NEWS that three of the world’s largest oil companies are discussing a merger of their refining and marketing operations in the United States signals a huge shake-up of the industry.
The talks, which could lead to a merger of operations by Shell Oil, Texaco and Star Enterprises – a joint venture of Texaco and the state-owned Aramco of Saudi Arabia – could produce an entity with about 15% of the market for petrol sales in the US.
The negotiations began earlier this year. Major oil companies have been under pressure for several years to improve profit margins in their refining and marketing operations, according to oil industry experts.
Higher crude oil prices, the need to make massive investments in refineries because of environmental regulation and competition have all contributed to that pressure, said several oil industry analysts.
“The reality is that the overall direction of return on investment has been down, not up,” said Adam Sieminski, vice-president of NatWest Securities in Baltimore. “It’s driving management crazy.” He said that the nine largest oil companies operating in the US earned only about a 7% return on refining and marketing.
“It is a tough, tough business and over the last year there’s been a growing realisation that it’s not going to get less tough,” said Daniel Yergin, president of Cambridge Energy Research Associates. “These companies have been going through a tremendous cycle of cost-cutting, and consolidation is really the next stage in cost-cutting to stay competitive.”
Oil company managements are under tremendous pressure from their boards of directors and shareholders to improve returns to attract investment by pension fund managers, he said.
Those pressures have already produced earlier steps toward consolidation and restructuring in the industry. British Petroleum and Mobil agreed to combine their downstream operations – refining and marketing – in Europe earlier this year. Conoco, part of DuPont, and Phillips Petroleum failed to reach an agreement on a downstream joint venture.
“I think the genie is out of the bottle now and every refiner in the country has to be asking himself `what do I do?'” said Yergin, who like others expects to see additional oil company consolidation of refining and marketing. “They’ll be asking, their boards will be asking and shareholders will be asking.”
The difficulty in the talks between Conoco and Phillips and one of the problems that the three companies involved in the current talks will face is how to value what each brings to the venture. If the talks are successful, profits would be paid to each of the companies based on what they contributed to the joint venture.
The venture would sell petrol and other products under both the Shell and Texaco brands. It would create two companies, one of which would combine Star’s refining and distribution assets, on the East and Gulf Coast, with Texaco’s. The second company would combine Texaco and Shell assets in the western US.
Together Shell and Texaco account for about 15% of US gasoline sales.
Although such a deal would face scrutiny by the Justice Department and the Federal Trade Commission, some analysts said it might be good for consumers – at least in the short run.
“In the first instance in this kind of a deal, prices would probably go down,” said Sieminski. “Costs would be lower and maybe they would use their higher market share to put a squeeze on the competition instead of the consumer.”
Shell and Texaco both have refineries in Washington, Texas, Louisiana and California.
No decision has been made about what facilities, if any, might be closed if the deal is completed, one source said. – The Washington Post