Shell Australia Ltd. and Mobil Oil Australia Ltd. have signed a memorandum of understanding (MOU) to combine their Australian refining operations into a new 50-50 joint venture.
If approved, the move will create a firm with 400,000 b/d of refining capacity, putting both partners among Asia's most prominent downstream players.
More important, the companies say the new JV will provide the economies of scale Australian refiners desperately need to match the large export refineries in the region. It will have a book value of more than $2 billion (Australian).
The companies have four refineries in Australia: Shell has refineries at Geelong, near Melbourne, and at Clyde, near Sydney; Mobil has refineries at Altona, near Melbourne, and at Port Stanvac, near Adelaide.
Associated pipelines and ships are included in the arrangement. But the individual marketing businesses of the two companies-including the distribution terminals and service station networks-are excluded from the plan. In other words, Shell and Mobil will remain independent competitors in the wholesale and retail products markets.
Under terms of the MOU, the stand-alone JV would have its own CEO and management team. The JV, to begin operating in January 1999, would also have its own name and logo. The plan is subject to clearance from the Australian Competition and Consumer Commission and the Foreign Investment Review Board. The parties have not yet entered into legally binding commitments, as negotiations on the fine details are still in progress.
Driving forces
One catalyst for the planned merger is very poor profitability for both Mobil and Shell in recent years. In 1997, the Australian downstream oil industry (Shell, Mobil, Caltex Australia Ltd., and BP Australia) recorded a net profit of just $81 million (Australian)-a result equivalent to a mere 2% return on shareholder funds. In 1996, the figure was 8%.Another factor is ever-increasing competition from cheap fuel imports from elsewhere in the Asia-Pacific region.
Both companies see the new JV as a chance to compete more effectively by lowering costs and improving efficiencies. They hope to reduce costs by $80 million (U.S.)/year, according to Shell.
"Savings in working capital are also expected, although these have not yet been quantified," Shell said.
The firms' two Victorian refineries, which are linked by a pipeline that supplies crude from Bass Strait oil fields, would form the core of the optimized four-refinery network. The idea would be to supply the Australian market, as well as niche export markets, in the most cost-effective way.
In a joint statement, Mobil Australia Oil Chairman P.C. Tan and Shell Australia Executive Director of Oil Products Peter Duncan said, "This is the sort of structural change that is necessary if we are to compete in a tough international market and is critical to ensure the long-term survival of the Australian refining industry."
No refinery closures are planned under the scheme, which will enable each refinery to concentrate on its production strengths, thus increasing specialization.
Employees from both companies would be employed by the new JV. The companies anticipate a total workforce reduction of about 10%, or 100-150 jobs. Job losses will mainly occur in non-operational areas.
Tan and Duncan see no relief in sight from market pressures and did not rule out the possibility of future refinery closures: "We anticipate increased competition from low-cost imports, and the future of any refinery would be determined by its ability to remain competitive."
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