Relationship with Chevron
Chevron Corporation, through one of its subsidiaries, holds 50% of the issued shares in Caltex Australia Limited. Various Chevron subsidiaries also enter into commercial arrangements with Caltex from time to time. Caltex benefits greatly from its relationship with the Chevron Group (Chevron) by being able to access Chevron’s global scale and extensive research and development activities. Without these benefits, Caltex might be at a competitive disadvantage to other oil refiners and marketers in the Australian market which are subsidiaries of international oil companies. Caltex is not a subsidiary of an international oil company and the Board recognises that this means that Caltex must be diligent in ensuring that Chevron is not favoured over other shareholders.
The Board has adopted a policy governing all transactions with Chevron. Under that policy, substantial transactions between Caltex and Chevron must be approved by the Board of Caltex prior to the transaction being entered into. A transaction will only be approved if the terms of the proposed transaction are arm’s length terms or no less favourable to Caltex Australia than arm’s length terms.
Of particular significance are agreements negotiated between Caltex and Chevron in relation to spot and term crude and product sales and purchases and the chartering of shipping for the transportation of crude and petroleum products purchased and sold by Caltex. Crudes purchased from all parties, including Chevron, are assessed using the same mathematical model and published market pricing data to determine the crude creating the greatest value for Caltex having regard to such factors as crude quality, purchase price, freight costs and processing suitability and value. If Chevron acts as an agent of Caltex in a crude transaction, it receives a commission fee which has been assessed to be less than the cost to Caltex of operating a Singapore trading office or of using an independent agent and Chevron only acts on instructions from Caltex. In relation to product purchases, a program is considered annually by the Board. As part of that consideration, the Board receives information on the current year’s transactions showing that they occurred on an arm’s length basis and approves the independent criteria to be used to assess that the following year’s arrangements will be on no worse terms than on an arm’s length basis.
The Board of Caltex Australia Limited has three directors who are executives of Chevron, one of whom is currently seconded from Chevron to act as the Managing Director and Chief Executive Officer. The appointment of Chevron executives as directors allows Caltex to access industry experience that these directors have gained through involvement in the day-to-day operations of one of the world’s leading global energy companies. They bring important knowledge and experience to bear on the Board’s consideration of operational and business matters which is not available from directors without industry involvement and which is not generally available in Australia.
Once appointed to the Board of Caltex Australia Limited, these directors are required under corporate law to act in the best interests of Caltex. It is a term of the letter of appointment of the Managing Director and Chief Executive Officer (to which the Managing Director and Chief Executive Officer agrees) that the scope, nature and performance of his duties are subject to, and must be undertaken in accordance with, the lawful directions of the Board of Caltex Australia Limited. Directors who are employees of Chevron must participate in an education session conducted by external Australian legal counsel shortly after their appointment which emphasises their duties to Caltex and how to manage any conflicts of interest that might arise.
The performance of the Managing Director and Chief Executive Officer is assessed annually by the Chairman against Caltex performance benchmarks. The results of this assessment are reported to Chevron which takes these into account in the remuneration it pays to the secondee.
Further information on the relationship with Chevron is available on Caltex’s web site.