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Daily Telegraph: Time may be right for fresh look at proposed mega-merger of BP and Shell

By Russell Hotten
Last Updated: 12:46am GMT 23/01/2007

Speculation about a merger between oil giants BP and Royal Dutch Shell refuses to go away, largely because many analysts, investors and also some executives at the two companies have always thought it quite a good idea.

But how to do it? That is the question.

Both companies have given the mega-merger much consideration over the years but their dreams of doing a deal have always foundered on the reality of regulatory and political hurdles, long before they ever got to face-to-face talks.

BP last put its financial advisers to work on the issue in 2005. For departing chief executive Lord Browne, a BP-Shell tie-up was always an aspiration and early last year Shell admitted that it considered a merger with its rival as part of a “scenario planning” exercise.

Could those putative proposals be ready for a dusting down, however? Some industry experts believe that changing circumstances in the oil industry warrant a fresh look at a merger.

ABN Amro analyst David Cline has long been an advocate of the two companies joining forces. “We believe the case for creating an oil mega-major by merging two European super-majors is compelling,” he said. “In our view, the strategic logic of a combination is strong. The regulatory and other barriers look surmountable.”

He estimates that a merger would create savings of about $10.3bn (£5.2bn) a year, and push the share price of a combined company past £30.

For starters, both companies have been wounded: Shell’s treatment over the Sakhalin 2 development in far east Russia may leave Britain’s largest company in a desperate struggle to replenish reserves, while BP’s shares have been hit by safety concerns and a worrying decline in production that has fallen short of even the company’s own projections. The falling oil price may make some exploration activities less economic, and yet both companies will face pressure to protect investment plans.

BP in particular faces hefty bills to invest in ageing infrastructure. When, last year, incoming chief executive Tony Hayward criticised the BP board — including himself — for wanting “more for less” it was an acknowledgment that the company needed to invest more.

On top of this, there is continuing concern over the future of the TNK-BP joint venture in Russia. TNK-BP has been a huge success, which is why the Russian authorities may seek to take back full control.

In North America, Shell is tidying up its operations with a planned £3.8bn acquisition of the 22pc it does not own in Shell Canada. “It all helps simplify a merger should the Shell and BP want to push the button,” said an analyst.

BP’s share price rose about 6pc last year, with Shell up about 8pc. In contrast, ExxonMobil’s shares soared 24pc.

Shell chief executive Jeroen van der Veer and Mr Hayward know they have to restore investors’ faith, possibly with some radical plans.

Morgan Stanley analyst Neil Perry said BP and Shell “have not only failed to respond to the oil price rally, they have under-performed the market since 2001.”

He added: “The oil industry is not going to sit tight while reserves decline and costs and taxes rise. It will respond.

“Historically, when it has faced difficulties of one form or another, the response has been consolidation.”

Mr Hayward has been at the forefront of BP’s expansion, and was instrumental in helping to integrate Amoco when it was bought by the UK company.

But would the new chief executive want to embark on a mega-deal having only just got his feet under the table? No, believe many observers.

There are plenty of operational issues that Mr Hayward and his board must address immediately. A merger is something he may have to put on the back burner until he has stamped his mark on the company.

At 49, Mr Hayward may feel he will still be first choice to lead a combined company after a few years.

The regulatory hurdles to any deal are high. Europe’s Competition Commissioner, Neelie Kroes, recently declared that mergers between energy companies would be looked at more closely. But the companies’ exploration operations could probably be brought together without much regulatory opposition.

Mr Cline also thinks that merging the two companies’ petrol stations would not find much opposition in Europe.

However, he said that he would expect “a combination of the refining and retail fuels activities of the two groups in the US to be regarded as unacceptable in most places”.

Another oil analyst said he believed that BP might welcome the chance to exit the refining market, preferring to outsource the processing of its oil.

The downside of spinning off and disposing of operations is that it exposes BP and Shell to more intense competition from powerful rivals. The upside is that the oil industry is possibly entering a new era, and a merger would give a combined company first-mover advantage. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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