Unocal Corp. will keep its sights on the gulfs of Thailand and Mexico to meet its plans for oil and gas production growth.
While the slide in oil prices that ended last spring may keep Unocal from meeting its 3 year target for increased oil production, the later price rebound may let the company "loosen the reins just a little" on capital spending, says Roger Beach, Unocal's new chief executive officer.
Beach, who on May 1 replaced the retired CEO Richard Stegemeier, spelled out Unocal upstream and downstream strategies in an interview with Oil & Gas journal. Stegemeier is continuing as Unocal chairman for another year.
COMPANY DIRECTION
Beach said his leadership of the company "is not going to be all that different" from his predecessor's. agree with the strategies in place."
In 1992, Unocal laid out a three tiered restructuring plan that involved cutting high levels of debt - incurred mainly during the 1985 takeover attempt by T. Boone Pickens - by $1.5 billion by May 1997, generating $700 million in after tax proceeds from asset sales by May 1994, and boosting cash flow by $200 million by May 1994.
By the first of this year, Unocal had met its cash flow goal and was 80% of the way toward meeting debt reduction and asset sale targets.
Among Beach's goals this year are completing sales of oil and gas assets. He also plans to reorganize senior management, expanding Unocal's teamwork structure to the top of that organization.
SPENDING STRATEGY
Earlier this year, Unocal cut its capital budget for 1994 to $1.25 billion, matching 1993's level, from a previously planned $1.46 billion. The current 1994 budget is based on West Texas intermediate crude selling for $15/bbl, the previous one on $18/bbl WTI.
The company wants to maintain that kind of flexibility to build cash flow while adapting quickly to changing business conditions.
The oil price plunge that started the year likely will delay Unocal's efforts to boost its crude oil production by 11-13% the next 3 years.
However, Beach said, the company will meet its targeted increase of 25-30% in natural gas production during the same period. During 1994, Unocal expects its gas flow to climb 13% from 1993's level to about 1.8 bcfd. Driving the gas production growth are increases in the gulfs of Mexico and Thailand.
UPSTREAM FOCUS
Unocal's short term upstream strategy focuses on boosting cash flow mainly through accelerated development of proved gas reserves in the Gulf of Mexico.
By the end of the first quarter, the company's Gulf of Mexico gas production had climbed to more than 680 MMcfd, its highest level in 14 years.
Unocal sees Asia as the prime driver of cash flow growth in 1998 and beyond.
During 1996-98, Unocal will look to Thailand for big jumps in upstream cash flow. Thai production currently is constrained by pipeline capacity to about 680 MMcfd. Once a second trunk line from Gulf of Thailand fields to landfall at Rayong goes on stream in late 1995 or early 1996, Unocal expects Thai gas flow to rise to about 850 MMcfd.
While Unocal has largely held the line on U.S. upstream capital spending, the company boosted 1993 outlays for non-U.S. exploration and production.
Elsewhere in Asia, Unocal, with operator Total, is delineating major gas discoveries in the Gulf of Martaban off Myanmar. Those supplies are targeted for delivery to Thailand via a proposed onshore/offshore pipeline.
Currently, Unocal also plans to drill eight wildcats in Indonesia's East Kalimantan area. And it is pursuing exploration opportunities in Viet Nam and China.
The other main area of interest for Unocal, notably in the longer term, is the Middle East/Central Asia. The company participated in a 1993 discovery on the East Shabwa block in Yemen and plans two wildcats in Syria.
And while the politics are extremely frustrating, Beach notes, Unocal remains committed to a group negotiating production sharing contracts with Azerbaijan for two giant oil fields in Caspian Sea.
"The potential is so great, we have to hang in there," he said, citing an estimate of Caspian Sea reserves potential of 3 billion bbl of crude oil. Unocal's emphasis now is to minimize its investment there but be ready to move quickly once negotiations bear fruit.
DOWNSTREAM FOCUS
Unocal also is focusing on changes in its downstream businesses.
The company plans to implement a pilot program to develop profit centers ancillary to its retail gasoline operations in California.
Currently, most Unocal outlets are full service and rely heavily on auto repair and maintenance for added revenue. During the next 2 years, Unocal plans to conduct site specific pilots at about 200 of its 1,200 retail outlets to test what other revenue streams work best. Options to be explored include selling fast food as well as adding fully fledged convenience stores and car washes.
Unocal also is beginning to install credit card electronic scanners at gasoline pumps and will move increasingly toward self-serve.
"We're a little bit behind the power curve," Beach said, noting that 90% of California service stations are self-serve. Unocal has lagged the market in this area, he explained, because of cash constraints following the Pickens takeover attempt.
With cash flow improving, Unocal wants to find ways to bolster market share in California, where it faces stiff competition from No. 1 marketer ARCO as well as Chevron Corp. and Shell Oil Co. Unocal plans to spend about $40 million in 1994 to upgrade and diversify retail outlets.
But the major downstream investments will be directed at modifying refineries to produce reformulated gasoline (RFG), an area in which Unocal has targeted $450 million in capital outlays by early 1996. The work includes adding more advanced blending controls, improving fractionation, and expanding hydrogen manufacturing capacity, as well as facilities expansions.
By 1996, Unocal expects to be able to increase light products output by about 10%, with about half the gain realized from increased use of oxygenates.
Despite the high price tag for modifying refineries, Beach is confident Unocal will realize an adequate return on its RFG investment.
"It won't be gangbusters, but it will be satisfactory."
Unocal has listed RFG as a main source of added cash flow during 1996-98, after expansion of hydrocarbon production in Thailand and geothermal power in Indonesia.
To help foot the bill for refinery changes, Unocal has begun an intense effort to cut downstream expenses. The program includes cutting the cost of chemically treating water for boilers and cooling towers and finding ways to rein costs of hazardous waste disposal. To date, these efforts have resulted in cost savings of 60% and 25%, respectively.
Other efforts include lowering procurement and vendor costs and improving efficiency of refinery maintenance.
Beach acknowledges there's still uncertainty about how much pump prices will jump after the newest round of stringent new RFG standards implemented by the California Air Resources Board (CARB). "No one knows," he said. "Anyone who tells you they know doesn't know what they're talking about."
Beach also believes CARB should phase in its RFG specifications over a longer period, rather than having them take effect all at once, to prevent a recurrence of the supply outages and price hikes that plagued the state when its tough new diesel specs took effect in 1993.
Beach doesn't expect California refiners to have any difficulty meeting the 1995 timetable for federal RFG specs, but 1996 could pose problems unless CARB adds some flexibility to the schedule.
"It would help a lot to make sure there's enough implementation time," he said.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
