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Royal Dutch Shell BP Merger?


Spill Could Make BP Vulnerable


BP is likely to eventually stop the flow of oil from its explosion in the Gulf of Mexico. After that happens, the autopsy of the spill will begin in earnest. But if the information dribbling into the public domain proves correct, the British energy giant will be a weakened creature — so weak it will be vulnerable to a takeover.

Royal Dutch Shell and Exxon Mobil are almost certainly running the numbers. Government leaders ought to be plotting their strategy, too.

The fiasco in the gulf, which killed 11 workers, has shined a new light on BP’s poor safety track record. The current disaster is the company’s third American offense in recent years, coming shortly after the 2005 Texas City refinery explosion that killed 15 workers and the 2006 Prudhoe Bay spill that leaked more than 200,000 gallons into Alaskan waters.

The list of problems reflects poorly on management and furthers the impression of a corner-cutting culture that the chief executive, Tony Hayward, had, until recently, been widely credited with improving. The response by BP’s board has been somewhat tepid, with little public support offered to management or guidance provided to shareholders.

Add these factors up, fold in the potential cost of cleanup, and it is little wonder that investors have wiped as much as $46 billion off the company’s market value since mid-April. At $141 billion on Thursday, BP’s capitalization is half of Exxon’s and less than the $165 billion value of Shell, which has traditionally traded at a discount to BP.

Even before BP’s latest troubles, the arguments for a deal were compelling, largely because of the cost savings that could accrue. Mr. Hayward’s predecessor, John Browne, wrote in his memoirs that BP had aimed for $9 billion in annual synergies from a possible merger with Shell a few years ago. Those would in theory be worth some $60 billion to investors.

And though a combination with Shell or BP would be huge, the antitrust implications might not be. The company would control no more than about 6 percent of the world’s proven oil reserves.

At a time when nearly 90 percent of the planet’s crude oil is controlled by even larger national energy groups — including Saudi Aramco and Russia’s Gazprom — that kind of scale seems defensible. It might even be viewed as a positive factor in securing Western energy independence from potentially unfriendly oil-rich governments.

Some operations in the United States and Britain would probably need to be sold, including refineries and service stations. That was envisioned in the discussions the companies held a few years ago, according to Mr. Browne’s book. But these would account for only a small fraction of the deal’s value.

Such wrinkles are tiny compared with BP’s other attractions for a Shell or an Exxon. Though BP has operations worldwide, it has a big footprint in the politically stable areas that the major oil firms increasingly crave. It is the largest producer in the Gulf of Mexico and Britain’s North Sea. And its Prudhoe Bay field in Alaska is still the largest in North America.

So what’s stopping Exxon or Shell from pouncing? For starters, there is still no clear indication of what happened on Deepwater Horizon, who was at fault and what it will cost to clean up things.

Any responsible acquirer would probably wait for greater clarity on these contingent liabilities before making a move. That could be months away.

And though antitrust concerns could be assuaged, the politics could prove trickier. For one, Britain’s new government might object to seeing a former national champion sold to a Texas corporation — even though BP was permitted by American authorities to buy Amoco and Atlantic Richfield in years past.

Washington, too, might fear the creation of a company so big it would be difficult for the government to put its “boot on their neck,” to use the language of the interior secretary, Ken Salazar, in relation to BP’s cleanup efforts. A merged BP-Exxon would effectively reconstitute a substantial part of John D. Rockefeller’s Standard Oil.

But times have changed. In 1911, when the government broke up Standard, oil was a domestic business. Today, private Western members of the oil fraternity operate on a global stage facing well-off competitors.

A weakened BP could struggle in that environment anyway. If rivals start circling, the company — and interested governments — may need to contemplate even bigger oil giants.


New York Times Article

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