Lyondell Chemical Company

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Lyondell Chemical Company

1221 McKinney Street, Suite 700
Houston, Texas 77010
U.S.A.
Telephone: (713) 652-7200
Fax: (713) 652-4151
Web site: http://www.lyondell.com

Public Company
Incorporated: 1985 as Lyondell Petrochemical Corporation
Employees: 8,900
Sales: $4.04 billion (2000)
Stock Exchanges: New York
Ticker Symbol: LYO
NAIC: 325110 Petrochemical Manufacturing; 325211 Plastics Material and Resin Manufacturing; 324110 Petroleum Refineries

Lyondell Chemical Company is one of the largest U.S.-based chemical manufacturers. The company makes a wide range of intermediate and specialty chemicals, including propylene oxide, which has numerous consumer and industrial applications; propylene glycol, used in aircraft deicers and fiberglass resins; propylene glycol ethers, which are important ingredients in coatings, cleaners, and solvents; butanediol, which is used in engineered plastics and urethanes; and methyl tertiary butyl ether (MTBE), a gasoline additive used to increase octane and reduce automotive emissions. In addition, Lyondell has major equity stakes in two joint ventures, Equistar Chemicals, LP, and LYONDELL-CITGO Refining LP. Equistar, 41 percent owned by Lyondell, is a petrochemical and polymers producer with 2000 revenues of $7.5 billion. Key products include ethylene, propylene, butadiene, ethanol, benzene, toluene, polyethylene, and polypropylene. Lyondell operates this venture on behalf of its partners, Millennium Chemicals Inc. and Occidental Petroleum Corporation. LYONDELL-CITGO, 58.75 percent owned by Lyondell, is a refiner of petroleum products with 2000 revenues of $4.1 billion. A partnership with CITGO Petroleum Corporation, this venture produces gasoline, diesel fuel, jet fuel, aromatics, and lubricants, selling the majority of its output to CITGO Petroleum.

Lyondell’s Roots

Although 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 Texas’s 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 facility for refining crude on this site—which went onstream in 1919. Sinclair Oil & Refining Company was subsequently renamed Sinclair Oil Corporation, and, with Rio Grande Oil Company and several other Depression-scarred companies, was merged in 1936 into the Richfield Oil Corporation.

In 1955 Texas Butadiene and Chemical Corporation bought the Lyondell Country Club in Channelview, 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 Channelview 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 Refining’s 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 the alternatives of liquidation or divesting Sinclair, Richfield opted instead for a marriage to Atlantic Refining. In 1966 Atlantic Richfield was formed. In 1969 the Justice Department finally allowed ARCO to merge with Sinclair. ARCO immediately sold Sinclair’s 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 Channelview 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 it quickly proved profitable. When ARCO bought Halcon’s 50 percent of Oxirane in 1980, it gained a profitable addition to its growing chemical business.

Through Oxirane, ARCO carved a niche for itself in petrochemicals. 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.

1985 Founding of Lyondell

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 polyethylene and polypropylene 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. Lyondell’s assets consisted of the Houston refinery, the former Allen Ranch; the Channelview 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 company’s 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 percent of its shares to the public.

Sibling company Lyondell Petrochemical followed much the same route. Under President Bob Gower, 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 Lyondell’s earnings increased 441 percent over 1987, spurred by increased demand for petrochemical products. The speed of this recovery, as well as Lyondell’s continued growth, led ARCO to spin off Lyondell. The spinoff was calculated to improve Lyondell’s market value, allow ARCO to enjoy a cash infusion while Lyondell’s performance was at a peak, and to increase Lyondell’s operational mobility. In January 1989 ARCO sold 50 percent 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. Prior to the offering, ARCO had Lyondell pay it a special distribution of $500 million, funded by debt that was placed on Lyondell’s books. Lyondell thus was saddled with $760 million in debt as it began its era of semi-independence (ARCO President Robert Wycoff served as Lyondell’s chairman and there were four other ARCO officers on the Lyondell board).

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

With startling candidness Gower, in the January 15, 1986 issue of Chemical Week, had summarized the key to Lyondell’s success: “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 spinoff, 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 Sinclair’s 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.

Company Perspectives:

We are in business to create value for our owners. We do this by expanding and optimizing our assets to achieve a leadership position. We use innovative solutions and agility to be the global leader, generating value for our customers, employees and communities.

At Lyondell Gower cut operating costs and trimmed away layers of management. Lyondell’s 1989 net income fell off 31 percent from 1988, as demand for gasoline and petrochemicals cooled. Lyondell’s 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 olefins plants that were shut down for overhauls. These expansions resulted in lower unit production costs, increased ethylene capacity by about 25 percent, and increased propylene and other byproduct capacity.

Acquisitions and Joint Ventures in the 1990s

In February 1990 Lyondell made its first acquisitions: low-density polyethylene and polypropylene plants from Rexene Products Company. These plants improved the value of Lyondell’s operations as they not only were captive consumers of ethylene and propylene but also enabled Lyondell to participate in the polyolefins market.

Lyondell’s early successes were derived from the company’s flexibility; for instance, Lyondell’s olefins plants were capable of switching from production of natural gas liquids such as ethane, propane, and butane, to heavy liquids such as naphthas, condensates, and gas oil, depending on which feedstock yielded the greatest profit. In addition to this, the Houston refinery was able to run on a large percentage of low-cost heavy crudes in addition to many foreign crude oils, allowing Lyon-dell to select the best-priced crude. The Channelview plant also displayed product flexibility, producing propylene from ethylene when product markets were stronger, and adjusting production mix and product volumes to utilize market opportunities. Lyondell had the freedom to act on these opportunities because as an intermediate producer it was not committed to supplying retail outlets. In 1989, Lyondell began to expand its Houston refinery’s paraxylene capacity. Finished in early 1990, it provided a 25 percent increase in paraxylene production.

In July 1993, in order to strengthen its refining operations, Lyondell contributed these operations to a joint venture with CITGO Petroleum Corporation, the U.S. subsidiary of Petroleos de Venezuela. Included in the venture, called LYONDELL-CITGO Refining LP, were the Houston refinery and a lube oil blending and packaging plant in Birmingport, Alabama. Lyon-dell held an initial 86 percent interest in the venture. The partners, however, agreed to launch a $1 billion upgrade of the Houston refinery to enable it to begin using the extra-heavy variety of Venezuelan crude and to increase capacity at the plant. Most of the output was then sold to CITGO for marketing through its U.S. network. Partnering with CITGO enabled Lyondell to run its refining operations in a much more stable manner, with long-term contracts with CITGO on both the crude supply and refined output sides. Following the completion of the plant upgrade in early 1997, Lyondell’s interest in LYONDELL-CITGO was reduced to 58.75 percent.

In mid-1994, meanwhile, ARCO made the first move in a plan to dispose of its remaining interest in Lyondell. At that time, ARCO made a debt security offering, worth close to $1 billion, that was convertible after three years into Lyondell stock. When this offer was completed, the five ARCO officers on the Lyondell board resigned, and Gower took over as chairman, remaining CEO as well. Dan Smith, who had been with Lyondell for most of its brief history, was promoted from COO to president and COO. He took over as CEO in December 1996 upon Gower’s retirement. In June 1997 William T. Butler, chancellor of Baylor College of Medicine and member of the company board since 1989, was named nonexecutive chairman of Lyondell. Also in 1997, ARCO followed through with its divestment plan and sold off its remaining stake in Lyondell.

While these ownership and management changes were taking place, Lyondell moved forward with another acquisition and the formation of another joint venture. In May 1995 the company paid $356 million to acquire the Alathon high-density polyethylene business and its plants in Matagorda and Victoria, Texas, from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation. Lyondell in December 1996 partnered with MCN Corporation to form Lyondell Methanol Company. The essence of the deal was that MCN purchased a 25 percent stake in Lyondell’s methanol plant, which Lyondell continued to operate.

Key Dates:

1985:: Atlantic Richfield Company (ARCO) separates its olefins operations from ARCO Chemical Company, forming a new subsidiary, Lyondell Petrochemical Corporation, which is soon renamed Lyondell Petrochemical Company.
1987:: ARCO spins off ARCO Chemical, selling 20 percent of its shares to the public.
1989:: ARCO sells 50 percent of Lyondell to the public in a $1.4 billion IPO.
1990:: Lyondell purchases low-density polyethylene and polypropylene plants from Rexene Products Company.
1993:: The company contributes its refining operations to a joint venture with CITGO Petroleum Corporation called LYONDELL-CITGO Refining LP (LCR); Lyondell initially owns 86 percent of LCR.
1995:: Occidental Chemical Corporation’s Alathon high-density polyethylene business is acquired.
1997:: ARCO divests its remaining stake in Lyondell; a major upgrade of the LCR plant in Houston is completed, and Lyondell’s interest in LCR is reduced to 58.75 percent; the company combines its petrochemicals and polymers businesses with those of Millennium Chemicals Inc. to form Equistar Chemicals, LP, with the company holding an initial 57 percent interest.
1998:: Lyondell’s interest in Equistar is reduced to 41 percent with the addition of Occidental Chemical’s petrochemicals business to the venture; Lyondell acquires ARCO Chemical for $5.6 billion; the company changes its name to Lyondell Chemical Company.
2000:: The company sells its polyolefins business to Bayer AG for $2.45 billion.

In December 1997, in its most dramatic joint venture agreement yet, Lyondell combined its petrochemicals and polymers businesses with those of Millennium Chemicals Inc. to form Equistar Chemicals, LP. At formation, Lyondell held a 57 percent stake in Equistar, which also assumed $745 million of Lyondell debt. Five months later, Equistar was expanded in size by about one-third with the addition of the petrochemicals business of Occidental Chemical. This deal decreased Lyondell’s ownership interest in Equistar to 41 percent (Millennium and Occidental each owned 29.5 percent). Equistar began life with annual sales of about $6 billion and with top three positions in North America and the world in ethylene, propylene, butadiene, and polyethylene. Lyondell operated Equistar for the partnership.

At this point, Lyondell had essentially placed all of its operations within the three joint ventures it had formed since 1993. The company then moved beyond these equity investments by gobbling up its former ARCO sister firm, ARCO Chemical, in a July 1998 acquisition valued at $5.6 billion. In addition to expanding the product lines in which Lyondell was involved, the deal also complemented the operations of Lyondell’s other ventures. ARCO Chemical was a major consumer of propylene, ethylene, and benzene—three of Equistar’s key products—and of methanol, which was produced by Lyondell Methanol. Lyondell also gained ARCO Chemical’s world-leading positions in propylene oxide, propylene glycol, and MTBE. Following completion of the acquisition, the company shortened its name to Lyondell Chemical Company. During 1999 Lyondell restructured its long-term debt through a $4.2 billion combined equity and debt offering.

New Initiatives for the New Millennium

During 2000 Lyondell moved to further relieve its debt load from the ARCO Chemical purchase by selling the polyolefins business it had inherited from ARCO Chemical to Bayer AG for $2.45 billion. The deal enabled the company to retire more than $2 billion of long-term debt. As part of the agreement, Lyondell and Bayer also agreed to form a 50-50 joint venture to build a state-of-the-art plant in the Maasvlakte region of The Netherlands that would be the world’s largest propylene oxide and styrene monomer plant. Start-up of the plant was expected by mid-2003. Meantime, Lyondell also was proceeding on its own with the building of another plant in The Netherlands, this one to produce butanediol and to begin operations in early 2002.

By 2001, these global growth initiatives were continuing with the backdrop of a cyclical downturn in the chemicals industry compounded by an economic slowdown in the United States that was spreading globally—not to mention the aftereffects of the events of September 11, 2001. After posting net income of $437 million for 2000, Lyondell appeared headed for a significant loss for 2001, having reported a net loss of $97 million for the first nine months of the year.

Principal Subsidiaries

Lyondell POTechGP, Inc.; Lyondell Quimica do Brasil, Ltda. (Brazil); Lyondell Refining LP, LLC; Lyondell Refining Company; Lyondell South Asia PTE Ltd. (Singapore); Lyondell Taiwan, Inc.; Lyondell Thailand, Ltd.; Nihon Oxirane Co., Ltd. (Japan); POSM Delaware, Inc.; PO Offtake, LP; PO JV, LP; POSM II Limited Partnership, L.P.; POSM II Properties Partnership, L.P.; Seinehaven BDO2 (Netherlands); Steamelec B.V. (Netherlands); Technology JV, LP.

Principal Competitors

The Dow Chemical Company; Shell Chemical Company; BASF Aktiengesellschaft; Bayer AG; Saudi Basic Industries Corp.; Chevron Phillips Chemical Company LP; Mitsubishi Chemical Corporation; Samsung Group.