Sunoco, Inc.

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Sunoco, Inc.

Ten Penn Center
1801 Market Street
Philadelphia, Pennsylvania 19103-1699
U.S.A.
(215) 977-3000
Fax: (215) 977-3409
Web site: http://www.sunocoinc.com

Public Company
Incorporated : 1890 as Sun Oil Company
Employees : 10,900
Sales : $8.58 billion (1998)
Stock Exchanges : New York Philadelphia
Ticker Symbol : SUN
NAIC : 211111 Crude Petroleum & Natural Gas Extraction; 211112 Natural Gas Liquid Extraction; 32411 Petroleum Refineries; 48611 Pipeline Transportation of Crude Oil; 48691 Pipeline Transportation of Refined Petroleum Products; 42271 Petroleum Bulk Stations & Terminals; 42272 Petroleum & Petroleum Products Wholesalers; 23311 Land Subdivision & Land Development; 483113 Coastal & Great Lakes Freight Transportation

Sunoco, Inc. is one of the largest petroleum refiner-marketers in the United States. The company operates five refineries in the United States with total crude oil processing capacity of about 730,000 barrels per day. In the marketing arena, Sunoco sells gasoline under the Sunoco brand in 17 states, principally in the Northeast and Midwest. Other company activities include the worldwide sale of lubricants and petrochemicals, the operation of pipelines and terminals in the United States, and the production of metallurgical-grade coke for the steel industry. In the late 20th century, the company underwent a major restructuring, which included the divestment of its exploration and production operations, and the company changed its name from Sun Company, Inc. to Sunoco, Inc. in late 1998 as one of the final steps in that process.

Early History

Sunoco’s beginnings go back to 1881, when Joseph Newton Pew, known as Newton Pew, and Edward Octavius Emerson incorporated Keystone Gas Company. Emerson was president, and Pew was the treasurer. Emerson, a 42-year-old banker, had the financial expertise and backing, while Pew, at 28, was just becoming known in the oil-and-gas real estate business, having traded in property and leases since the 1870s. Emerson and Pew’s new company succeeded so well that within a year they incorporated Penn Fuel Company, the first supplier of natural gas to a major city, Pittsburgh, for home use as well as for industrial use. In the words of Pew’s nephew J. Howard Pew, “When Newton Pew arrived in 1882, few Pittsburghers realized they were in need of natural gas. The Penn Fuel Company immediately embarked upon correcting this oversight by building gas pipelines to the city.”

By 1884, the two men had sold their interest in the Penn Fuel Company and started The Peoples Natural Gas Company. Not too long after that, the partners got wind of substantial oil discoveries in Ohio. Pew sent his nephew, Robert Cunningham Pew, to investigate the possibility of securing leases in northwestern Ohio’s oil fields. Under Pew and Emerson’s direction, Robert spent $4,500 on two leases in Ohio’s Findlay township. Robert Pew was left to manage the Ohio oil operations while Edward Emerson and Newton Pew focused their attention on the natural gas end of their business. By 1889, however, production in their Ohio oil fields grew so large that it could no longer be ignored. Pew and Emerson incorporated the Sun Oil Line Company in order to acquire the necessary pipelines, leases, storage tanks, and tank cars. The operation continued to grow to the point where, in 1890, Pew and Emerson thought it wise to consolidate their interests, and they incorporated Sun Oil Company of Ohio, in Ohio, with the stated intention of “producing petroleum, rock and carbon oil; transporting and storing same; refining, purifying, manufacturing such oil and its various products...,” getting Sun Oil off to a running start.

In 1894 Sun Oil, in a joint venture with Merriam and Morgan Paraffine Company of Cleveland, incorporated the Diamond Oil Company for the purpose of purchasing a refinery just outside Toledo for $22,200 from economically troubled Crystal Oil Company. This plant refined the first oils that Sun Oil ever shipped. In 1895 Pew and Emerson bought out Merriam and Morgan’s interest, and the refinery became entirely Sun Oil’s. Not only did Sun Oil get its first refinery out of Diamond Oil; it adopted a diamond shape enclosing the words “Sun Oil” as the company trademark.

Both of Emerson and Pew’s businesses were developing at a rapid pace. While Sun Oil continued to grow, The Peoples Natural Gas Company also prospered under the control of Emerson and Pew. In 1899, Pew bought out Emerson’s stake in the Sun Oil Company and, by 1903, he had sold his own stake in The Peoples Natural Gas Company. In 1901 Pew reincorporated Sun Oil Company in New Jersey as Sun Company. Between 1899 and 1903 Newton Pew worked hard to help Sun Oil stand firmly on its own feet.

In 1901 the Spindletop well in Beaumont, Texas, spurting 100,000 barrels of oil a day for ten days, was the biggest oil strike yet. Newton Pew lost no time sending Robert Pew there. At that time, Beaumont was suffering from something akin to gold fever, except that Beaumont’s gold was black. Within a month, Robert Pew had returned to Toledo, and Newton Pew sent Robert’s brother, James Edgar Pew, in his stead.

J. Edgar Pew would become one of the most famous and respected oil men in the production end of the business. In the words of a retired Sun executive, J. Edgar Pew “was shrewd enough to see that you could make more money by drilling and producing the oil than by going around and buying it.”

Pew bought 42 acres of land on the Neches River and erected storage tanks. In 1902, at a public auction, he bid $100,000 for the assets of the bankrupt Lone Star and Crescent Oil Company. His was the only bid of the day and it won the assets. The auction’s terms, however, demanded an immediate down payment of at least 25 percent. When Pew went to the two local banks he’d been using, he found them closed for Decoration Day. As he kicked up dust on the streets of the town he saw his prize slipping away, until he spotted some men remodeling an old building to hold a new bank. Sun’s reputation was already so well known, that a man inside the building wrote J. Edgar a check for $25,000 on the spot.

Meanwhile, Robert Pew observed that the key to Sun’s success in its Texas endeavors lay in finding a way to move its Texas crude inexpensively to refineries, because the cost of transporting it over land was so high that it was out of the question. In October 1901, Newton Pew spent $45,000 for land on the Delaware River in Marcus Hook, Pennsylvania, and started building a refinery there to process the Texas crude. United Gas Improvement Company, of Philadelphia, Pennsylvania, was Sun’s partner, with 45 percent of the venture. Five months later, in March 1902, the refinery received the first crude Sun sent out of Texas, delivered by Sun’s first tanker, the S.S. Paraguay. In 1905 Sun transformed the Thomas W. Law son, the world’s largest schooner-rigged sailing ship, into an oil carrier.

Amidst all this, J. Howard Pew, Newton Pew’s second son, began work at Sun. J. Howard Pew had finished both high school and college by the time he was 18. In 1901 the 19-year-old J. Howard began working in the Toledo, Ohio, refinery, experimenting with the heavy black residue from Sun’s Texas crude. In the new Marcus Hook refinery, the crude was developed into a lubricating oil, known as Sun Red Stock. By 1904 J. Howard Pew and his team of researchers had developed the first commercially successful petroleum asphalt. Sun had more than 100 trade-name products on the market by 1910.

In 1908, Joseph’s third son, Joseph Newton Pew, Jr., joined the Sun staff in the purchasing department. He recalled that, about three months after he started, he asked his father for “a real job.” According to Joseph, his father’s response was, “Joe, you have been given your opportunity and it is up to you to make your job.” Joe took those words to heart. He drove ox teams through the mud to get loads of pipe across West Virginia, laid mahogany roads in Venezuela, and spent five nights without sleep while bringing in a new well in Illinois.

By 1912 when Joseph Newton Pew, Sr., Sun’s first president, died, his sons were already working together as a team. J. Howard became president at the age of 30; Joseph Newton Pew, Jr., became vice-president at 26.

J. Howard Pew took a business trip to Germany in 1915, a year after the beginning of World War I. He was shocked by Germany’s air and naval strength and predicted with some accuracy the amount of damage Germany could inflict on Allied shipping, including oil tankers. When he returned to the United States, he authorized the beginning of Sun Ship, a shipbuilding facility on the Delaware River, south of Philadelphia. By 1917, when the United States became involved in the war, Sun Ship was able to slide its first freighter, the S.S. Chester Sun, into the water. By the end of World War I, Sun Ship had built three minesweepers and six tankers for the U.S. Navy.

Opened First Service Station in 1920

Before the war, Sun’s place in the petroleum industry was in lubricating and industrial oils, and it sold oil directly to Philadelphia’s United Gas Improvement Company (UGI). During the war, however, Sun severed its connections with UGI, and Sun was left with a huge supply of gas oil, the source of gasoline. The automobile industry had grown so rapidly that by 1918 more than six million vehicles moved over U.S. highways. Quickly shifting gears, Sun began to construct its first gasoline filling station in Ardmore, Pennsylvania, which opened in 1920. A diamond-shaped sign with a red arrow through it proclaimed Sun’s Products. Since that day, Sun’s trademark has not changed nor has the name of the gasoline, Sunoco.

In 1922 Sun Company once again reincorporated, as a Pennsylvania company, under the name Sun Oil Company (PA). Also in 1922, at the Marcus Hook refinery, Sun Oil set in motion its first high-pressure cracking units that enabled it to produce gasoline much more quickly. This expanded capacity allowed Sun Oil to increase its sales beyond the mid-Atlantic region.

Most other refiners at this time were adding tetraethyl lead to gasoline to kill engine knock. Sun Oil took a different track. It produced premium gasoline without adding lead. In 1927 Sun Oil introduced its only grade of gasoline, calling it Blue Sunoco, “The High Powered Knockless Fuel at No Extra Price.” Blue dye was used in the gasoline so that motorists could identify it by its color, through the glass of the 1920s gravity-flow gasoline pumps.

In 1923 Sun Ship introduced the Sun Doxford diesel engine. In a few years Sun Ship became the largest U.S. manufacturer of large marine diesel engines. In 1931 it launched the world’s first all-welded tanker, the S.S. White Flash. In 1931 Sun built the first long-distance petroleum products pipeline in the United States. This 730-mile pipeline stretched from Twin Oaks, Pennsylvania, through Syracuse, New York, to Cleveland, Ohio, with branch lines to cities in between.

The usual refining practice in the oil industry at the time was to heat the crude to such extreme temperatures that it became vaporous. The vapors were then condensed into gasoline and other products. This process yielded only about 40 percent highgrade fuel. The leftover 60 percent was a sludgy substance that could only be made into low-profit items. All this began to change in 1933, when Eugene Houdry, a Frenchman, made an appointment to see Arthur Pew, Newton Pew’s oldest son.

Houdry was working on an invention that would get more gasoline out of every gallon, of a much higher octane. Most of his preliminary work had been done in France, and in Vacuum Oil company’s refinery in New Jersey. When Vacuum merged with Standard Oil Company of New York, however, Houdry’s refining project was shelved. He had been trying to sell his refining process to other companies, but he had had no luck until he reached Sun Oil. Within an hour at the first meeting, Houdry and Arthur Pew struck a deal. Working in Sun Oil’s Marcus Hook laboratory, Houdry developed a model that performed to perfection. Sun Oil then built Houdry’s catalytic cracking plant at Marcus Hook refinery, ran it on trial for a year and a half in secret, then announced its success to the world in 1937.

Toward the end of World War II, when the gas needs of the United States were critical, the Marcus Hook refinery shipped more than 1.1 million barrels a month of 100-octane aviation gas. At the same time, Sun Ship built an average of one ship a week. The end of the war brought a sharp decline in U.S. ship construction, as foreign competition took business from U.S. commercial builders, Sun Ship included.

After the war, J. Howard Pew started grooming as his successor an outsider from Sun Oil’s ranks. In 1947 Robert G. Dunlop became Sun Oil’s first non-Pew president in 60 years. During his presidency, revenues grew sixfold and profits ninefold.

By the early 1950s, when car types began to vary, Sun Oil’s one type of gasoline could no longer meet the differing octane needs of higher-compression engines, and Sun Oil’s market share began to fall off. In 1956 Sun Oil opened its first custom-blending pump in Orlando, Florida; from five grades of gasoline, customers could select the one that best met their car’s octane needs and the pump would mix it then and there. By 1958, Sun Oil had removed the last of the pump’s flaws and was able to introduce six grades of custom blending to its entire market territory.

Dunlop’s ability to make quick decisions led to Sun Oil’s abundant Lake Maracaibo, Venezuela, oil discovery in 1957. Taking the advice of an advisory group, Sun Oil investigated this offshore site that ultimately had nearly 100 wells producing 450 million barrels of oil, 200 million of which were Sun Oil’s share. Sun’s Venezuelan operations, known as VenSun, prospered until Venezuela nationalized its oil industry in 1975.

Sun Oil went on to establish the North Sea Sun Oil Company Ltd. in 1965. The next year, as a member of the Arpet group, Sun helped discover the Hewett gas field off England’s coast, beginning Sun’s history in offshore North Sea drilling.

Merged with Sunray DX in 1968

Bob Dunlop steered the company through the Sun Oil-Sunray DX Oil Company merger. Their courtship began in 1967 at an industry dinner in Midland, Texas, where Dunlop and Sunray chief Paul Taliafero were seated next to one another. Sun Oil operated primarily in the eastern United States and Sunray almost exclusively in the Midwest. Their refining and marketing regions added to each, complementing rather than competing. By every measurement Sun Oil was about twice the size of Sunray DX. The companies agreed to merge in 1968. A year and a half was spent planning the mechanics of the merger, which resulted in a company with 30,000 employees and more than $2 billion in assets. The merger turned Sun Oil into a huge corporation and changed the way the company would be run from that point hence.

All this time Sun Oil was working to develop what was called the world’ first oil mine, Canada’s Athabasca sands, on the Athabasca River. It was thought these sands held more recoverable oil than all of the oil in the Middle East. The problem was how to transport the sand to where the oil could be recovered or how to recover the oil onsite in such a far north location. Sun Oil finished construction of a refinery in 1967, intended to boil 45,000 barrels of oil out of the sand daily. The cost of such production was too high to compete with reigning low oil prices. Ten years later, however, when oil prices started climbing, Sun Oil’s sands began to turn a profit.

Sun Oil constructed a $150 million operation in Yabuco, Puerto Rico, including an all-weather harbor and a 66,000-barrel-per-day refinery in 1969. In 1971 Sun Oil Company (PA) became simply Sun Oil Company.

In 1970, when Dunlop retired, H. Robert Sharbaugh became Sun Oil’s new president. Attention was focused on pushing up the stock price and raising the cash dividend. Individual employees were given the opportunity to advance their own careers when a management-training school was founded. By 1974, Sharbaugh had been named CEO, and by 1975 he was chairman of the board. In 1975 Sharbaugh announced he would restructure the company into 14 decentralized operating units and two property companies, all of which would be controlled by a nonoperating parent company.

In 1976 Sun Oil Company changed its name to Sun Company, Inc., to portray the fact that it was involved in more businesses than just oil. That same year Theodore A. Burtis became Sun’s new president. In 1978 Chairman Sharbaugh authorized the purchase of a large interest in Becton, Dickinson and Company, a medical supply firm, and it became obvious that Sharbaugh’s vision for Sun differed from that of the board. In 1979 Theodore Burtis became Sun’s new chairman.

In 1979 Sun, in an effort to redirect its company toward energy resources, made an acquisition in mining. This was Elk River Resources, Inc., which had mining operations in Kentucky and Virginia, with reserves of 186 million tons of coal in those states and in West Virginia. By 1983 this acquisition’s production increased by almost 35 percent. Additional acquisitions expanded its coal reserves by 70 percent.

Acquired Texas Pacific Oil in 1980

In 1980 Sun bought all the domestic oil and gas properties of Texas Pacific Oil Company, a subsidiary of the Seagram Company, Ltd., for $2.3 billion. The acquisition brought to Sun properties with approximate average daily production of 32,000 barrels of crude oil and 104 million cubic feet of natural gas, as well as four million acres of unexplored land in the United States. In February 1982 Sun Ship was sold to Levingston Shipbuilding Company; it had not turned a profit in more than five years. Robert McClements, Jr., took over Burtis’s duties as president in 1981, but Burtis remained CEO and chairman.

In 1982 when the People’s Republic of China invited oil companies to help it develop its 3,000 miles of coastline, Sun was one of the first to jump in. In 1983 Sun was granted shares in exploration tracts in the Gulf of Beibu and the South China Sea. By 1984, a Sun-manned jack-up rig had been installed off Hainan Island in the Gulf of Beibu, and drilling began.

In 1984 Sun acquired the Exeter Oil Company for $76 million and some Victory Oil Company properties for $281 million. As McClements explained it, “The acquisitions reflect Sun’s strategy of acquiring existing producing properties and, using its production know-how, quickly bringing them up to snuff.” Within a short period of time Exeter’s production climbed from 500 barrels a day to more than 1,000.

Burtis worked closely with McClements on strategic direction until McClements became CEO in 1985. That year Sun divested itself of its medical supply business. In 1986, the year the company celebrated its 100th anniversary, Sun continued to refocus on its core petroleum business by selling Sun Carriers, Inc., a motor freight transportation subsidiary, and Sun Distributors, Inc., a distributor of industrial products. The following year the company sold Standard Trucking Company. McClements added the chairmanship to his position as CEO that year, and Robert P. Hauptfuhrer was named president and chief operating officer.

Restructurings, 1988-98

Beginning in 1988, Sun entered a ten-year period marked by major restructuring initiatives. With oil prices on the decline in the late 1980s, Sun laid off employees and made the decision to exit from domestic oil and gas exploration and production. In November 1988 Sun spun off to its shareholders its subsidiary Sun Exploration and Production Company. As a result, McClements was once again appointed president of Sun, while Hauptfuhrer became chairman and CEO of the spinoff, which was soon renamed Oryx Energy Company. Simultaneous with these developments, Sun acquired Atlantic Petroleum Corporation for $513 million, which brought to Sun another refinery, a network of more than 1,000 Atlantic service stations (which were soon rebranded under the Sunoco name), and a pipeline system.

In early 1991 Robert H. Campbell was appointed president and COO, with McClements remaining chairman and CEO. Later that year, another restructuring was begun, this one resulting in 1,000 job cuts and $100 million per year in pretax savings from streamlined operations. With the collapse of the real estate market, Sun also decided to divest its real estate business, Radnor Corp., a process that dragged on through the end of the decade.

By early 1992 Campbell was chairman, CEO, and president of Sun, following McClements’ retirement. That year, Sun formally adopted a new strategic direction, which focused on value-added businesses: branded gasoline marketing, lubricants, chemicals, and logistics. Also in 1992 the company began to reduce its ownership interest in Suncor Inc., a Canadian affiliate that included the oil sands business. An initial public offering in March 1992 reduced Sun’s stake from 75 to 68 percent; in May 1993 the stake was reduced again, to 55 percent, through a sale to a group of underwriters. Also in 1993 the company sold Cordero Mining Co., operator of a coal mine in Wyoming, to Kennecott Coal Company for $120.5 million.

In August 1994 Sun spent about $170 million to acquire a 177,000-barrels-per-day refinery in Philadelphia from Chevron U.S.A. Inc. This refinery was immediately adjacent to the refinery Sun had acquired with the 1988 acquisition of Atlantic Petroleum, and the two were combined into a single, more efficient refining complex. In 1995 this complex was linked directly to Sun’s Marcus Hook Refinery via a 19-mile inter-refinery pipeline. In June 1995 Sun sold its remaining 55 percent interest in Suncor to a group of Canadian underwriters for $855 million.

Further restructuring moves came in 1996 as Sun continued to focus on the downstream side of the business. In September 1996 Sun sold its international oil and gas production business to Agip (U.K.) Limited, a part of Italy’s ENI S.p.A., for $260 million in cash, thereby completing its exit from upstream activities. Just two months later, Sun bolstered its lubricants business through the purchase of the Kendall and Amalie lubricants unit of Witco Corporation. In December 1996 Sun departed from company tradition when it hired an outsider as company president for the first time. John G. Drosdick—who had previously served as president of two other major petroleum marketing firms in the United States, Ultramar Corporation and Tosco Refining Company—was named Sun president and COO, with Campbell retaining the chairman and CEO positions.

In 1997 Sun continued to restructure, particularly working to modernize its refineries and make them more efficient. The company was able by 1999 to cut its costs to refine a barrel of crude oil from $3.68 to $2. Sun appeared to be turning the corner on profitability as net income increased from $263 million in 1997 to $280 million in 1998, despite a revenue decline from $10.53 billion to $8.58. In a move perhaps symbolizing the end of the decade-long restructuring, the company changed its name in November 1998 to Sunoco, Inc., thereby adopting the well-known brand name. The company also made its first alterations to the Sunoco logo since 1954. With a new corporate image, heightened cost-consciousness, and a sharp focus on the downstream, Sunoco was well-prepared to defend its position as one of the largest independent U.S. refinery-marketers well into the 21st century.

Principal Subsidiaries

Helios Capital Corporation; Marine Investment Company of Delaware; Mascot Petroleum Company, Inc.; Mohawk Valley Oil, Inc.; Radnor Corporation; Sun Alternate Energy Corporation; Sun Altantic Refining and Marketing Company; Sun Canada Inc.; Sun Coal & Coke Company; Sun Coke Company; Sun Executive Services Company; Sun Geologic and Seismic, Inc.; Sun Ocean Ventures, Inc.; Sun Oil Argentina Limited; Sun Oil Argentina Limited S.A.; Sun Oil Company (U.K.) Ltd.; Sun Oil Export Company; Sun Oil International, Inc.; Sun Oil Shabwa Yemen Limited; Sun Oil (Thailand) Limited; Sun Oil Trading Company; Sun Pipe Line Company of Delaware; Sun Services Corporation; Sun Ship, Inc.; Sun-Del Services, Inc.; Sunoco Overseas, Inc.; The Claymont Investment Company; Triad Carriers, Inc.

Principal Operating Units

Sun Northeast Refining; Sunoco Northeast Marketing; Sunoco Chemicals; Sun Lubricants; Sunoco MidAmerica Marketing & Refining; Sunoco Logistics; Sun Coke.