Despite Reforms, Texaco Is Dogged by Aloof Reputation : Peers Claim Problems With Pennzoil Result From Heavy-Handed Approach

BACKGROUND OF A BATTLE In the two months since a Houston jury returned an $11.1-billion verdict against Texaco in a lawsuit brought by Pennzoil, many have wondered just what the panel heard during 17 weeks of trial to persuade it that Texaco’s alleged interference in Pennzoil’s planned takeover of Getty Oil warranted such damages.

In a search for answers, Times Staff Writer Debra Whitefield reviewed the trial transcript--all 25,445 pages--plus various depositions, trial briefs, exhibits and motions. She also conducted interviews with lawyers, jurors and the judge.

The two stories below are a reconstruction of how, through a complex series of events, Getty Oil came to be acquired by Texaco and of how Texaco apparently fumbled in defending itself against the Pennzoil lawsuit.

The news about Texaco’s $11.1-billion misfortune in court reached a group of Texas oilmen as they huddled in a duck camp near Corpus Christi, Tex., in late November. They spent the rest of the morning swapping Texaco stories.

They talked about Texaco’s aloofness, recalling a time when some of the company’s supervisors wouldn’t let their geologists join local geological societies for fear that they would socialize with people from competitors.

There were jokes about the company’s legendary cheapness. It became known for haggling over nickels and dimes in million-dollar land deals, and its pay has long been considered the worst among the oil industry’s so-called Seven Sisters: Exxon, Mobil, Shell, Texaco, British Petroleum, Chevron and Gulf (now part of Chevron).

They scoffed at Texaco’s track record in finding oil and said the company hasn’t done much of anything since Saudi Arabia in 1936.

They chuckled about Texaco’s autocratic management and the short leash from its New York headquarters, telling tales of higher-ups overturning land deals negotiated by Texaco’s people on the scene.

“Everybody had a horror story about Texaco,” one of the oilmen recalled.

Verdict Drew Cheers

A few weeks later, a meeting of gas industry executives and workers was under way in Houston when a judge upheld the jury verdict against Texaco. The meeting was interrupted so the judge’s decision could be announced. According to a source who was there, “everybody stood up and cheered.”

This seems like a rude way to act toward venerable old Texaco, whose ubiquitous white gas stations became a familiar site on the American landscape and whose corporate persona was shaped by Milton Berle, on the old “Texaco Star Theater,” and Bob Hope, assuring motorists to “trust your car to the man who wears the star.” This is the company that’s been sponsoring the Saturday afternoon radio broadcasts of the Metropolitan Opera for 46 years.

But beneath that old-shoe veneer, Texaco became the company that the rest of the industry loved to hate. Its peers came to view Texaco as a quirky, ultraconservative, parsimonious, inward-looking and poorly managed company that was troublesome to deal with, clinging to its position as the world’s No. 3 oil company on the strength of old fields that continued to yield oil.

Since 1980, when John K. McKinley became chairman and chief executive, Texaco has been working to change both the image and the reality. It has formally decentralized in an effort to grant more authority to those in the field, launched a $3-billion refinery modernization program, and joined in some relatively risky exploration projects off California, in Alaska and the Gulf of Mexico, and in the South China Sea.

Several Major Changes

Its Harrison Venture Capital unit expanded in 1983 with investments in more than 30 computer, electronics and other high-technology firms. The company also started a $400-million face-lift of its service stations, complete with food marts and a new Texaco star, tripling the volume of gasoline pumped at more conventional stations.

“I don’t buy this pessimism about Texaco,” declares 75-year-old Michel T. Halbouty, a well-known independent Texas oil and gas man. “The new Texaco is a far better company than the old Texaco. McKinley opened up the company, and they’ve become aggressive in looking for new reserves.”

In November, 1983, Texaco’s board asked McKinley to stay beyond his normal retirement date. And just two months later, he moved boldly to snatch Getty Oil away from Pennzoil--a move applauded as a sign of life at Texaco that doubled its shrunken oil reserves in one swoop.

On a per-barrel basis, that was a far cheaper way to “find” oil than the costly and uncertain business of hunting for new reserves. The Getty deal looked even better when Texaco managed to sell off Getty’s non-energy units for about $2.7 billion--or $800 million above their book value, according to Texaco.

“Whatever our reputation was before Mr. McKinley took over, there have been dramatic changes since,” a company spokesman asserts.

But Texaco’s critics aren’t so sure. A recently departed Texaco lawyer characterizes the company’s decentralization efforts this way: “Management has tried to decentralize, which means McKinley would issue an edict that ‘this company will be decentralized.’ But he’s in such a cocoon, he doesn’t know what happens after that.”

Stemming as it does from the company’s effort to reverse its fortunes, Texaco’s struggle with Pennzoil can be viewed as a struggle to escape its past.

Glimpses of Old Firm

And when Texaco made tactical courtroom errors and apparently misread the dangers of Pennzoil’s lawsuit against the company, which now has the potential to unravel the Getty deal, some saw glimpses of the old Texaco.

Says the head of a prominent Texas oil company: “Texaco’s operations are run just about like that lawsuit was run.”

The head of one of the Seven Sister companies added:

“They couldn’t have handled it worse, and part of it was the military style of the enterprise. Orders come from the top. Information, but not much in the way of opinions, move up. There’s very few people in the company who would (question the chairman), and there’s no one who would tell him he is wrong.”

New York-based analyst Rosario Ilacqua of L. F. Rothschild said vestiges of Texaco’s storied managerial “arrogance” might have caused it to underestimate the threat posed by Pennzoil’s lawsuit: “They felt the whole lawsuit was beneath them. . . . I think those attitudes have relaxed a little, but they haven’t evaporated entirely.”

Most oil-industry officials who are critical of Texaco didn’t want their names used, in some cases because they claimed friendship with high-ranking Texaco managers and in others because they do business with the company.

Run Like a ‘Fiefdom’

Less bashful is the chairman of Pennzoil, J. Hugh Liedtke, who grumbles that Texaco is run like a “fiefdom” and says, “They have a certain mind-fix there that frankly has existed for years.”

Texan Halbouty believes that this is a case of Texaco’s long-standing reputation clouding the way people interpret the company’s actions today.

“I think the reputation of the past causes people to sneer at everything Texaco does,” he says. “When you’ve got 80 years of imagery, it takes a hell of a long time to turn it around. You’re not going to do it in two or three years.”

It is a reputation that dogs the company at every turn. In Texas, Houston oil and gas attorney David Ivey says, some even believe that Pennzoil might not have filed the lawsuit if it had been another company that interrupted Pennzoil’s deal to merge with Getty.

At Stanford University, the West Coast’s most heavily recruited school for oil geologists and geophysicists, a professor could recall only three graduates going to work for Texaco (one of whom soon quit) in the last five years. He called that a “paltry number” compared to the other big U.S. oil companies.

The professor recalled that when he got out of school in the early 1970s, Texaco’s was the lowest of the job offers he got from 10 oil companies. It was also the only company requiring him to sign a statement that he never belonged to the Communist Party and was loyal to the United States.

Executives Lack Authority

Whether the company has changed radically, Liedtke said his executives are frustrated at negotiating with Texaco executives who turn out not to have the authority to do what they promised. That sounds familiar to a former executive at Getty.

“For many, many years, Texaco was almost impossible to make a deal with on acreage,” the long-time oil man says. “The guy you were talking to never had authority to do it. So you’d negotiate a deal and someone higher up would kick it back. Over the years, this was the word on Texaco.”

Once you have a deal, says Houston attorney Ivey, Texaco is likely to complain about it.

“In the oil field, they are tough to deal with,” says Ivey, who has represented several clients doing business with Texaco. “They are difficult and won’t work with you. Say they’re sent a bill for $100,000. If they question even $1,000, they send the whole thing back. They have a habit of just being difficult.”

Texaco makes no bones about its primary mission, which is “to create wealth for its stockholders,” as McKinley began his remarks to shareholders last year. Over the decades, it has been very good at that.

Founded in 1902 as the Texas Co. in the wake of the famous Spindletop gusher near Beaumont, Tex., Texaco developed quickly into one of the major oil producers. It and Gulf Oil were the only leading U.S. oil firms that grew up independent of John D. Rockefeller’s Standard Oil empire.

Struggle for Control

From the start, it was a partnership of a Texas oil man, Joe Cullinan, and a New York finance man, Arnold Schlaet, setting up a struggle for control that was won by the company’s New York faction. Headquarters were soon moved there, and are now in White Plains, N.Y.

Oil historians say that gave Texaco’s top management a remoteness from the oil industry that still afflicts the company. At the same time, Cullinan’s autocratic leadership was done one better, critics say, by long-time Chairman Augustus C. Long in the 1950s and 1960s.

“They were not only autocratic, they were absolutely distant,” Halbouty says. “The old Augustus Long line was ‘To hell with everybody else.’ The company didn’t care if it stepped on anyone. . . . They were the world’s worst.”

Texaco became known in the industry primarily for two major oil and gas finds. It became a 50% partner in Saudi Arabia in 1936 with Standard Oil of California, now Chevron, the first to pump oil there. And over the years it developed oil and gas fields in Louisiana that continue to be a major source of production and reserves for the company.

Persuaded that crude oil would remain inexpensive and plentiful, Texaco de-emphasized exploration and built up a large refining and marketing system--leaving it ill-prepared for the energy shocks of the 1970s that interrupted supplies and sent oil prices soaring.

Oil Reserves Plunged

As with the rest of the industry, the skyrocketing prices were a boon to Texaco that masked other problems, notably the industry’s largest decline in oil reserves. From 1970 to 1983, Texaco’s proven reserves of oil plummeted from 7.5 billion barrels to 1.9 billion barrels, according to Texaco and John S. Herold Inc., a Greenwich, Conn., research firm.

“They were Johnny-come-lately in the North Sea, and they’re not involved in any big way on the North Slope,” said analyst William Swanston of John S. Herold. “They were pretty much riding on their laurels in Saudi Arabia.”

While it remains the world’s third-largest oil company in sales and assets, it ranked ninth in oil reserves in 1983--about even with much-smaller Getty.

And while the oil industry was spending an average of $7 to $10 to find or acquire each new barrel of oil in the 1980-84 period, according to John S. Herold, Texaco was spending $32 to $37 a barrel.

One big reason: An $87-million write-off when it came up empty-handed in 1983 at Mukluk No. 1, a once-promising Alaska site.

This was the backdrop to Texaco’s surprise bid for Getty, whose principal asset was its two-thirds ownership of the Kern River Field near Bakersfield. Now owned by Texaco and producing 95,000 barrels of oil per day from about 4,300 active wells, it is the fifth largest proven reserve of oil in the United States.

Partner With Pennzoil

(In a testimonial to the lure of new oil, Texaco’s other California interests include a joint off-shore oil venture with Pennzoil in the Santa Barbara channel. The two courtroom combatants are the lead partners in the Harvest Platform, expected to enter production in about a year.)

This and other ventures will pay off for Texaco, predicts Halbouty: “McKinley’s achievements will be a lot better known a few years from now. The offshore reserves may take several years” to generate revenues.

Meanwhile, Texaco says its refinery modernization program and shutdowns of a dozen old refineries, coupled with the upgrading of several hundred service stations and the purchase of Chevron retail operations in Europe, have put its long-unprofitable refinery and marketing operations into the black.

Operating earnings in the first nine months of this year for marketing and manufacturing, the company notes, were $111 million, contrasted with a loss of $258 million a year earlier.

Texaco’s crisis in the Pennzoil case and McKinley’s age, 65, have inevitably raised questions about succession at the company. Some believe that however the imbroglio with Pennzoil is resolved, Texaco’s board must make some major changes at the top.

“This management group has been responsible for this problem, they have been responsible for Texaco’s past dismal track record, and it’s time for them to go,” declared analyst Alan Edgar of Schneider, Bernet & Hickman, a Dallas brokerage.

Analyst Ilacqua notes that about 50 million shares of Texaco stock was traded in December alone, amid the uncertainty created by the Pennzoil verdict. He says:

New Breed of Holders

“It’s obvious McKinley won’t be there much longer, and one thing that intrigues me is we’re seeing a whole new breed of shareholders, and management’s got to be aware of that. There’s room for a lot of criticism of management, and you wonder if any of that will surface.”

The head of the Seven Sister company, who counts himself as friendly with all the principals, assumes that either Vice Chairman James W. Kinnear or President Alfred C. DeCrane Jr. will succeed McKinley. DeCrane is in “the Texaco mold,” this executive says, while Kinnear, “given a long enough piece of rope, might try to change the system.”

Whoever survives or emerges, however, Pennzoil’s Liedtke says the timely resolution of the two companies’ impasse requires a new “mind-fix.”

“Unless it does change, I see no hope,” he says.

Times Staff Writer Karen Tumulty contributed to this story.