
The combined operations, says Chevron Chairman and CEO Dave O'Reilly, will reduce costs by $150 million/year and "improve the effectiveness of capital spending." This will be achieved through "tapping efficiencies in purchasing and logistics, enhancing feedstock flexibility, optimizing production scheduling, improving organizational efficiency, and reducing staffing," said the companies. About 600 jobs will be lost from the combined 6,000 Chevron and Phillips workforces.
The transaction is expected to close by midyear after being approved by both companies' boards. A regulatory review also will be required before the deal is finalized.
"This joint venture creates one of the world's leading chemicals producers, with a global market presence, excellent growth prospects, and a strong financial position," said Jim Mulva, chairman, president and CEO of Phillips.
Asset base
According to estimates from both Chevron and Phillips, the new company will be one of the world's leading producers of olefins and polyolefins. Jointly, the new company will be the world's fifth-largest producer of ethylene, with a combined gross capacity of 8.2 billion lb. The top producers, according to the firms' estimates, are recently merged Dow Chemical Co. and Union Carbide Corp., ExxonMobil Corp., Royal Dutch/Shell, and Equistar Chemicals LP-a joint venture of Lyondell Chemical Co., Millennium Chemicals Inc., and Occidental Petroleum Corp.
Also, the JV will become the fourth-largest producer of polyethylene, with a gross capacity of 5.5 billion lb. The other three top producers of polyethylene are Dow Chemical, ExxonMobil, and Equistar.
With regard to styrene production, the JV will rank as the seventh-largest producer worldwide and second in North America. The JV will have 1.7 billion lb of styrene monomer and 1.2 billion lb of styrene polymer capacity. The new company will take the third position for paraxylene capacity, just below ExxonMobil and BP Amoco PLC.
"Our two petrochemicals operations are a great fit," said O'Reilly.
JV management
In the coming months, the JV firm will arrange for the financing of $1.6 billion of debt and will make a one-time payment of $800 million to each of the parent companies.
Governing the JV will be a six-member board, which will consist of two Chevron-appointed directors, two Phillips-appointed directors, and a JV CEO and CFO. The latter two appointments will serve as nonvoting members.
President and CEO of the new firm will be Jim Gallogly, Phillips's senior vice-president of chemicals; the JV's CFO will be Kent Potter, Chevron Overseas Petroleum Inc. vice-president of finance.
One director to be appointed from Chevron will be Chevron Chemical Co. President Darry Callahan. The other Chevron-appointed director will be Marty Klitten, Chevron's CFO. Mulva will serve as one Phillips-appointed director. Phillips Executive Vice-Pres. of Downstream Bill Parker will serve as the other Phillips director.
"This new joint-venture company will have the people, assets, and technology to create one of the premier chemicals companies of the world," Gollogly said.
