Sell-off is key to oil merger approval

Date: 25/02/1999

By Tim Jones

EUROPEAN regulators should be able to lay the ghost of John D. Rockefeller to rest with relative ease when two of the largest parts of his old empire come to Brussels for clearance, claim oil sector analysts.

This would leave the US authorities with the tricky task of avoiding the partial recreation of Rockefeller's notorious Standard Oil monopoly they broke into 34 pieces 88 years ago via the €70-billion merger of Exxon and Mobil Corporations.

The merger, which was announced in November, would create the world's largest oil company with annual sales revenues of €180 billion.

With output of 2.5 million barrels a day (mbd) and combined reserves of 21 billion barrels of oil and gas, Exxon Mobil Corporation could meet the world's needs for more than a year.

Exxon and Mobil are anxious to avoid a repetition of the delays to the Boeing/ McDonnell Douglas aerospace merger at the hands of Competition Commissioner Karel van Miert, and have been in constant contact with Brussels to iron out regulatory problems before they arise.

Exxon chief executive Lee Raymond and his Mobil counterpart Lou Noto met Van Miert last week. Talks centred on Mobil's two-year-old refining and marketing ('downstream') joint venture with British Petroleum, which itself recently completed a merger with US oil giant Amoco, to pool assets worth €4 billion. The venture comes second only to Royal Dutch/Shell, with 12&percent; of the market in fuels, and top in the lubricants market, with an 18&percent; market share.

Van Miert and his officials in the Commission's Directorate-General for competition (DGIV) are concerned that the joint venture would give Mobil and Exxon access to BP-Amoco's pricing and strategic plans.

However, simply unravelling the venture will be difficult. The BP/Mobil enterprise operates in 43 countries, dealing with refineries, depots and retail sites along with the pipelines, terminals, road tanker fleets, plant and equipment used for manufacturing and distributing oil products.

“It has gone too far to be broken up and BP is unlikely to give it up, so disposal is the most likely route,” said Steve Turner, an oil analyst at London bank HSBC. “BP has the right to block sale to anyone they do not like and this gives them the whip hand. BP could block the whole merger if push came to shove.”

BP manages the greater part of the venture, with a 70&percent; stake in the fuels partnerships which run the refining and manufacturing operations of both companies, together with their commercial and retail networks including 5,600 BP and 3,300 Mobil service stations. “Because BP already has a majority stake in the joint venture, it would not change BP-Amoco's position in the European market if BP took it over,” said Turner. “It does not matter if it has a 60&percent; stake or a 100&percent; stake for regulatory purposes.”

Paul Ting, an oil sector analyst at investment bank Salomon Smith Barney in New York, has written a detailed report looking into the possible divestment costs of winning clearance from the US Federal Trade Commission and Van Miert.

This too advocates a straightforward sale of Mobil's European downstream assets. “Certainly this assumption has lots of appeal,” he said. “It is clean and simple.”

He calculates that, if Exxon Mobil Corporation sold its pooled European downstream assets, it would mean the loss of the equivalent of 384 mbd of the total volume of crude processed by Mobil's refineries and 174 mbd of Mobil's gasoline/diesel marketing volume. This represents 27&percent; of Mobil's foreign refining and 50&percent; of downstream marketing, worth roughly €200 million.

“This reconfirms our belief that, while it is not absolutely certain the merger will go through, the likelihood is high,” said Ting.

In the US, life will be harder for the two companies. Both companies operate refineries in Texas, Louisiana and California while, in some northeastern US states, the combined group would control as much as 40&percent; of petrol retailing.