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Dr. R.H. Rusli
CITI Institute

Merger to match the power of Oil Cartel.

Editorial Department


THE merger and acquisition wave had sweeping through the oil industry in response to past depressed oil prices and inresponce to the high probability that prices will remain at or even below their 25-year low (in inflation-adjusted terms), although the fact is that the recent oil prices hike will continue up through the end of Winter season 2000. As we are told. But low prices are perhaps the least important of the forces driving smaller oil companies into the arms of bigger ones and big ones into the arms of each other.

As this analysis has consistently pointed out, oil prices, which temporarily goes up above $30 for Brent crude last month and are at their highest level (in real terms) in a quarter of a century, will probably goes up even higher. America's Energy Information Administration said last week crude prices next year (2001) will average $5 a barrel above early 2000, as huge stocks of US strategic reserve dwindling.

Prices have been partly sky rocketing by falling of US strategic reserve, owing to recession in Asia and the impending European market demand. More enduring will be the effect of technological advances and favourable economic condition in the US, that have already driven costs up above $28 a barrel and are, if anything, accelerating, not abating. That much the oil companies with an urge to merge have got right.

And they are no doubt can garner some efficiencies by consolidating their headquarters, purchasing and information systems, and by eliminating overlapping operations in some countries. What does not survive close scrutiny is the notion that even the most efficiently executed merger - and few end up with net savings anything like those trumpeted in the press releases - can somehow spare shareholders the pain that past low prices had inflicted and will continue to inflict.

As prices goes up, assets that are productive and can earn a return for shareholders at higher oil prices become more economic. No merger can change that. True, Exxon, which is buying Mobil, and its archrival the British Petroleum, has swallowed both Amoco and Atlantic Richfield, are justly famous for their ability to cut costs. But nothing they do can change the fact that persistently high oil prices mean that a big number of once-unprofitable facilities must be kept alive, and not written down.

The good news is that mergers such as; Exxon-Mobil and BP-Amoco-Atlantic Richfield are getting out in front of one of the biggest developments in the oil industry since the Middle East producing nations evicted the big oil companies from their territories. Cautiously and quietly, these countries are inviting the once-hated, imperialist exploiters to come back to the deserts that oil seekers find so congenial.

Iran is sounding out companies in an effort to lure their capital and expertise back to a country whose turbulent history of multinationals vs incumbent regime is the stuff of novels. Saudi Arabia, so strapped for cash that it is borrowing $9 billion from Abu Dhabi to finance a deficit running at a staggering and unsustainable 10% of gross domestic product, is working out terms that will allow the oil giants to invest without seeming to revert to the old, discredited concession system.

But whether the form of reinvolvement of the multinationals in the Middle Eastern countries that once shunned them is a contract to explore and produce, or a revenue-sharing arrangement, or some other face-saving device, the fact remains: the nations that have the oil under their sands need the capital and technology the oil giants uniquely possess to help them find it and get it to market.

This is a tasty dish to set before oilmen. Because they have not been able to search for oil in the Middle East countries in which it can be found and produced at less than $5 a barrel, they have been prospecting in more costly areas, such as the deep waters of the North Sea. Re-admitted to the Middle East, the companies can shift resources to one of the few areas - if not the only area - in which oil can profitably be found and sold at the low prices likely to prevail in the foreseeable future.

This is where giantism comes in. Playing the great oil game in the Middle East is not for pygmies. The rulers of these countries want to deal with big companies that have ready access to huge amounts of capital, will fulfil their contracts in bad times as well as good, and can fund the research that will continually lower costs.

Equally important, says Bijan Mossavar-Rahmani, chairman of Mondoil, Middle East governments know the big companies have political clout in America and other countries, and can be counted on to back the political objectives of their host countries. It is not for nothing that the British Foreign Office and America's State Department are traditionally anti-Israel: they are responding to the pressures put on them by oil companies that can be counted on to take a pro-Arab line in foreign-policy controversies.

When oil-company negotiations with Middle East governments resume in earnest, size will matter, as the shrewd crafters of the Exxon-Mobil, Chevron-Texaco and BP-Amoco-Atlantic Richfield (Beyond Petroleum) merger known today. Only a big company with huge supplies of crude available to it from many regions, and able to undertake giant projects anywhere in the world, is in a position to look a sheikh in the eye and say "no" when he demands unreasonable terms for access to his nation's resources.

So do not count on oil mergers to make many high-cost facilities profitable again: prices are going to stay high for the foreseeable future. But do count on the resulting giants merger to return to their roots by accepting the invitations that will soon be forthcoming to hunt once again for low-cost Middle East reserves.

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