Shell, Texaco, Aramco eye R&M alliance

Richard Wheatley
Associate Managing Editor-News

Proposed alliance breakout [11515 bytes]

Shell Oil Co., Texaco Inc., and Saudi Arabian Oil Co. may form a new refining/ marketing alliance to operate some combination of their U.S. downstream assets.

Included would be assets of Star Enterprise, Texaco's U.S. downstream 50-50 joint venture with Saudi Aramco.

Such a combination could create the largest gasoline retailer in the U.S., with a refining capacity of more than 2 million b/cd of crude oil.

Texaco said the goal of discussions currently under way "is to create a more efficient and competitive operation that maximizes the strengths of both companies, including their brands, to create a revitalized downstream business in the U.S.

"We also believe that a joint arrangement would enhance the ability of both companies to meet anticipated product requirements and to improve results at a time of difficult downstream industry financial conditions," Texaco said.

Shell said the company is "continually looking for opportunities to improve business performance and believes it is increasingly evident that the efficiencies resulting from joint arrangements" would be positive for its customers, employees, and the future of its downstream operations.

The companies will explore options on forming the new alliance, and Texaco said no further announcement would be made until discussions end. These talks could lead to definitive agreement, but the companies said no decision on a deal is likely before yearend.

What's involved

If such an asset combination occurred, the new venture could number almost 23,000 service stations, interests in 14 refineries, and have approximate book-value assets worth more than $17 billion, if all assets were combined.

In addition to the Star Enterprise assets, an alliance could include service stations, refineries, pipeline networks, and storage complexes.

The new venture would control slightly less than 15% of the companies' combined share of branded gasoline sales and consumer automotive lubricants each.

A combination of all the U.S. refining capacity of Shell and Texaco would represent slightly less than 13% of U.S. refining capacity.

Shell, which has retail operations in 39 states and the District of Columbia, was ranked first last year in U.S. gasoline sales by the Lundberg Letter. Shell's total crude capacity in seven refineries exceeds 1 million b/cd (OGJ, Dec. 18, 1995, p. 41). The company owns 80 crude and products terminals and has about 8,800 branded stations.

Texaco Refining & Marketing Inc., ranked 12th in 1995 gasoline sales, has retail operations in 45 states and the District of Columbia. It operates four refineries with combined crude capacity of 385,035 b/cd. Texaco owns 30,000 miles of pipeline and about 14,000 branded stations, including those of Star Enterprise.

Star Enterprise, ranked 7th in 1995 gasoline sales, operates Texaco-branded stations on the U.S. East Coast and Gulf Coast. It has three refineries with a total crude capacity of 605,000 b/cd.

Conditions, costs

The proposed alliance comes at a time of intense competition and pressure on margins.

U.S. net refining margins shrank to 33¢/bbl in 1995 from 92¢/bbl in 1986, and there are 33 fewer U.S. refineries in existence today than in 1985. Since 1990, 60,000 jobs have been lost in the petroleum refining and marketing business.

Such a Shell-Texaco-Saudi Aramco alliance could result in the loss of more U.S. jobs short term as assets are rationalized. Longer term, however, the objective would be additional job creation, an industry official said.

In 1992-94, the U.S. petroleum industry spent an average of $10 billion/year on environmental protection, or twice the budget of the U.S. Environmental Protection Agency. The annual outlay represents two-thirds of the U.S. profits of the top 300 oil and gas companies during that period.

Steven A. Pfeifer, a PaineWebber Inc. analyst, said the alliance "makes a lot of sense from a cost-cutting standpoint." The potential for pre-tax savings totals $1 billion/year, Pfeifer said.

PaineWebber said areas where savings could be realized are in overhead, refining, transportation, distribution, and retailing. The savings' estimate assumes that Shell and Texaco could achieve roughly twice the savings expected to be realized from the British Petroleum Co. plc-Mobil Corp. downstream joint venture in Europe (OGJ, Aug. 26, p. 24).

Norman Duncan, president of NED & Associates Inc., Houston, a strategic consulting firm, said a key marketing decision will be "who is going to market, where, and under what logos?"

Duncan said one-time savings would come from closing stations where both Shell and Texaco now market, but daily savings would have to come from the product movement side of the business.

Duncan said product movements might save 20¢/bbl, but margins will be much less: "If they can save 5¢/bbl, I would be surprised."

Negative views

Not all reaction to the proposed merger was positive.

Leo Liebovitz, president of the Society of Independent Gasoline Marketers of America (Sigma), Reston, Va., said, "Marketers are always concerned whenever there is a significant move toward greater market concentration, as this merger would be."

He cited concerns, including the potential for "loss of suppliers, loss of competitors, and losses to competition."

Prior to presstime, Liebovitz said Sigma had just learned of the merger discussions, adding, "It's too early to speculate on what position, if any, Sigma will eventually take."

Sigma will monitor the situation "to ensure that the interests of the entire independent marketing sector are protected," Liebovitz said.

Citizen Action, a consumer watchdog group, said it would ask the Federal Trade Commission to block the merger for anticompetitive reasons.

Ed Rothschild, of Citizen Action, said, "This merger will sharply reduce competition in major gasoline markets. The combination will result in just three companies in California-ARCO, Chevron, and Texaco/Shell-controlling over 75% of the gasoline market.

"If allowed, a merger...would set a dangerous precedent. Such a combination is aimed at destroying rather than enhancing competition among refiners and gasoline retailers."