THE SILENT GIANT

THE TALK IS telegraphic and is accompanied by knowing nods in an 18th-floor office at the home base of Caltex Petroleum Corp. Bahrain, off the coast of Saudi Arabia, is calling. A decision must be made, and the flow of oil can’t be stopped while the decision-makers ponder the numbers. The research must have already been done. “Is it cheaper to buy product or drain reserve?” comes the question.

Patrick J. Ward, the vice president in charge of trading and logistics, has the facts; he’s made a decision. “Go with product. Product’s cheaper this time.” Today, Caltex will buy already-refined petroleum products to supply its customer rather than have the crude it owns refined. The spot market is a better deal-this time.

Attracting the international headquarters of Caltex from New York to Las Colinas in 1982 was considered a major coup, an affirmation of both Ben Carpenter’s visionary development and the Dallas area as a whole. But after the corporation took over its 10 top floors of Caltex House, it virtually faded from the public view. Caltex is hardly a household name in this area-or for that matter, in the United States.

Why does Caltex keep such a low profile here? For one thing, the firm is a privately held, 50-50-owned subsidiary of two oil giants: Texaco and Chevron. Another reason for its relative obscurity is that none of Cal-tex’s products are sold domestically. Overseas, the circle with the red star is as easily recognized as the Texaco star in this country. Caltex is a giant abroad, a longtime player in the international energy market. In some locations, it holds as much as a 35 percent share of the market-contrasted with major companies in this country, which are at the top of the market with a 10 percent share.

Because of their complementary geographical distribution and operations, Texaco and Chevron (formerly SOCAL or Standard Oil of California) combined forces in 1936 through the formation of the Caltex subsidiary, which today spans the globe from South Africa across the Middle East and southern Asia, up to Japan and Korea, and back down to the Philippines, Australia and New Zealand.

If this privately held corporation were ranked with public companies according to its annual sales revenues, Caltex would be listed among the top 10 petroleum companies worldwide and would hold a spot among the top 20 of the Fortune 500 industrial companies. Caltex’s recent figures show net sales averaging 1,119,000 barrels of crude oil and petroleum products-per day.

Despite its behemoth size and intriguing silences, Caltex’s business is relatively simple: It supplies customers with crude oil and the refined petroleum products that come from crude oil. The firm may opt to either buy the crude and then refine it, pay someone else to process it, or buy a product already refined to sell to its customers.

In the days before OPEC, the oil business was less complex. The price of the raw product didn’t shift with every Middle Eastern ripple. Crude was nearly always available. Today, it takes enormous personnel (and computer) hours just to keep track of its availability and the economics of the buying options. Negotiations are constantly under way to obtain the raw product.

Today, Caltex still buys “equity” crude (crude from its parents). But even that function is precarious. The company must continuously maintain that delicate balance between making a profit and watching out for the broader interests of the family company. Sometimes the parent companies’ crude turns out to be the best deal; other times, a market trader produces a rival product at a better cost and location.

Almost 9,500 people are employed by Caltex, but fewer than 5 percent work at the Las Colinas headquarters. Their job is monumental: to see the big picture in order to maximize profits. Most corporate headquarters are charged with a similar task, but the wild fluctuations of the global oil market requires Caltex to be more flexible.

Day-to-day Caltex personnel must have the flexibility to shelve well-laid plans for alternatives as the market demands, cope with changing government regulations and react to political upheaval in foreign governments. Inevitably, some restraints on a multinational corporation are beyond its control.

The price of crude changes daily. It can be brought about by normal ups and downs in supply and demand or by the imposition of a high tariff by a consuming nation that’s trying to divert consumption to another energy source. Another level of complexity is that a shift in price isn’t always what it appears when you consider the value of the dollar- the unit of exchange for all oil-in relation to the numerous currencies that rise and fall on a daily basis.

In a business in which there are few constants, the old business acumen of controlling the bottom line by controlling costs is doubly applicable. Refining the refineries has been one of many approaches to controlling costs. For example, more sophisticated equipment placed in one refinery in which Caltex has an interest allows it to use a heavier, less-costly crude mix to obtain the same products. Cutting the energy required to produce energy products has been a strategy for industrial operations for a decade. In a recent year, Caltex’s energy conservation measures saved $73 million.

Although updating a particular refining operation has an impact on the company’s current and long-term balance sheets, the efficiency with which information is processed and examined-and thus acted upon-is the heart of Caltex’s ability to control costs. The market opportunities that the enormous information flow presents to the trading and logistics side of the business is staggering.

Around-the-world trading-24 hours a day-is the name of the game. While people in Dallas sleep, employees at the Singapore Trading and Transport office are vigilant. Using direct computer communications and facsimile machines as well as plain old-fashioned telexes and telephones, each affiliated company feeds in information so that the whole picture can be constructed.

The complexity of interpreting the data is not so much a product of the sheer size of the operation as it is the inherent complexity of the product itself.

For example, not just any crude in any given refinery will produce the lubricating oils needed in Yosu, Korea, or the jet fuels needed in Kurnell, Australia. All crude has varying elements and contaminants when it comes out of the ground. The crudes themselves also vary as to what types of products they are best suited to produce. And not every refinery is set up to refine out all types of elements or to produce a full range of products.

A sophisticated analysis of the crude occurs both in the field and in the Las Colinas office to determine its refining capabilities and its economic potential. “We would ask our process engineering experts in Dallas and in Singapore, ’What’s the best crude to run in the refinery to meet these demands?’ ” Ward says.

If the parent companies’ crude doesn’t satisfy the requirements, then Caltex must go to the open (or spot) market. Day-to-day decisions about crude purchases (which are made about 45 to 60 days before the refined product hits the market) may boil down to moment-by-moment negotiations involving lengthy options and a complete rearrangement of purchase patterns in a relatively short time span. But the process of getting a particular order of crude to run in a particular refinery to supply a particular market starts well in advance of the purchase day. Although Caltex does long-range planning, company strategists are prepared to deal with the unexpected.

That could be moment-by-moment changes when someone spots a switch in plans that could decrease the price of producing the product, yet still supply its customers with crude. Ward tells of one such experience that would challenge even a master chess player. In this case, Caltex was operating as its own entity rather than as the affiliate of the operations in the local countries. Says Ward: “We [Caltex] were putting crude into the Philippines, retaining title and paying them (the Philippine Caltex affiliate) a fee to run it, then taking products out and putting that into Hong Kong. At the same time, we were looking at bringing certain products like motor gasoline and diesel down from Bahrain into the same area. Then, running through our weekly crude oils, we said, ’Gee, if we had a crude at the right place, we could run it in Batangas in the Philippines and put more gasoline, say, into Malaysia. Then we could back that motor gasoline out from Bahrain and back the diesel out from Singapore.’ In other words, we would change the whole pattern,” says Ward. “But that particular type of crude was more expensive. Through all the talking and negotiations, we did get a crude that enabled us to do that.”

Once the crude was available, operations went into an even higher gear. “Within four or five hours, they had to agree to do this or not do it, which meant rearranging all the product shipping and the crude supply to the different refineries. That’s the kind of thing that gets interesting. You do it in very short bursts,” says Ward. One more twist was even added to the complex scenario by the end of the short time span. The strategists threw in a product exchange. Caltex swapped Esso one of its excess products out of Hong Kong for one of Esso’s from Singapore.

State-of-the-art information processing and communications networking could produce only piles of useless computer runs. But a trained eye spotted that key opportunity to set into motion a series of alternatives to produce a major cost savings for the company. The flow of oil is kept flowing-and so is the adrenaline of the Caltex strategists. Don’t let its low public profile fool you. When Caltex talks, the world is on-line.