BP Amoco-ARCO merger hits snags in Alaska; concessions required

This processing plant at Prudhoe Bay, Alas., is part of the massive holdings of BP Amoco Exploration in the state. BP Amoco PLC sees the combination of its Alaskan assets with ARCO's as a "compelling strategic and geographic fit of quality assets," but Alaska Gov. Tony Knowles sees the combine as potentially too dominant for the good of the state. Photo courtesy of BP Amoco.

Since BP Amoco PLC announced its planned takeover of ARCO in early April, the company has made few public pronouncements about the deal, which is pending approval by US, Alaskan, and European authorities.

The deal values ARCO at $26.8 billion and is expected to lead to the creation of a company able to compete on equal terms in all sectors with the petroleum industry's other two supermajors: Royal Dutch/Shell and the currently merging Exxon Mobil Corp. (OGJ, Apr. 12, 1999, p. 22).

A BP Amoco official told OGJ that on no account would any details of the progress of the merger be made public as long as regulatory approvals are outstanding but that the merger was on course for completion as planned by yearend. An ARCO official gave the same answer.

The BP Amoco spokesperson said that both companies' shareholders have approved the proposed merger, as has the European Commission, but that the US Federal Trade Commission and the Alaskan state authorities have yet to give their consent.

While the FTC has not made any public comments about the BP Amoco-ARCO deal, the state of Alaska-which is likely to be most affected by the merger because of the overlap of the two companies' assets there-has made its own requirements for a merger known.

While the plans met no major hurdles in Europe, the Alaskan authorities and the FTC appear to be more potentially bothersome: Alaska because the authorities are concerned about the effect that merging its two biggest oil industry players could have on its economy, and the FTC because of antitrust concerns.

Internal progress

Last year's merger of British Petroleum PLC and Amoco Corp. was characterized by the UK firm-which had performed well financially in recent years while other majors stumbled-turning its own management microscope on Amoco's assets.

BP Amoco Chief Executive John Browne briefed financial analysts in July on the progress of the BP-Amoco merger, telling them how the company planned to lop $4 billion off annual costs, sell $10 billion worth of assets, and boost capital outlays to a total of $26 billion during 1999-2001. He said the merger, at that time, was essentially complete and outlined the thinking behind a massive portfolio clear-out that would see underperforming BP Amoco assets weeded out (OGJ, July 26, 1999, p. 38).

The planned cost reductions and asset disposals Browne detailed did not include any that BP Amoco will gain when it takes over ARCO. Browne said only, "While ARCO will represent about 15% of the total market capitalization of BP Amoco, it will strengthen the portfolio, particularly in gas and the US downstream. It will also give us new opportunities in Alaska and further potential for future growth in Asia."

The shareholders of both BP Amoco and ARCO voted in favor of the take- over: On Sept. 1, BP Amoco shareholders voted 99.3% in favor of the deal, following the vote by ARCO shareholders on Aug. 30, which showed 97.36% in favor.

Browne told BP Amoco shareholders, "Today's conclusive endorsement by our shareholders is a crucial step in our progress towards closing the transaction.

"Our discussions with the various regulatory authorities are also moving constructively ahead, and our integration plan is ready to be implemented. All this gives me great confidence that we can meet our target to complete the deal before the end of the year."

Browne told shareholders that ARCO had already identified ways to slash its $4 bil- lion/year cash costs by $500 million/year, while BP Amoco had identified $1 billion in savings from combining the two companies.

"Overall," said Browne, "$700 million of savings would come from the upstream, with around half of that coming from a tight focusing of the exploration program.

"The remainder-some $300 million-would come from synergies in the downstream business and from the rationalization of corporate headquarters.

"These are hard synergies. The $1 billion number doesn't include any savings from the extension of our best practice or from improved revenues. In terms of staff numbers, we estimate that, in addition to the changes arising from ARCO's existing plans, we expect to see a reduction of around 2,000 posts."

In May, BP Amoco formed the "ARCO integration team," which was charged with ensuring a smooth absorption and continued solid financial performance.

BP Amoco PLC's aim is to focus its investment on "ideal" sites, such as this ethylene plant at its Grangemouth complex near Edinburgh, where its upstream and downstream businesses overlap to enable cost-cutting. ARCO's upstream and downstream interests in Indonesia, represented by its Tangguh field and the related LNG export plant development project, are also expected to meet the BP Amoco ideal. Photo courtesy of BP Amoco.

The company said the integration of ARCO would be different from that of Amoco. Until closure of the takeover, the two companies will operate as independent firms. All integration work would be handled by the teams within BP Amoco and ARCO; otherwise, it would be business as usual.

EC approval

BP Amoco was hit by EC demands for approval of the planned merger of Exxon Corp. and Mobil Corp. (OGJ, Oct. 25, 1999, p. 22).

In late September, the EC called for the breakup of the European refining and marketing joint venture of BP Amoco and Mobil as a precondition for approval of the Exxon-Mobil merger.

BP Amoco is reported to be keen to buy the Mobil stake, which is valued at about £1 billion. Mobil is thought to have wanted to maintain its relationship with BP Amoco, but EC officials feared that the recent rash of megamergers could kill off competition in member countries.

However, almost immediately the EC flashed a green light to BP Amoco's absorption of ARCO, providing the two companies sell off some interests in a number of gas export pipelines in the UK southern North Sea.

The EC insisted that the enlarged group sell off ARCO's share in the Thames, Hewett, and Caister-Murdoch pipelines, along with its stake in the gas processing terminal at Bacton.

EC investigators were concerned that a merged BP Amoco-ARCO would have an equity interest in all the pipelines and processing facilities with spare capacity in the UK southern North Sea, which they thought could be detrimental to operators planning to develop new gas fields.

The EC concluded that its investigations dispelled initial doubts that recent concentrations among the supermajors might result in too small a cluster of oil companies capable of searching for and developing unexplored reserves.

The EC said it saw a threat to competition for oil and gas that would be consumed in 10-15 years' time: "However, the supermajors will still face competitive constraints from smaller oil companies. Also, countries on whose territory oil and gas is found have no incentive to let oil companies restrict production. Finally, smaller explorers indicated that, because of size differences, they would not compete for the same type of exploration rights, and they would not be dependent on the bigger explorers to sell their oil."

Alaskan issues

Alaska Gov. Tony Knowles made it clear what BP Amoco and ARCO must promise before he would approve the merger: increased North Slope competition and a renewed commitment to Alaska.

In late September, Knowles said, "If the discussions between the state and BP Amoco are successful in addressing Alaska's concerns, I have asked that any draft merger agreement be released to the Alaska public. Before any agreement is finalized, I have asked the state and BP Amoco negotiators to hold a series of town-hall meetings to get the public's review of the terms and seek their suggestions."

Knowles planned that the meetings would take place during mid-October in Alaska's major urban areas and oil and gas industry centers and include a state-wide teleconference and web site debates. The town hall meetings were slated for Anchorage, Fairbanks, Jun- eau, Kenai, and the Eskimo village Barrow.

Knowles also discussed the merger with antitrust officials at the FTC.

The talks between BP Amoco and the Alaska governor's office were intended to lead to the signature of a final agreement between the two parties in early November so that Alaskan state views could be contributed to the FTC decision-making process, which is scheduled to be concluded in November.

However, on Oct. 15, Knowles announced a delay of 1-2 weeks in his plans to release early results from the negotiations with BP Amoco. A spokesman from the governor's office attributed the delay to an FTC decision to push back its schedule for consideration of the BP Amoco-ARCO deal.

The spokesman said the delay did not indicate problems in the talks and that a resolution of issues surrounding the takeover could still be reached by the companies' goal of the end of the year. He added, "We are more interested in regulatory terms that are acceptable to the state than holding to a fixed, arbitrary timeline."

In the run-up to the town hall meetings, Knowles held meetings with executives of other petroleum companies with the intention of raising interest in building up another producer with assets in Alaska to counterbalance the merged BP Amoco-ARCO.

The governor had called on BP Amoco to divest "sufficient acreage and production to allow another major company to participate on the North Slope." He also demanded: access to natural gas for development; a renewed commitment to hiring Alaskan staff; continued support for environmental protection, including the completion of planned double-hull tankers; and continued support for Alaskan communities and education.

While BP Amoco and ARCO accept that their combined oil and gas operations in Alaska will have to be trimmed to enable the merger to go ahead, the companies are keen to develop more Alaskan gas.

Browne said that Alaska will be home to the company's gas technology center. BP Amoco also offered to build a $70 million gas-to-liquids pilot plant on the North Slope when it opened discussions with the government of Alaska.

The company is developing GTL technology under a joint venture with Kvaerner AS, Oslo, while ARCO is a licensee for the GTL process being developed by Syntroleum Corp., Tulsa (OGJ, Aug. 9, 1999, p. 24).

BP Amoco is working with the University of Alaska on a 2-year project to develop an electroceramic membrane that would separate oxygen from air as part of the process to convert natural gas to liquid hydrocarbons.

Announcing a $2.5 million grant for the project in May, from the US Department of Energy, US Sen. Frank Mur- kowski (R-Alas.), said, "This research could provide the key to unlock the benefits of gas-to-liquids technology for Alaska's benefit."

Murkowski said the membrane is expected to cut the cost of producing synthesis gas, one of three main steps in the GTL process, by more than 25%: "It could make it more commercially viable to move North Slope gas through the existing Trans-Alaska pipeline, helping Alaska gas to market."

Fallout

The anticipated divestment of Alaskan assets by BP Amoco has seen a number of companies declare themselves as potential buyers. In early October, Alaskan government officials spelled out concerns about the competitive advantage that would result from the planned combination of the state's two largest oil producers.

Alaska's commissioner of natural resources, John Shively, held talks with FTC officials in Washington on land divestitures that could be required of the joint company as a condition for approval of the acquisition.

Shively said, "We met with the FTC and continue to meet with BP. The state's position is that BP needs to divest some assets off the North Slope, and we want the divestiture to create an opportunity for another operator up there."

Analysts estimate that Alaska's current legislation would require BP Amoco to divest about 330,000 acres of exploration leases because its acquisition of ARCO would take the enlarged company beyond the 500,000-acre cap. While Alaskan officials did not outline the terms that might be offered to potential buyers of the BP Amoco assets, Knowles said the union of BP Amoco and ARCO would put 75% of key North Slope output under the control of one company: "This represents an unacceptable monopolistic control of Alaska's resources."

A BP Amoco official in Alaska said the company is talking with the state about antitrust concerns. He said: "We are committed to bringing new players to the state. We want their capital, their experience, ideas, and participation."

As Knowles approached other North Slope leaseholders to gauge their interest in buying BP Amoco's excess assets, Anadarko Petroleum Corp., Houston, announced that it would like to expand its exploratory presence in Alaska, and Phillips Petroleum Co. said it was keeping its eyes on opportunities from BP Amoco divestitures.

Aside from the required divestitures of exploration acreage in excess of the state's 500,000-acre limit, Knowles also recommended that the company divest some of its producing assets.

Jim Bowles, president of Phillips's Americas exploration and production division, told reporters in mid-October, "Our chairman has expressed an interest in Alaska, so I think you could anticipate that would be an area we'd be interested in, if those assets are available.

"Our position is, we want to look at whatever does come out on the market. If it's something that's sizable enough to catch our interest, we'd like to be considered for it."

BP Amoco and ARCO are reckoned to control about three quarters of oil and natural gas production from the North Slope, Alaska's key production area.

Bowles said, "We all have an ongoing relationship with the governor's office just because we do business in the state. There is no doubt we've had discussions with (Gov. Knowles) on a number of issues in Alaska, and that's a key one."

He noted that it is not yet known how many assets BP Amoco might have to divest: "I wish we did have an idea on that. I think that issue has to be at advanced stages of discussion. From BP's viewpoint, it would probably be the least, the better."

Anadarko Pres. John Seitz told a recent Houston conference that his company was "keeping an eye on the situation. We're an opportunistic company, and if the right opportunity is there, we'll take advantage." Seitz confirmed that Gov. Knowles had met with Anadarko's CEO to "explain the position of the state."

Also, Knowles visited the San Francisco headquarters of Chevron Corp. to discuss the major's interest in taking on BP Amoco assets as a means of shoring up its Alaska presence. Chevron declined to comment on the matter.