Atlantic Richfield Company
Address:
515 South Flower Street
Los Angeles, California 90071
U.S.A.
Telephone: (213) 486-3511
Fax: (213) 486-1756
http://www.arco.com
Statistics:
Public Company
Incorporated: 1870 as Atlantic Refining Company
Employees: 18,400
Sales: $10.3 billion (1998)
Stock Exchanges: New York Pacific London
Ticker Symbol:ARC
NAIC: 21111 Oil and Gas Extraction; 213111 Drilling Oil and Gas Wells; 213112 Support Activities for Oil and Gas Operations; 32411 Petroleum Refineries; 48691 Pipeline Transportation of Refined Petroleum Pipelines; 22121 Natural Gas Distribution; 44711 Gasoline Stations with Convenience Stores; 44719 Other Gasoline Stations
Key Dates:
1865: Charles Lockhart establishes the Atlantic Refining Company, the first refinery in the United States.
1874: Standard Oil Trust buys Atlantic Refining.
1911: Standard Oil is broken up by federal order; Atlantic Refining is independent again.
1915: Rio Grande Oil Company is established in El Paso, Texas.
1936: Rio Grande Oil merges with other companies to become the Richfield Oil Corporation.
1957: Richfield is the first to discover oil in Alaska.
1966: Atlantic Refining and Richfield merge to form the Atlantic Richfield Company.
1977: The Alaskan pipeline opens with Atlantic Richfield as 21 percent owner.
1989: Net income reaches a record high of $1.95 billion.
1992: ARCO completes a deal to pipe gas from China to Hong Kong.
1995: ARCO purchases an eight percent stake in the Russian oil company Lukoil.
1998: ARCO sells its majority interest in ARCO Chemical Company and spins off its U.S. coal assets.
1999: Foundation laid for merger between ARCO and BP Amoco
Company History:
Atlantic Richfield Company, better known as ARCO, is the seventh-largest U.S. oil company. A vertically integrated company, ARCO explores for, produces, refines, and markets crude oil, natural gas, and natural gas liquids. Although the company has operations in the North Sea, Indonesia, Russia, Venezuela, Pakistan, China, and Algeria, its largest reserves and most productive operations are in Alaska. In the lower 48 states, it is the largest marketer of gasoline in five western states, with 1,700 gasoline stations. In 1999, the company announced plans to merge with BP Amoco plc, itself created through the 1998 merger of British Petroleum and Amoco. The merger, if accomplished, would make BP Amoco the world's second largest oil and gas company.
Company Origins
ARCO's origins go back to the discrete histories of Atlantic Refining Company and Richfield Oil Corporation. In 1865, six years after Drake's Folly, the world's first oil derrick, went into operation, Charles Lockhart and his partners established the Atlantic Refining Company in Philadelphia, the first refinery in the United States. Not surprisingly, Atlantic was unable to compete successfully in the turbulent world of petroleum, and in 1874, the gigantic Standard Oil Trust swallowed up Atlantic, although the merger was kept a secret, with Atlantic retaining its name and personnel. Atlantic possessed the largest petroleum refinery in greater Philadelphia, and the company continued to grow as a subsidiary of Standard.
Atlantic's fortunes changed radically after the turn of the century. Theodore Roosevelt's trust busting was carried out faithfully by his successor, William Howard Taft. In 1911 a federal court successfully prosecuted Standard Oil, compelling it to dissolve into smaller entities, one of which was Atlantic Refining Company. Newly independent Atlantic had refineries but was dependent on others for crude oil. As a result, its president, John Wesley Van Dyke, made crude-oil self-sufficiency his goal, and under his skillful management, Atlantic increased its exploration activities.
Richfield's history is dramatically and colorfully told by its former president, Charles S. Jones, in From the Rio Grande to the Arctic: the Story of the Richfield Oil Corporation. Jones delves into the earliest history of Richfield, whose predecessor, the Rio Grande Oil Company, was established by a store-owner in El Paso, Texas, in 1915. Rio Grande's good fortune coincided with the heyday of Pancho Villa's raids across the border. In order to rid frontier towns like El Paso of Villa, the U.S. Army pursued Villa and his raiders deep into Mexican territory, using some 600 trucks to supply its troops. The army inadvertently became the largest consumer of Rio Grande oil at that time. From then on, the company's growth went unhindered, and its headquarters eventually shifted from Texas to California.
The Great Depression took a heavy toll on the Rio Grande Oil Company, forcing it in 1936 to reorganize and merge with other companies to become the modern Richfield Oil Corporation with Charles Jones as its president. Richfield embarked on a new era, marked by a significant oil discovery in California in 1938. Richfield consequently was well-prepared for the challenges of World War II, when the entire U.S. oil industry faced wartime demand. A pioneer in the manufacture of high-octane aviation gasoline, Richfield increased its high-octane production in 1941-1942 by 150 percent. By 1948, according to Jones, Richfield had developed into a highly successful, well-balanced oil company.
Richfield, unlike Atlantic, continued its success in finding crude oil. In 1948 the Cuyama Valley in California yielded to Richfield huge quantities of petroleum, although insufficient to meet demand for oil. In the 1950s, Richfield's oil explorations expanded overseas but, most importantly, included an interest in Alaska.
Richfield's explorations in Alaska predated World War II, but serious prospecting did not get underway until 1955, the year California ceased being self-sufficient in oil. Richfield was the first to discover oil in Alaska, in the Swanson River area, in 1957. This discovery became the first commercial oil field in Alaska's history. Environmentalists opposed further oil exploration. This did not, however, deter Richfield from proceeding to purchase enormous tracts of federal land, laying the basis for the future ARCO's astonishing growth and prosperity.
The Philadelphia-based Atlantic Refining Company was even shorter of crude oil than was Richfield, but Atlantic's leadership was not interested in the exploration and production activities of its dynamic Dallas, Texas, branch. One Atlantic executive in Philadelphia declared he did not know what an oil well looked like and had no intention of finding out. The result of this disharmony was a palpable decline in Atlantic's profits. The company's fortunes began to turn around, however, when a former Harvard business professor, Thornton Bradshaw, became financial vice president of Atlantic in 1956. Bradshaw perceived that disunity and dependency on crude oil purchases were both undermining Atlantic's viability. The solution was a merger with another oil company.
The candidate for a merger, in 1962, was Hondo Oil & Gas Company, whose president, Robert O. Anderson, was a dynamic, multi-faceted businessman. The marriage of the two companies worked. Atlantic's strength lay in the refining of petroleum, and Hondo Oil & Gas's was in the business of finding and producing oil. With energy needs soaring in the United States, however, the new Atlantic produced at best only 50 percent of its own crude.
The 1966 Atlantic-Richfield Merger
In the mid-1960s, with Anderson as chairman and chief executive officer of Atlantic Refining Company, feelers once again went out for a partner with which to merge. This time the choice fell on oil-wealthy Richfield. The California-based company, with its vast Alaska leases, 2.5 million acres, would have had little reason to merge with eastern-based Atlantic were it not for a still-pending 1962 Department of Justice suit against Richfield. Its mergers in 1936 with Sinclair Oil Corporation and Cities Service Company was only now, nearly 30 years later, being challenged as illegal by the Justice Department on antitrust grounds. The choice for Richfield was to face possible liquidation or the divestiture of Sinclair and Cities Service, or to merge with some company untainted by monopolism. In this light, Atlantic Refining Company appeared to be ideal, especially as Robert Anderson was held in very high regard in the oil business and had turned his company into a highly profitable one.
The merger of the two oil companies took place in January 1966, forming Atlantic Richfield Company. Two years later, the biggest oil discovery in the Western Hemisphere was made in Prudhoe Bay, Alaska, with Atlantic Richfield the biggest federal leaseholder in the state. The production of this vast oil wealth would be delayed nearly a decade because of disputes with environmentalists, native Alaskans, and other oil companies with competing claims, and until the Trans-Alaska pipeline system was constructed. The stable leadership of Anderson, chairman of Atlantic Richfield until 1986, and Thornton Bradshaw, president until 1981, would resolve these difficulties and turn their company into the eighth-largest oil company in the United States, a company well equipped to face the complex challenges of the 21st century. In 1972 Atlantic Richfield moved its headquarters from New York City to Los Angeles.
The resolution of rival Alaskan interests was accelerated by the Arab oil embargo in 1973. The federal government granted permission for the construction of the much disputed pipeline, and oil flowed through it for the first time in midsummer 1977. The original estimated cost of the pipeline was $900 million. This amount had escalated to $10 billion by the time oil actually flowed through it, largely to meet environmental guidelines. This was the largest expenditure for any private undertaking in U.S. history. Despite this unimaginable cost, Atlantic Richfield, 21% owner of the pipeline, benefitted enormously. Profits soared, and by 1980 total company assets stood at $16 billion compared to $8 billion four years earlier.
The soaring profits from its Alaskan oil fields had a surprisingly sobering effect upon Atlantic Richfield's leadership, seasoned oil men who were well aware of the historic volatility of the oil market. There was a very strong consciousness, evident in Atlantic Richfield's annual reports predating even the 1973 oil embargo, that natural resources, none more than oil, were finite and that if the company were to survive and, more importantly, generate a profit, the production and refining of oil could not remain the company's main objective. The conundrum of the late 20th century--how to supply the vast U.S. energy needs in the face of oil's ultimate depletion and the country's heavy dependence on foreign crude--would be Atlantic-Richfield's chief challenge, one that would determine its fate in the decades to come.
While oil flowed through the Alaskan pipeline at a rate of nearly two million barrels a day, Atlantic Richfield was undergoing a radical restructuring that not only reflected its growth as an oil company, but as an oil company intent on branching into new products and markets. Gone, however, was the age when new products, markets, and profits were the company's sole concerns. No company could hope to survive in an environmentally conscious society without a major investment in the environment. As oil prices rocketed, therefore, so, too, did Atlantic Richfield's investment in environmental causes. As early as 1970, for instance, the company began producing lead-free gasoline. In 1972 Atlantic Richfield removed all billboard advertising, and in the same year received two awards for its conservation efforts. By 1976 total spending on conservation amounted to $400 million. Atlantic Richfield produced and marketed the first low-emissions gasoline in the United States.
A late-20th-century company could ill afford to ignore its social responsibilities, as the growing endowment of the ARCO Foundation revealed. Social responsibility, however, could neither begin nor end with siphoning off a small fraction of its oil profits to charity. ARCO also donated trees to a park, revegetated used coal-mine areas, and encouraged employees to engage in volunteer activities by releasing them from work.
Mergers and Restructurings in the 1960s-70s
In the face of its explosive growth following the opening of the Alaska pipeline, ARCO executives saw the need for a dramatic restructuring of the company. As early as 1968, the year of the Prudhoe Bay oil discovery, the company realized that it would one day have far more oil than it could refine and market. Once again merger talks began, and the partner became Sinclair Oil Corporation. Its merger with Atlantic Richfield in 1969 endowed ARCO with its biggest oil refinery, in Houston, and more importantly for the future, enabled the company to undertake a five-year, $1 billion expansion of petrochemical production.
The growth of ARCO with the completion of the pipeline in 1977 necessitated further restructuring. The aim was to decentralize into eight wholly owned companies--ARCO Alaska, ARCO Oil and Gas, ARCO Chemical, ARCO Products, ARCO Transportation, ARCO International, ARCO Coal, and ARCO Solar--and to focus on new products, apart from traditional oil and gas production. In line with this restructuring, which would be complete in 1979, ARCO merged with the Anaconda Company in 1977. Within a few years, ARCO Coal Company became a leading coal producer in the United States and the nation's number-one producer of low-sulfur coal. By the mid-1980s, under the chairmanship of Lodwrick M. Cook, a yet more radical strategy was devised to ensure profitability and a lessening dependence on oil: to divest ARCO of all marginally profitable enterprises and to drastically cut costs across the board. As a result, between 1985 and 1987, ARCO reduced its workforce by approximately 12,000 employees. The company's Philadelphia refinery was sold, along with 1,000 ARCO service stations east of the Mississippi, making 'Atlantic' a name only, a reason for the increasing use of the company's acronym, ARCO.
Decentralization, concentration on areas of highest profitability, cost cutting, and diversification enabled ARCO to weather the precipitous decline in crude oil prices in 1986 and to ward off the threat of a takeover. Diversification away from traditional oil and gas production had been successful.
Besides ARCO's lucrative production of coal, success was evident in ARCO's petrochemical industry. Petrochemicals became an important facet of ARCO's business in the 1970s. In 1985 the company formed Lyondell Petrochemical Company by merging existing assets. Lyondell, a division of ARCO, increased ARCO's petrochemical capacity and moved to the forefront of petrochemical production. It became a leader in converting crude oil, for example, into feedstock. ARCO Chemical, in which ARCO had an 83.4 percent ownership interest in 1991, became the foremost producer in the world of propylene oxide, used in the manufacture of furniture foam, plastics, and detergents; and calcined coke for the manufacture of aluminum. Another creative idea turned into a successful product by Lyondell, unrelated to petrochemical production, was the WALLFRAME building system, a popular prefabricated wall system. Offering superior insulation properties, ARCO Solar represented ARCO's most radical departure from tradition. Producing energy from the sun by means of photovoltaic cells, ARCO Solar by the mid-1980s had won 45 percent of the photovoltaic market and had become the world's leading producer of photovoltaic devices. The company sold ARCO Solar because the business was not competitive on a large scale.
Increased International Activity in the 1990s
Since its inception, ARCO had expanded steadily overseas, with 25 percent of its petrochemicals exported overseas by the early 1990s, especially to Asia. In 1991 ARCO had interests in 20 foreign countries, including a petrochemical plant in southern France, significant coal-mining interests in Australia, and a highly lucrative oil-exploration venture in Indonesia.
Net income reached a record high in 1989 of $1.95 billion; however, within two years profits were almost one-third that, at $709 million. The primary culprits were lower gas prices and an economic recession, things over which ARCO had little control. To cut costs, ARCO eliminated 2,100 jobs in 1991.
As ARCO's reserves declined, it pursued several strategies to maintain its revenues over the long term. One was the purchase of proven reserves from other companies. In 1988 it purchased oil and gas properties in California from Tenneco, and in 1990 purchased properties from TXO Production in Oklahoma and from Oryx in California. Three years later, ARCO joined with Phillips Petroleum to lease 130,000 acres near Alaska's Cook Inlet.
The company also stepped up its efforts to bring foreign reserves into production. ARCO had discovered an 85-billion-cubic-meter gas field in 1982 off the southeast coast of China, but had been unable to exploit the find. As a Chinese joint venture, the operation had to meet the Chinese regulation that it be a self-sustaining project, in effect, requiring the gas to be exported for hard currency. Finally, the operation was made feasible in 1992 when ARCO completed a deal to pipe the gas to Hong Kong for electrical power generation. ARCO held a 34.3 percent interest in the venture and managed the construction of the 480-mile Yacheng pipeline.
In 1994 Mike R. Bowlin took over as chief executive officer and the following year replaced Lodwrick M. Cook as chairman of the board. Also in 1994 ARCO finished modifying its refineries to meet EPA emission control regulations.
Acquiring interests in foreign companies was another ARCO strategy to increase its international revenues. In 1994 the company bought 9.9 percent of the Zhenhai Refining and Chemical Company in China. The following year ARCO took the risky step of purchasing an eight percent stake in Russia's top private oil company, Lukoil. The $340 million deal gave ARCO an interest in some of the largest oil reserves in the world. ARCO also worked out a joint venture with Lukoil to develop certain reserves, including several around the oil-rich Caspian Sea. However, this new relationship with Lukoil held much uncertainty. Russia's political instability and the past disappointments of Western oil companies with their investments in the country recommended a cautious outlook.
ARCO's Yacheng pipeline was completed in 1996 for $1.13 billion, under budget and two months early. As the gas from that field finally began to flow, ARCO reached an agreement with the Algerian state oil company, Sonatrach, to increase production from the Rhourde El Baguel Field, the country's second largest oil field. Estimated to have had some three billion barrels of oil at its discovery in 1962, the field was slowing in production by the mid-1990s. ARCO's experience with miscible gas technology was expected to enhance the oil recovery from the field. By the end of 1997 ARCO had increased the field's production by 17,000 barrels a day.
In 1998 ARCO sold its majority interest in ARCO Chemical Company and spun off its U.S. coal assets, leaving the company focused solely on hydrocarbon-related business.
In 1999 ARCO agreed to be acquired by BP Amoco for $26.8 billion in stock, which would make BP Amoco the world's second-largest oil and gas company. BP Amoco and ARCO planned to combine resources on Alaska's North Slope, where the two would control all oil production. The efficiencies were expected to result in significant cost reductions, including a predicted loss of about 2,000 jobs. Approved by ARCO shareholders in September 1999, the merger still had several regulatory hurdles to clear before it was finalized.
Principal Subsidiaries: ARCO Alaska, Inc.; ARCO Pipeline Company; ARCO Oil and Gas Company; ARCO International Oil and Gas Company; ARCO Products Company; ARCO Transportation Company; Vastar Resources, Inc.; Lyondell Petrochemical Company (49.9%).
Principal Competitors: BP Amoco plc; Exxon-Mobil Corporation; Royal Dutch/Shell.
Further Reading:
'Alaskan Agreement Helps Clear Way for Approval of BP Amoco Deal with ARCO,' PR Newswire, December 2, 1999.
'A Brief History of ARCO,' Atlantic Richfield corporate typescript, 1989.
Cappell, Kerry, 'This Giant Sure Has a Big Appetite,' Business Week, April 12, 1999, p. 34.
'Extracting Oil from the Caspian: Great Game, Awful Risks,' Economist, February 15, 1997.
'From Major to Minor,' Economist, May 18, 1996.
Harns, Kenneth, The Wildcatter: A Portrait of Robert O. Anderson, New York: Weideinfeld & Nicolson, 1987.
Jones, Charles S., From the Rio Grande to the Arctic: The Story of the Richfield Oil Corporation, Norman: University of Oklahoma Press, 1972.
Mack, Toni, 'Brass-Ring Time,' Forbes, May 3, 1999, p. 56.
Shoenberger, Karl, 'Arco's Suprisingly Good Fortune in China,' Fortune, February 5, 1996, p. 32.
'A Well-Matched Pair: Synergies Abound as BP Amoco and California's ARCO agree to a Friendly, $26.8 Billion Merger,' Time International, April 12, 1999, p. 53.
Source: International Directory of Company Histories, Vol. 31. St. James Press, 2000.
