BP Amoco plc and ARCO are trying to allay Alaska`s fears about their pending merger.
Officials from both companies testified at a recent U.S. Senate energy committee oversight hearing that the merger would benefit the state where they are the biggest oil producers and currently operate separately the two main sectors of supergiant Prudhoe Bay oil field.
The U.S. Federal Trade Commission is considering BP Amoco`s $26 billion acquisition of ARCO.
The companies have disclosed that FTC has asked them for more information regarding their Alaskan production and California retailing operations. They plan to complete the deal by yearend.
Concerns
Sen. Frank Murkowski (R-Alas.), the energy committee chairman, said he is undecided about the merits of the deal.
He said, "BP will become the largest nongovernmental oil producer in the world; it will produce close to 20% of U.S. domestic crude oil, and it will control 18.4% of West Coast gasoline markets and 14.2% of East Coast markets."
He said the acquisition may have an even more dramatic impact in Alaska. "The combined company will control 70% of the North Slope resource and 72% of the Trans-Alaska Pipeline System. That will include virtually all of the infrastructure on the North Slope."
Bruce Botelho, Alaska attorney general, said, "After the merger, BP, as the principal owner of the infrastructure and the one company with available tanker space, would appear to have a significant advantage in future bidding.
"Additionally, it would be the only company with access to the results of almost all of the seismic work done to date on the North Slope. Would BP`s leasing and bidding behavior change materially in the absence of a competitor such as ARCO?"
Jay Hakes, Energy Information Administration chief, noted the companies` merger "promises no overlap in their downstream segments-the business area usually of most concern to the public in petroleum company mergers.
"However, the merger reveals a more complicated picture in U.S. upstream activities. BP Amoco and ARCO together represent 69% of Alaskan crude oil and natural gas liquids production, most of which supplies the West Coast. Alaskan crude oil provides 45% of the crude oil used in West Coast refineries.
"In spite of the Alaskan crude oil volumes flowing to the West Coast, more economic options may exist for California refineries than exist for Alaskan producers. California refineries can probably run any crude oil in the world and do run a variety of international crudes. But Alaskan crude oil export data indicate that currently not many refiners outside of the West Coast find Alaskan crude oil to be economically attractive."
John Lichtblau, chairman of the Petroleum Industry Research Foundation, New York City, put it succinctly: "ANS crude is a price-taker, not a price-maker."
Merger benefits
Mike Bowlin, ARCO chairman and CEO, explained that the merger was advantageous because, "The most successful companies will be those that can be cost-competitive on a worldwide basis. In a commodity business, cost is critical."
He added, "Large companies have the financial means and scope of operations to invest in new technology, which improves exploration success, lowers operating costs, and allows for the extraction of more oil and gas from existing reservoirs."
Bowlin said, "Our companies are an exceptional fit. BP Amoco (BPA) has virtually no overlap with ARCO`s West Coast refining and market operations. BPA has fewer than 20 gas stations in counties where ARCO markets. Consequently, the new combined organization will enjoy a highly efficient and cost-competitive national presence."
Alaskan concerns
Richard Olver, BPA`s exploration and production group managing director, addressed Alaskan worries about the merger.
He said lower oil prices require that E&P costs be reduced in expensive areas such as Alaska, in order for companies to remain highly competitive.
He said the merged company will invest $5 billion in Alaska over the next 5 years, an increase from their separate investments the past 5 years and from the future investments that the companies had planned individually.
Olver said, "In a very true sense, our $26 billion acquisition of ARCO is a clear expression of our belief in Alaska`s potential and future."
He said the merged company wants to market its North Slope gas and will continue both ARCO`s project exploring LNG prospects and BPA`s plans for a $70 million gas-to-liquids (GTL) pilot plant on the North Slope.
"We are confident, if the respective technologies prove commercial, that there are sufficient resources for both Alaskan LNG and GTL projects," he said.
Bowlin said the ARCO team will determine next June whether the LNG project can be sized to reduce costs 25%, thus making Alaskan North Slope LNG competitive in the Asian market.
Olver said that, because Alaskan law limits individual oil companies to a maximum of 500,000 acres of onshore and offshore lease acreage, the merged company would have to divest about 350,000 acres. He said prospective buyers would be given not only the acreage but also BPA`s and ARCO`s analyses of prospects.
Managing Director
BP Amoco plc Exploration and Production Group
