Restructuring generally refers to corporate retrenchment in some lines of activities and consolidation of retained assets in others in order to improve corporate profitability and returns to stockholders. Mergers and acquisitions effectively consolidated energy assets, particularly oil and gas reserves, into the custody of surviving corporations. Another form of consolidation involved reducing the scale of ongoing operations. Elimination of higher-cost operations can raise the overall return on retained assets. Domestic oil and gas production, particularly onshore, is a good example. When oil prices were rising steeply, the FRS companies' net lease ownership of undeveloped U.S. onshore acreage rose from 127 million acres in 1977 to a peak value of 192 million acres in 1981. Thereafter, the FRS companies' holdings steadily declined to 42 million acres in 1993. Similarly, the number of onshore producing wells of the FRS companies, on a net ownership basis, rose from 196 thousand in 1977 to a peak value of 232 thousand in 1985 but then steadily declined to 153 thousand in 1993. One of the important effects of this consolidation was a decline in the FRS companies' cost of extracting oil and gas in the United States, from over $6 per barrel, excluding taxes, in 1985 (in 1993 dollars) to less than $4 per barrel in 1993.

Retrenchment was largely driven by two motives. One purpose was to sell, or otherwise dispose of, businesses which were of low profitability or were not integral to long-term investment strategies. Due to poor performance, diversified businesses outside petroleum and chemicals were good candidates for divestiture (Figure 16). Although the other nonenergy line of business accounted for 10 percent of the FRS companies' net assets in 1981, this line of business accounted for one-third of the value of asset disposals thereafter. 158 Overall, the FRS companies'

retrenchment in diversified businesses benefitted bottom-line results. The rate of return on other nonenergy assets steadily rose from a negative level in 1982 to a positive 10 percent in 1988 and has remained positive since then, despite a recession-induced dip in 1991 (Figure 16). This improvement in financial performance reflects the higher profitability, on average, of businesses that were retained.

Another aim of retrenchment and associated sales of assets was to raise cash to reduce debt. Asset sales

noticeably increased in 1983 and 1984 and reached a peak in 1988 when Tenneco sold their petroleum assets for $7.6 billion (Figure 15). The takeovers and takeover defenses of the early 1980's involved massive amounts of debt. Companies involved in takeovers and takeover defenses accounted for 73 percent of the FRS companies' build-up of long-term debt between 1981 and the peak year for FRS debt, 1987.159 Although the sharp increase in the FRS companies' overall ratio of total debt to equity evident by 1985 (Figure 22) was largely traceable to those companies involved in takeovers and takeover defenses, two-thirds of the other FRS companies were increasing their debt load as well. As a source of financing, long-term debt jumped from less than 15 percent to nearly 25 percent of total funds in the 1981-1985 period (Table 33). In large part because of the accumulation of debt, reduction of debt claimed a growing share of the FRS companies' capital resources (Table 34). In recent years, the FRS companies have contained their growth in debt (Figure 22) and asset sales have receded in importance as a source of funds.

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The FRS companies did not make many changes in the direction of their investment strategies until oil prices collapsed in 1986. Indeed, the composition of capital expenditures in the 1981-1985 period was strikingly similar to that of 1979-1980, when oil prices were escalating rapidly (Table 35). Somewhat more than 60 percent of capital expenditures was directed to oil and gas production in both periods, downstream petroleum declined to 16 percent or so of capital expenditures, about 8 percent went for diversified businesses followed closely by chemical operations, and less than 5 percent of capital expenditures was allocated to energy development outside petroleum.

Of course, mergers and acquisitions played a much larger role, since the first half or so of the 1980's was the period of consolidation of upstream assets (Figure 6 in Part I, Chapter 2). The apparent stability in the FRS companies' investment patterns in 1979-1980 and 19811985 largely reflected the relative profitability of their lines of business, which changed little until the oil price collapse (Figure 21). Oil and gas production continued to be, by far, the most profitable line of activity through 1985. Downstream profitability, though hurt by continued excess capacity and a glut of gasoline supplies in 1984, remained a distant but clear second to upstream rates of return, followed by chemical operations.

Source: Energy Information Administration, Form EIA-28.

Oil prices moved from a general decline to a total collapse beginning in late 1985. For example, the average price of crude oil imported into the United States dropped from $27 per barrel in the fall of 1985 to $11 per barrel in July of 1986. Although oil prices increased somewhat since then, they have generally remained at a low level apart from a war-induced, transitory upswing in late 1990.

The lower level of oil prices since 1986 led to substantial realignments of the FRS companies' investment targets. Exploration and development expenditures fell by a third in 1986 from their 1985 level (Table 30) and generally remained far below the levels of the prior 7 years. By 1993, the FRS companies' worldwide E&D expenditures of $23 billion were at about half the peak values of 1981 and 1982. Nearly all of the cutbacks in E&D were in the United States. Apart from 1988, the FRS companies' expenditures for domestic E&D steadily fell from $28 billion prior to the oil price collapse, to a range of $14 to $15 billion, and were cut back further to $10 billion in 1992, their lowest level since 1977. By contrast, foreign E&D expenditures, which were trimmed by 25 percent in the context of the 1986 oil price collapse, nearly doubled between 1986 and 1989, and have remained in the $13 to $14 billion range into the 1990's. A variety of factors contributed to the shift in emphasis to locales outside North America. These factors, which are discussed in the next chapter, include the interactions of costs, geology, development of markets, regulations, and tax policies.

Lower oil prices, at least for the first few years after their collapse, increased the profitability of downstream petroleum and chemical operations (Figures 16 and 21). Lower oil prices led to lower petroleum product prices which, in turn, increased the demand for petroleum products. Economic growth both stimulated petroleum demand and was aided by lower oil prices, with annual real GDP growth in the United States averaging over 3 percent during 1986 through 1989. In the context of increased gasoline demand, particularly for higheroctane grades, gasoline marketing became a renewed target of investment among FRS refiners as did gasoline manufacturing capability. Refinery utilization also improved over the 1986-1989 period in part because petroleum demand increased and also because the retrenchment in U.S. refinery operations was largely at an end by the beginning of 1986. Over 3 million barrels per day of crude oil distillation capacity were removed from service between January 1, 1981 and January 1, 1986. Lower oil prices and economic growth had

similar beneficial effects on chemical operations: feedstock prices fell, demand improved, and profit margins widened. The FRS companies shifted the focus of their capital spending to downstream petroleum and chemical operations in the latter half of the 1980's. The share of total FRS companies' capital expenditures allocated to chemical manufacture, petroleum refining, marketing, and transport rose from 24 percent in 19811985 to 38 percent in 1986-1990 (Table 35).

The emphasis on downstream petroleum and chemical operations in the capital budgets of the FRS companies continued into the early 1990's. Outlays for these lines of activity amounted to 41 percent of total capital expenditures through 1993. However, the factors contributing to this continued emphasis were somewhat different than in the late 1980's. Capital expenditures for worldwide refining operations rose to 20 percent of total outlays. In part, the growth in spending was for the continued upgrading of retained facilities to increase yields of lighter products.

Environmentally-related objectives also became more prominent in recent years. In the United States, heightened environmental standards plus scheduled earlier compliance with environmental quality requirements led to increased downstream outlays. Most recently, the Clean Air Act Amendments of 1990 mandated that: (1) reformulated gasoline be sold in areas with the severest air pollution levels (beginning January, 1995), (2) minimum oxygen content for gasoline supplied during the winter months in 39 areas of the country (beginning November, 1992), and (3) the sulfur content in diesel fuel be reduced (beginning October, 1993). The FRS companies' estimated capital expenditures for environmentally-related purposes in U.S. refining rose from $0.3 billion in 1989 to $1.9 billion in 1992.161 Abroad, the European Community nations are reducing the lead content of gasoline, which has required additional investment for the FRS companies' foreign refineries.

Although the FRS companies' capital expenditures for their chemical operations fell from $8 billion in 1990 to $5 billion in 1993, spending for these operations remained at a high level in historical context and constituted 13 percent of total capital expenditures. A decline in chemical profitability from the record levels of 1988 and 1989 (Figure 16) reduced the attractiveness of this line of activity. A surge in additions to worldwide chemical capacity and weakened economic

growth beginning in late 1990, first in the United States and then in other industrial nations, dampened prices, particularly among commodity chemicals. Price-cost margins were also eroded by the higher oil and feedstock prices during the several months of conflict following Iraq's invasion of Kuwait in August, 1990. Financial results for the FRS companies in 1992 and 1993 suggest that chemical profitability may have leveled off.

Diversified businesses were second only to U.S. oil and gas production as a target of investment cutbacks in the late 1980's and early 1990's. Capital expenditures for businesses outside energy and chemicals steadily fell from their peak of $7 billion in 1981 and remained at a level slightly above $2 billion in the 1990's. Low profitability and incompatibility with longer term investment objectives led to massive divestitures of enterprises in the other nonenergy line of business during the 1980's. In addition, the FRS companies' apparent asset commitment to this line of business was further reduced in 1987, when Burlington Northern spun off its energy operations to shareholders (creating Burlington Resources) thereby removing its railroad operations from the scope of FRS reporting, and in 1988, when highly diversified Tenneco left the ranks of FRS respondents through the sale of their petroleum

assets.

Despite a gradual but steady erosion of coal prices, both before and after the oil price collapse of 1986, the FRS companies generally maintained their interest in coal operations during the remainder of the 1980's. Their coal production grew at a somewhat faster pace than the rest of industry. Their capital expenditures for coal, though averaging only about half the level of earlier years ($0.8 billion annual average in 1986-1990 versus $1.6 billion in 1981-1985), were mainly directed at cutting costs and raising mine productivity rather than significant expansions of capacity. However, the profitability of coal operations was always well below the average for the other lines of business and showed no trend either upward or downward during the decade of the 1980's. Some FRS companies appeared to remain in coal production mainly for lack of a satisfactory purchase offer for their coal assets.

Then, during the 1990's, seven FRS companies sold their coal assets. 162 Most of the divested coal reserves, apart from those of Burlington Resources, were located in the higher cost Eastern region of the United States, close to export points. This favorable locational feature may have enhanced their value as future sources of supply to European markets, as subsidies to local coal production are being scaled back in some European countries.163 These divestitures of coal assets represent a sizable withdrawal of commitment by the FRS companies to U.S. coal production. In 1989, for example, these seven companies accounted for 51 percent of FRS coal production (and 15 percent of total U.S. coal production).

Unlike coal production, in which the FRS companies sustained a continuing and noticeable presence in the 1980's, nuclear and nonconventional energy were targets of divestiture. By 1986, many of the FRS companies had largely withdrawn from uranium production, due to a number of setbacks to the industry, and to nonconventional energy development, due to downward revisions of oil price expectations. The oil price collapse in 1986 and subsequent lower level of energy prices served only to accelerate the ongoing retrenchment. By the early 1990's, the last FRS uranium producer ceased operations. Ongoing operations in nonconventional energy are mainly in Canadian tar sands production and geothermal power generation with smaller asset commitments in cogeneration and solar power manufacturing. Capital expenditures for nuclear and other energy fell from over $1 billion in 1981 and 1982 to about $200 million in recent years.

The distribution of the FRS companies' productive assets across lines of business in 1993 reflected both restructurings and shifts in investment targets effected since the decline in oil prices began in 1981 (Table 36). Changes in the pattern of asset deployment largely occurred after 1985 because investment strategies changed little in the first half of the 1980's and implementation of restructuring plans can take years until completion. Petroleum refining and marketing showed the largest growth in asset share from 1985, followed by chemical manufacturing and foreign oil