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Shell must put BP out of its misery

Screen Shot 2014-10-28 at 11.51.59Article by Jeremy Warner published on 4 Jan 2015 in The Sunday Telegraph

Valued at nearly £140bn, Shell is today worth almost twice as much as BP. Shell must put BP out of its misery before anyone else pounces. Here’s an idea that has investment bankers drooling in anticipation, but needs to be killed off here and now before it becomes self fulfilling… I can’t speak for Shell, but I can report that there is absolutely no appetite for it within BP, which is as bemused as me by the rumours.

Here’s an idea that has investment bankers drooling in anticipation, but needs to be killed off here and now before it becomes self fulfilling – that the time may finally be ripe for Britain’s two oil majors, Royal Dutch Shell and BP, to bury the hatchet and merge, or rather, for the much stronger Shell to takeover the weakened BP.

I can’t speak for Shell, but I can report that there is absolutely no appetite for it within BP, which is as bemused as me by the rumours.

The concept is, of course, scarcely new. We know that exploratory talks have been held on several occasions in the past. Lord Browne, the former BP chief executive, no less, has admitted to them.

By his own account, he broached the subject nearly a decade ago during a stroll along the banks of Lake Como with his then opposite number at Shell.

For some reason, Shell and BP tend in their fortunes to be remarkably counter-cyclical. When one is up, the other is down, and visa versa. At the time, BP was in the ascendant, with its big bets in Russia and the Gulf of Mexico still the subject of rave reviews.

Shell had been laid low by environmental catastrophe and accounting scandal. And it was widely thought to have made the wrong call in focusing on Nigeria for new reserves, rather than Siberia.

How things change. BP’s investment in Russia is for the time being basically toast, while post the Texas oil refinery disaster and the Gulf oil spill, its name is also dirt in the United States. Valued at nearly £140bn, Shell is today worth almost twice as much as BP. Shell must put BP out of its misery before anyone else pounces.

In any case, to compete adequately in today’s changed world – with its hugely powerful players among the state-owned oil companies, Russian monoliths, and emerging market giants – you need a European champion of altogether greater stature, or so the argument goes.

It’s also complete nonsense. In downstream refining and retailing, the competition issues are huge and essentially insurmountable without a degree of disengagement that would undermine much of the cost saving logic of any merger.

Admittedly, there shouldn’t in theory be too much of a problem combining upstream production and reserves, which even together are an insignificant share of global totals. But it is questionable how much would actually be saved by doing so, or indeed whether one is any better than two in gaining access to new reserves of this geopolitically sensitive resource. Logically, you’d think it worse.

Low prices are a big incentive for cost-cutting deals in the extractive industries, but the complexity and transactional risk of a mega-merger of this sort is always likely to outweigh any possible gains.

Both for Shell and BP, there are better and smaller ways of buying up reserves on the cheap than merging with each other.

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