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Lyondell Petrochemical Company

Lyondell Petrochemical Company

1221 McKinney Street, Suite 1600
Houston, Texas 77010
(713) 652-7200
Fax: (713) 652-4598

Public Company
1985 as Lyondell Petrochemical Corporation
Employees: 2,250
Sales: $6.49 billion
Stock Exchange: New York

Lyondell Petrochemical Company manufactures and markets a broad spectrum of petrochemicals, ranging from olefins mostly propylene, ethylene, butadiene, and butylenesto aromatics, methanol, and specialty products, as well as refined petroleum products including jet fuel, gasoline, heating oil, and lubricants. While Lyondell was incorporated in 1985 as a wholly owned subsidiary of Atlantic Richfield Company (ARCO), its roots are much a part of the history of Texas. In 1918 two-year-old Sinclair Oil & Refining Company purchased the Allen Ranch in Houston, Texas, its first 720 acres of land. Included in the land was the site at which General Sam Houston and the Texas Army forded the Buffalo Bayou, retreating from Texass defeat at the Alamo, before the army turned at the San Jacinto River, dealt Santa Anna a crushing blow, and won Texas its independence. Sinclair built the first shell still crude battery for refining crude on this sitewhich went onstream in 1919. Sinclair Oil & Refining Company was subsequently renamed Sinclair Oil Corporation, and in 1936, with Rio Grande Oil Company and several other Depression-scarred companies, was merged into the Richfield Oil Corporation.

In 1955 Texas Butadiene and Chemical Corporation bought the Lyondell Country Club in Channel view, Texas, and built a plant on that site. By 1957 the new plant was producing 300 tons of butadiene a day. Sinclair Petrochemicals Inc., a subsidiary of Sinclair Oil, which was then a subsidiary of Richfield purchased the Channel view site in 1962.

During the mid-1960s Atlantic Refining Company was searching for a merger partner to enhance its own growth. In 1965 Atlantic initiated talks with Richfield. Atlantic Refinings overture, which typically would not have appealed to Richfield, was attractive because Richfield was being sued on antitrust grounds by the Department of Justice for its 26-year-old merger with Sinclair. Faced with liquidation or divesting Sinclair, a marriage to Atlantic Refining would allow Richfield to skirt the issue. In 1966 Atlantic Richfield was formed. In 1969 the Justice Department finally allowed ARCO to merge Sinclair. ARCO immediately sold Sinclairs east coast marketing arm to the U.S. subsidiary of British Petroleum Company to satisfy the Justice Department. In 1969 the Justice Department also required ARCO to continue to aggressively market the Sinclair brand name for five more years in case the Justice Department was ultimately able to win its case and force Sinclair to become an independent company. The Justice Department was unable to do so, however. After Sinclair was merged into ARCO, the Channel view plant became a part of ARCO Chemical Company and the Houston plant joined ARCO Products Company.

Also during the 1960s, Atlantic Richfield began to realize that the growing market for oil was not limitless, and it became actively interested in developing its petrochemical business. In 1966, together with Halcon International, ARCO created Oxirane Chemical Company, a research-and-development, engineering design, and consulting company. The joint venture produced propylene oxide using a new process developed by Halcon, and quickly proved profitable. When ARCO bought Halcons 50% of Oxirane in 1980, it gained a profitable addition to its growing chemical business.

Through Oxirane, ARCO carved a niche for itself in petrochemicals that is still a major part of ARCO Chemical and of Lyondell. By 1980, when Halcon sold its share in the partnership to ARCO for $270 million and the assumption of $380 million in long-term debt, Oxirane was generating $1 billion of business a year worldwide. What was formerly Oxirane then became a part of ARCO Chemical.

In the years that immediately followed, ARCO Chemical failed to distinguish itself as a developer of new technology. Unable to develop market share in polyethylene and polypropylene, ARCO Chemical decided to sell those businesses. By 1984, the company had sold both its high- and low-density PE and PP businesses, as well as several polymer operations. Although ARCO Chemical tried to sell what remained of the olefins businesses, which at that time were a drain on its earnings, Atlantic Richfield Company had other plans. In 1985 ARCO separated its olefins operations from ARCO Chemical Company, and set them up as a separate ARCO unit, naming it Lyondell Petrochemical Corporation, soon renamed Lyondell Petrochemical Company. Lyondells assets consisted of the Houston refinery, the former Allen Ranch; the Channel view petrochemical complex, formerly Lyondell Country Club; and several money-losing product lines.

ARCO Chemical continued to develop its core business as a part of ARCO until September 1987. At this point ARCO managers, realizing that the growth of the companys chemical segment was not fully recognized by investors because ARCO Chemical was just a small division of Atlantic Richfield Company, spun off ARCO Chemical Company, selling 20% of its shares to the public.

Sibling company Lyondell Petrochemical followed much the same route. Under president Bob Gower, a former employee of Sinclair Oil, Lyondell had reduced overhead and improved its operating costs just one year after its formation. Gower cut staff but improved morale by increasing workers responsibilities.

In 1988 Lyondells earnings increased 441% over 1987, spurred by increased demand for petrochemical products. The speed of this recovery, as well as Lyondells continued growth, led ARCO to spin off Lyondell. The spin-off was calculated to improve Lyondells market value, allow ARCO to enjoy a cash infusion while Lyondells performance was at a peak, and to increase Lyondells operational mobility. In January 1989 ARCO sold 50% of Lyondell Petrochemical Company to the public for $1.4 billion, making it the largest initial public offering of 1989, as well as the largest equity offering by a U.S. industrial company.

ARCO could not have picked a better time to offer Lyondell to the public, although the stock was an aftermarket disaster, sinking 23% from its initial $30 offering price. This deal did not only benefit ARCO, bringing in cash that was redistributed into other areas of its businesses; it also spurred important growth at Lyondell. The spin-off allowed Lyondell to create an entrepreneurial atmosphere and rewarded management with new responsibility. Freed of the constraints of operating with ARCO, Lyondell set its own agenda.

With startling candidness Gower in Chemical Week, January 15, 1986, had summarized the key to Lyondells success, saying, our assets are run-of-the-mill, mundane. So is our technology, so is our market position. So the only way to set ourselves apart is with the performance of our people. Following the spin-off, Gower continued to pursue this philosophy, with renewed vigor.

Gower had come to Lyondell by way of Sinclair Oil. He joined Sinclair Oil as a research scientist. Both before and after Sinclairs merger with ARCO, he had risen through a variety of sales, research, and engineering assignments, becoming a vice president of ARCO Chemical in 1977 and senior vice president in 1979. He had gone on to direct the technology division, then later, business management and marketing for large-volume petrochemicals. In 1984 he had been elected senior vice president of planning and advanced technology at ARCO. When Lyondell was formed in 1985, he became its president, and was elected its CEO in 1988.

At Lyondell Gower cut operating costs and trimmed away layers of management. Lyondells 1989 net income fell off 31% from 1988, as demand for gasoline and petrochemicals cooled. Lyondells operations also suffered from weather- and maintenance-related problems. Nevertheless, Gower continued to spend. A large percentage of the $176 million Lyondell spent in 1989 on capital projects went into the expansion of the two olefin plants that were shut down for overhauls. These expansions resulted in lower unit production costs, increased ethylene capacity by about 25%, and increased propylene and other by-product capacity.

In February 1990 Lyondell made its first acquisitions, of a polyethylene plant and a polypropylene plant from Rexene Products Company. These plants improved the value of Lyondells operations as they not only are captive consumers of ethylene and propylene but also enable Lyondell to participate in the polyolefins market.

Lyondell succeeded due to the companys flexibility; for instance, Lyondells olefins plants are capable of switching from production of natural gas liquids such as ethane, propane, and butane, to heavy liquids such as naphthas, condensales, and gas oil, depending on which feedstock will yield the greatest profit. In addition to this, the Houston refinery is able to run on a large percentage of low-cost heavy crudes in addition to many foreign crude oils, allowing Lyondell to select the best-priced crude. The Channelview plant also displays product flexibility, producing propylene from ethylene when product markets are stronger, and adjusting production mix and product volumes to utilize market opportunities. Lyondell has the freedom to act on these opportunities because as an intermediate producer it is not committed to supply retail outlets. In 1989, Lyondell began to expand its Houston refinerys paraxylene capacity. Finished in early 1990, it provided a 25% increase in paraxylene production.

While Lyondell has become extremely independent, it retains ties to ARCO, which in 1991 owned 49.96% of Lyondell. Pipelines link ARCO to some Lyondell operations, although Lyondell shops for better-priced crude. Lyondell also rents some office space and warehouse space from ARCO. Lyondell operates a small unit at the Channelview complex for ARCO Chemicalwhich, like Lyondell, is still controlled by Atlantic Richfield Companyand sells many of its products to ARCO Chemical.

Principal Subsidiaries

ARCO Channelview, Inc.; ARCO Lyondell, Inc.; ARCO Mount Belvieu; ARCO Lyondell Licensing, Inc.; Lyondell Polymers Corporation; Lyondell Petrochemical de Mexico, Inc.; Lyondell Rancho Pipeline Company.

Further Reading

Lyondells climb into the black, Chemical Week, January 15, 1986.

Maya Sahafi

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