OGJ Newsletter

Oil industry mergers have achieved a mind-blowing scale, with Exxon gobbling up Mobil and Total swallowing Petrofina (see story, p. 37). Yet according to Daniel Yergin, chairman of Cambridge Energy Research Associates, the merger mania is unlikely to stop here, with the expectation of continued low oil prices forcing further change.

Writing in London's Financial Times, Yergin said that, with oil prices at $11-12/bbl, the economics of new projects become problematic.

"Mergers and acquisitions are the ultimate form of cost-cutting, sometimes to be measured in billions of dollars. Once the tumult of the merger passes, they enable companies to spread their costs over a larger base," wrote Yergin.

By the time the current period of low oil prices is over, he said, the landscape of the industry will look different. There will be further consolidations, some perhaps obvious now and some likely to come as a surprise. "And as the new combines rationalize their operations," Yergin wrote, "they will create opportunities in production for entrepreneurial independents that have the same access to technology as the supermajors to move up in scale (see related story, p. 27). Parallel opportunities will be available to penny-conscious operators in refining and marketing."

Comments by oil industry officials at a financial analysts' meeting last week bolstered the view that the merger frenzy is not over.

Texaco's Peter Bijur says his company is carefully reviewing growth prospects through alliances, mergers, or acquisitions, Wall Street Journal reported. He added, however, that he doesn't believe in just following a trend. Concurring, a Chevron official said, his firm wouldn't rush into a deal, either.

Another of last week's mergers has implications for petroleum companies seeking chemicals assets.

France's Rhône-Poulenc and Germany's Hoechst are uniting their life sciences businesses into a 50-50 venture called Aventis. As part of the plan, the firms will divest their chemicals businesses. Following the chemicals sale, which will include Hoechst's Celanese subsidiary and R-P's Rhodia unit, the firms may have to readjust their cash positions in Aventis, depending on the proceeds each receives. Hoechst is an important producer of polymers, including polyester fibers, polyethylene terephthalate, polypropylene, and polyethylene.

Parker Drilling and Superior Energy Services are revising the stock exchange rate under their weeks-old merger agreement to better cope with the worsening outlook for the oil industry (OGJ, Nov. 9, 1998, p. 46, and Newsletter). Parker will now exchange 0.975 share of common stock for each Superior share, instead of 0.9. The acquisition price of $168 million and all other of the deal's details remain unchanged, said Parker.

"The adjustmentellipsereflect(s) recent deterioration in the outlook for activity in the oil field service industry, particularly in the contract drilling and workover segment," said Parker.

In addition to mergers and acquisitions, petroleum companies continue to cut staff to cope with a new low-price environment.

Texaco plans to double the number of jobs it will cut vs. the 1,000 announced just last month as part of a restructuring that had targeted $200 million/year in savings (OGJ, Nov. 16, 1998, Newsletter).

The elimination of 2,000 jobs will enable the company-often speculated to be a merger candidate-to save $400 million in 1999 and $600 million in 2000. Most of the restructuring would affect Caltex, its joint venture with Chevron.

Union Pacific Resources will reduce its Fort Worth headquarters staff by 14%, or about 140, saving about $12 million/year. Combined with attrition, the latest cuts will have resulted in a loss of 20% of UPR's headquarters jobs this year and exclude future job losses related to the pending sale of its midstream gas business to Duke Energy (OGJ, Nov. 30, 1998, Newsletter).

Karyn Grass, executive director of the Independent Petroleum Association of Mountain States, has urged U.S. Energy Sec. Bill Richardson to seek ways to preserve marginal well production, resume purchases for the Strategic Petroleum Reserve, and test royalty in-kind payment systems that would reduce producers' accounting costs.

Grass says small oil firms need relief from low prices now: "The major companies are staying in business by merging and then slashing their work force. Unfortunately, that strategy won't work for (most) small independent producers. It's hard to cut employees when your work force only amounts to a few people. The choice often comes down to going out of business."

With the majors now looking to improve performance through mergers and acquisitions, Russia's petroleum sector appears to have hardly begun the restructuring process that western firms have largely completed.

Yukos has already reorganized itself into E&P and R&M units along western lines, but now plans to focus on operational efficiency, with a target of cutting production costs by 25%. "Production units will be permitted to deliver their crude oil to non-Yukos affiliated entities," it said. "Refining units will be able to purchase non-Yukos crude oil, and marketing units will be allowed to sell non-Yukos oil andellipseproducts." Yukos will no longer have to carry out its own operational, maintenance, and transport functions but can put the work out to tender.

The moves are expected to significantly reduce operating costs.

Azerbaijan's parliament has given the nod for its 11th offshore oil contract, this one with Amoco, a participant in one of the largest mergers announced to date-BP Amoco. After its merger with BP is complete, Amoco will hold a 25% interest in Inam block, 200 km south of Baku (OGJ, July 27, 1998, p. 37). U.K.'s Monument Oil & Gas and Russia's Central Fuel Co. each hold 12.5% of the 25-year contract, while Azeri state firm Socar controls 50%.

Socar's share of an initial 3-year drilling program involving two exploratory wells will be funded by the foreign firms. Socar can extend this period by 2 years for two more wells. After signing, Azerbaijan will receive $32 million, plus $10 million when flow starts and $2.5 million for every 100 million bbl of oil produced.

The debate surrounding Caspian oil export routes continues, with Azerbaijan International Operating Co. (AIOC) official John Leggate saying the proposed Baku-Ceyhan pipeline may cost the group as much as $500 million/year vs. AIOC's preferred option.

The figure equals the difference in transport costs between the Baku-Ceyhan route and an alternate route to Supsa, Georgia. The AIOC consortium prefers the Supsa option, because the Ceyhan route would increase oil costs by as much as $2/bbl vs. the Baku-Supsa route. The Ceyhan option would cost $3.7 billion vs. $1.8 billion for Supsa. AIOC will make a recommendation, or at least a full progress report, to Azeri President Aliyev this month.

Civil strife continues to disrupt pipeline operations and oil supplies in India and Nigeria, continuing a string of similar incidents in recent months (OGJ, Oct. 26, 1998, p. 35).

In India, separatist guerrillas blew up an Indian Oil Corp. crude oil pipeline in Assam state Nov. 28, cutting off Assam oil supplies to the rest of the country. It was the second act of sabotage targeting an oil pipeline in Assam in as many days and the fifth attack on oil facilities in 5 years by Assam insurgents. The pipelines were expected to be restored to service last week.

Just days after it reopened five flow stations tied to the Forcados terminal in southern Nigeria (see Industry Briefs, pp. 44-45), Royal Dutch/Shell had to shut five flow stations in Bayelsa state in southern Nigeria last week, following a crude oil spill of about 1,500 bbl on the Santa Barbara River, apparently caused by sabotage of a pipeline valve. That cut off flow of 145,800 b/d of oil from Nembe oil field. It came days after another crude spill, of 1,000 bbl, into the same river, blamed on a vandalized valve in Afam field in Rivers state.

Militant youths last week still were preventing cleanup crews from visiting the spill sites, demanding compensation.

In new reaction to Ottawa's planned restrictions on gasoline sulfur levels, Shell Canada says the changes could kill a multibillion-dollar oilsands project in northern Alberta. The $3.8 billion (Canadian) project includes an oilsands mine at Muskeg River in the Fort McMurray region, an upgrader at Shell's Scotford refinery near Edmonton, and a linking pipeline.

Ottawa plans to limit gasoline sulfur to 150 ppm by 2002-about one-third of current sulfur levels-could impose stiff financial burdens on Canada's refiners. They say Ottawa should wait until the U.S. sets limits for sulfur emissions in 1999.

Meanwhile, 27 Northeast and Mid-Atlantic congressional representatives have sent a letter to EPA urging it to cut sulfur in U.S. gasoline to 40 ppm from the current average of 260 ppm. The bipartisan letter to Administrator Carol Browner said EPA should set a single sulfur level nationwide and reject the regional approach that API and NPRA have proposed.