ARCO strategy aims to bolster global upstream, downstream

ARCO's Bowlin
A threefold theme, an all sides approach.
ARCO has mapped a campaign designed to strengthen its international assets and earnings during the next 5 years.
Chairman and Chief Executive Officer Mike R. Bowlin last week told shareholders the company's assets are too light in the international arena compared with those of other major oil companies.
Most ARCO upstream operations are in Alaska, California, and the Gulf of Mexico/Gulf Coast area. It also refines and sells petroleum products on the Lower 48 West Coast.

Bowlin said at the annual meeting of shareholders in Los Angeles, "Our theme will be threefold: a strengthened base of assets, efficient operations, and strong growth in volumes. To increase our international assets and earnings, we are approaching the goal from all sides: new venture exploration, acquisitions, redevelopment projects, and strategic alliances."

International operations

The U.K. and Indonesia were the base of ARCO's international upstream operations until early this year when production began from a gas field in the South China Sea south of Hainan Island. Yacheng 13-1 field, in which ARCO owns a 34.3% interest, is selling gas to a power plant that serves Hong Kong nearly 500 miles away.

"We have been trying to add a third leg to our international stool for years, and now we have it with China," Bowlin said.

The stool will soon have a fourth leg: Algeria. ARCO has signed an agreement to conduct an enhanced oil recovery project with state owned Sonatrach in Rhourde El Baguel oil field in a campaign to quintuple the field's production.

In addition, ARCO in the past 8 months has made major investments in one of Russia's largest oil companies, Lukoil, and now holds an 8% interest in the company. ARCO and Lukoil also disclosed an agreement that calls for spending as much as $3 billion on joint venture projects overseas.

Elsewhere, ARCO exploration in Irian Jaya appears to have chalked up a significant gas discovery at 2 Wiriagar Deep, which flowed a combined rate of more than 100 MMcfd.

Bowlin said, "What we need to do now is prove up the kind of reserves that could support a world scale liquefied natural gas project. We'll know more about the size of the deposit by yearend."

Bowlin also cited downstream opportunities overseas.

In autumn 1994 ARCO bought an interest of almost 10% in Zhenhai Refining & Chemical Co, which Bowlin called the best in China. "We had hoped to expand our share, but this doesn't seem likely at the moment."

ARCO plans to maintain its investment in Zhenhai and keep looking for opportunities in China's petroleum products and petrochemical markets.

Oil and gas prices

Acknowledging recent jumps in crude oil and gasoline prices, Bowlin said, "We've been in a tough, declining price environment for the past 15 years."

In 1995 dollars, U.S. gasoline prices have dropped more than 50% since 1980, while the 1995 price of U.S. natural gas was down more than 60%. U.S. crude saw the largest drop of all, with 1995 prices down about 75% from 1980.

Bowlin gave two major reasons for last month's U.S. gasoline price increases:

Crude prices are up worldwide, and the industry is passing those costs along in the market, "as we must."
Crude oil inventories are tight. In California, there was the additional effect of industry refinery problems, which cut gasoline production. A tight market always causes higher prices.

"The negative side of this is the hardship higher gasoline prices work on our customers, and we deeply regret that," Bowlin said. "We believe market conditions will improve shortly."

Even so, higher prices make it possible for the industry to achieve an "acceptable" rate of return and begin to recover its investment in reformulated gasoline. ARCO, for example, spent $450 million on its Los Angeles refinery to meet new federal and state standards for gasoline.