Oil price fall sparks flurry of mergers

Date: 10/09/1998

By Chris Johnstone

WHERE BP/Amoco and Royal Dutch/Shell and Texaco blazed a trail, other oil giants and second-league players are set to follow.

Pressure from the market-place is pushing the European oil refining and marketing industry into mergers and partnerships, so promising a bulging case-load for European and American regulators but no short-cut solutions for a struggling sector.

The trend got under way in August when BP launched what amounted to a take-over of Amoco, while Shell and Texaco have moved to merge their European refining and retail operations.

The BP/Amoco deal and investor grumblings about the underperformance of Shell's share price over the past six months smoked out the Shell/Texaco accord prematurely.

"There will be lots of these deals happening," said Peter Regnier, director of UK-based oil prices and market consultancy OPAL.

Vernon Ellis of Andersen Consulting, London, agrees. "There is a lot of pressure on oil companies to act because all the signs are that prices will continue low and they will have to cut their costs," he said.

Analysts, who only a year ago were predicting oil prices at a healthy $18-19 (16-17 ecu) a barrel, are now predicting only a slight recovery from current 20-year lows of just above $12.50 (11.5 ecu) a barrel. In a recent study of the sector, Belgian stockbrokerage BBL forecast oil at $14-15 (13-14 ecu) a barrel by the end of the year, modifying a prediction it made only a month ago that the price could rise to $16 (14.5 ecu).

An economic meltdown in Latin America or a deterioration of the problems engulfing Asia or Russia would dash even these cautious expectations of a price improvement. Faced with this prospect, oil companies are seeking to diversify. "They are seeing themselves more as energy companies, not just oil companies," said Ellis.

The best example of this is the BP/Amoco deal. The merger is more about gas than oil and BP's wish to have a world-wide presence in a sector where it has been weak in the past. Amoco is the biggest producer of natural gas in the US, and combining its units with BP's modest European output should put the merged company among the top three producers globally. "BP sees the way the world is going with even more use of gas," said one analyst.

The BP/Amoco deal should get through the European Commission unscathed when it is notified towards the end of this month, if initial remarks from Competition Commissioner Karel van Miert are anything to go by. But although there are no significant overlaps in Europe between their refining and retail operations, the combination of the companies' petrol stations in the US is expected to raise problems in Washington.

The pooling of Royal Dutch/Shell and Texaco's European refinery and petrol station operations faces a tougher ride. The deal, which mirrors an existing agreement between the two in the US, is already raising competition concerns on the grounds that the partners' market shares in the Netherlands, Ireland and Luxembourg could be anti-competitive.

Commission officials say they were not involved in any pre-announcement talks with Shell and Texaco aimed at paving the way for clearance. "It is still not clear whether this will be looked at under the merger rules or under Article 85," said one. Article 85 of the Treaty of Rome bans anti-competitive agreements between firms.

In the past, oil companies have proved inventive in juggling their assets, with straight swaps of refineries and fields, property transfers and joint ventures already a feature of the industry. Bitter competition in one area has not foreclosed cooperation in another. Shell and Amoco, for example, have combined their oil exploration and production activities in west Texas. Mobil and BP cooperate in Europe on some refinery operations, because alone they do not have the muscle to take on the world's biggest companies Shell and Exxon.

The close relationship between oil firms, the largest of which used to be known as the 'seven sisters', means they will not be rushing to complain, at least in public, to competition authorities about their rivals. "We would not even think about complaining," said a spokesman for one firm. "Why should we?"

The motive behind most of these deals has been a wish to share risk in an unpredictable, capital-intensive business. Full-blown deals, such as that involving BP and Amoco, are a giant step forward from the old ad hoc risk-sharing arrangements.

Among the 'mini-majors', France's Elf Aquitaine is marked out as one of the likeliest candidates to strengthen its position with partnerships or purchases. US company Conoco, owner of the Jet network of petrol stations in the UK and Germany and SECA in Belgium, is seen as a front runner to buy an interest in Elf.

France's Total, Spain's Repsol, and Italy's AGIP are also believed to be eager to strike deals which will either increase their size or rationalise their activities. Repsol has already rushed into the Latin American market and AGIP is said to be keen to expand in Europe or Latin America. "All sorts of combinations are possible," said Ellis.

Analysts say Mobil, the US giant now relegated from third to fourth place in global ranking of oil companies according to their market worth, assets and production, is under the greatest pressure to do a deal which would return it to the super-league of industry players.

Major feature on the European oil-refining industry.