Shell/Texaco pursues European R&M merger

Sept. 14, 1998
Shell Europe Oil Products Inc.'s Stanlow refinery in the U.K. has 260,000 b/d crude distillation capacity and supplies the industrial north and midlands of England. Despite Shell's earlier decision to close its Shell Haven refinery on England's south coast to balance supply and demand, the inclusion of Texaco's Pembroke refinery puts the Shell/Texaco combine in surplus for products in the U.K. Photo courtesy of Shell. [111,960 bytes]
David Knott
Senior Editor
Shell Europe Oil Products Ltd. and Texaco Inc. are preparing to begin detailed negotiations with a view to merging their European refining and marketing assets.

Last week, the two majors signed a nonbinding memorandum of understanding to join forces in a venture owned 88% by Shell and 12% by Texaco, which is due to be up and running by mid-1999 (OGJ, Sept. 7, 1998, Newsletter).

The companies said the venture will continue to market products under the Shell and Texaco brands, and is intended to improve shareholder returns and value for customers in the highly competitive European market.

A Shell official told OGJ that details of the deal have yet to be worked out, but that there is "general acceptance" that there will be some rationalization of assets.

He added that there will also be job losses, "although we have no idea how many at the moment." Shell's European R&M business has 25,000 employees while Texaco's has 4,300.

Shell has interests in 17 European refineries, while Texaco has interests in two. Similarly, Shell dominates the retail side, with almost 13,000 outlets across Europe compared with Texaco's almost 3,000 (see table [83,184 bytes] , p. 31).

Shell operates 13 lubricants blending plants in Europe to Texaco's 3. Also, Shell owns 78 products terminals and has interests in another 255, while Texaco owns 11 terminals and has interests in another 23.

Marketing

The announcement gave no details about how the JV will operate and leaves key questions unanswered, according to Wood Mackenzie Consultants Ltd., Edinburgh.

"In a number of markets," said the analyst, "the combined share of the two companies will be higher than is comfortable for Europe's competition authorities.

"In refining, the combination of Texaco's refineries with Shell is not a natural fit. The overall conclusion is that there must be more to this than meets the eye."

Wood Mackenzie said that, when market shares rise above 25%, the European Union's competition authorities begin to take an interest. The proposed merger is expected to present problems in the Netherlands, Ireland, Norway, Luxembourg, Denmark, Switzerland, and the U.K.

"One unanswered question," said Wood Mackenzie, "is: Why have Shell and Texaco indicated that they will continue with the two brands?

"Although this could save on initial rebranding costs, it fails to capture the economies of running a large pan-European single brand network, as is being done by BP/Mobil." (British Petroleum Co. plc and Mobil Corp. merged European R&M operations 2 years ago-OGJ, Mar. 25, 1996, p. 21).

Another interesting aspect of the merger is what will happen over Texaco's 50-50 joint venture with Norsk Hydro AS, which was established in 1995 to operate filling stations in Denmark and Norway.

"Would Norsk Hydro want Shell as a partner rather than Texaco," said Wood Mackenzie, "or will the Hydro-Texaco joint venture be excluded from any tie-up between Shell and Texaco in the rest of Europe?"

The Scandinavian situation has been complicated further by Shell's subsequent announcement of a deal with Petrofina SA, Brussels, in which Shell will buy Fina's chain of 182 retail outlets and four products terminals in Norway in return for a number of Shell stations in the Netherlands.

The Shell official said the Shell/Fina deal was routine portfolio management and is expected to go through by yearend. While Shell and Fina have not agreed upon how many Dutch Shell stations will transfer to Fina, the official said that the total would be equal in value to Fina's Norwegian assets.

Mathieu Zajdela, managing director, downstream, Petroleum Finance Co., Paris, said the planned Shell/Texaco merger will have positive results for both companies, particularly in the U.K.

Shell's U.K. retail operation was said to be a drag on the company's finances because of price wars and the growing market share of supermarkets: "Shell seems to have been relatively less successful than other British majors in winning back market share during the last 2 years."

Zajdela said the Shell/Texaco combine will operate close to 17,000 service stations across Europe with a 16.5% share of the retail market, putting it in a market-leading position ahead of Exxon Corp. and BP/Mobil.

"In view of the strong brand images on all markets where the operators are present," said Zajdela, "it would seem logical to continue to reap the rewards of this.

"In addition, both operators have invested considerable finances in workovers of their networks. Where both operators are in tune is in convenience store retailing operations; however, it is clear that maintaining two brands may also seriously reduce potential cost savings."

Refining

Wood Mackenzie said the key issue for Shell/Texaco on the refining side is what to do with Texaco's interest in Rotterdam's Nerefco refinery.

Netherlands Refining Co. was formed in 1989 by the merger of BP's Rotterdam and Texaco's Pernis plants. It is Europe's largest refinery, with total capacity of 400,000 b/d, of which Texaco owns 35%.

"The refinery," said Wood Mackenzie, "although massive, is relatively uncompetitive in overall European terms, falling into the third quartile for cracking and octane.

"Although the addition of the sophisticated Pembroke facility to Shell's current refining portfolio may have its merits, it is difficult to see why the new alliance would wish to retain Texaco's share of Nerefco, given that Shell has its own large and more sophisticated 374,000 b/d refinery at Pernis, right next door."

The analyst also notes that Shell's recent decision to close Shell Haven refinery in the U.K. brought the company's products supply/demand into balance.

"The addition of Texaco's Pembroke refinery takes them back to being in surplus," said Wood Mackenzie, "even after allowing for the additional Texaco market volumes.

"Furthermore, geographically, Pembroke is not that far from Shell's Stanlow refinery, and both refineries have inland product pipeline connections supplying the English industrial heartland."

The analyst said Pembroke is an excellent refining asset-although its limited desulfurization capacity is a weakness-and is unlikely to be closed. It supplies the U.K. and Irish markets as well as exports products to the U.S.

Zajdela said that no new refinery closures are expected to be announced while the terms of the deal are being finalized.

"Nevertheless," he added, "in addition to Shell's plan to close Shell Haven, it has previously been trying to sell off its Cressier plant in Switzerland, before deciding to stop actively seeking bids when offers proved too low.

"Shell's efforts to find a partner to help operate its Berre refinery in southern France had come to nothing, and processing has been cut this year by 40%. The refinery is gradually being shifted towards becoming a supplier for nearby petrochemical facilities.

"In addition, Shell has recently announced plans to sell its 27% stake in the Atlas refinery in Turkey along with its network of more than 600 retail outlets there."

Zajdela concluded that the Shell/Texaco combination addresses the problems of cost that European refiners face, but it does nothing to solve the region's excess capacity in refining nor the problem of retail competition from supermarkets.

"For these reasons," said Zajdela, "the JV may be difficult to implement. If the two partners succeed in solving all pending questions, there is no doubt that the JV will be associated with significant measures in the European oil industry, with regard to refinery closures and new investment/divestment plans."

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