ConocoPhillips becomes the latest oil titan
globeandmail.com
By MATHEW INGRAM
Globe and Mail Update
When oil and gas giant BP (formerly BP Amoco) announced that it planned to buy Arco in the spring of 1999, one analyst said that if the speed of consolidation in the industry continued at the same pace "within five years there may be only four major oil companies based in the U.S." If the merger of Phillips Petroleum and Conoco ? announced late on Sunday ? is successful, that prediction will have come true in a little over two years.
BP, the former British Petroleum, started the frenzy in the oil patch in August 1998, when it created a $108-billion (U.S.) giant by merging with Amoco. French oil giant TotalFina bought Elf Acquitaine for $48-billion in 1999, then Exxon and Mobil were next in line in December 1999, creating the world's largest oil company with revenues of $230-billion and a market value of $250-billion. Then BP Amoco merged with Arco in April of 2000, followed by the wedding of Chevron and Texaco late last year.
At that point, Conoco and Phillips were like the chubby girls with the glasses at the high-school dance, standing in the corner watching all the cool kids. It was inevitable they would match up with someone, if only to prove to investors that they weren't completely missing the consolidation train. And even after the merger, ConocoPhillips still won't be in the top tier: It will only be the third-largest integrated oil company in the United States based on market capitalization and production, and sixth largest globally.
When BP merged with Amoco in 1998, one of the primary motivating factors behind the deal was the low oil price, which at $13 a barrel (U.S.) or so was getting close to 20-year lows (it would bottom out at around $10 a barrel, or lower than any time since the 1970s). A number of industry watchers predicted that the power of the OPEC cartel had been broken, and a new era of cheap oil was emerging ? a view epitomized by a now-infamous story in the Economist which forecast that crude would hit $5 a barrel.
As a result of all these projections, the price that investors were willing to pay for oil and gas companies became depressed ? and it didn't recover for a considerable period of time, even though the price of oil did. That's because these rallies in the crude price were seen as unstable, a function of shaky OPEC deals and transitory supply disruptions, and there wasn't much conviction that higher prices would really stick.
This kept up the pressure on the top tier of oil producers to find ways of expanding their reserves while simultaneously reducing their costs, and one of the best ways to do that is to merge with someone else who is equally large. As with many other industries, there was also the self-fulfilling prophecy that a consolidation trend often produces: As your competitors get bigger, the impetus for you to merge becomes even stronger. And the fact that stock prices were low made the process even more appealing.
In many ways, the U.S. mega-mergers are a reversal of the trend that began in 1911, when John D. Rockefeller's Standard Oil monopoly was broken up ? a fact that got plenty of mention when Exxon and Mobil merged, since they were the two largest parts of the Rockefeller empire (Standard Oil of New Jersey and Standard Oil of New York, respectively). The others included Amoco (Standard Oil of Indiana), Chevron (Standard Oil of California), Conoco (Continental Oil Company) and Arco (Atlantic Petroleum).
So why have the mergers continued even though the oil price has recovered? Because even with a higher spot oil or gas price, the long-term and macro-economic factors remain the same. Supplies of cheap crude oil and natural gas are dwindling in North America, and that means producers of a certain size are facing an increase in costs ? because they have to go after reserves in high-cost areas such as Alaska, the Canadian oil sands and the North Sea, or control a web of assets in countries such as Indonesia, Yemen, Russia, Vietnam, Venezuela, China and the Middle East.
The best way to accomplish those goals and yet keep costs low is the same as in other industries: Get big, and go for volume. Can't make money pumping with reserves of a billion barrels and wells pumping a million a day? Buy reserves of five billion barrels and pump 5 million a day, with only twice as many staff. Becoming larger also allows a company to have sizeable assets in many market areas, from refining and marketing to retail gasoline sales, from crude products to natural gas. One oil journal described the new motto as: "Size and diversity bring strength in adversity."
And with OPEC and global oil prices both looking increasingly fragile, that motto looks more prudent by the day.
E-mail Mathew Ingram at mingram@globeandmail.com |
