Pardon the intrusion. Informative information for all. Sorry for the length, but no URL link. Comments?
Platt's Oilgram:
SAUDI ARABIA SEEN AS COMMON LINK IN EXXON-MOBIL MERGER TALKS, LOW
CRUDE PRICES
New York-An economic sandstorm is sweeping the already beleaguered global oil industry, and it is blowing from Saudi Arabia.
Its effects range from the possible mega-merger of Exxon and Mobil to the stunning drop in world oil prices of nearly $1/bbl Nov 30, sending dated Brent to barely $10/bbl. The common factor behind this turmoil, industry sources say, is a new determination by the Saudis, holding more than one-fourth of the world's crude reserves, to reclaim their domination over world oil markets and rebuild their shrunken market share. The key to that strategy is twofold: First, punishingly low market prices for as long as it takes to choke off surplus world production. Second, the Saudi strategy is to enlist a handful of the world's biggest oil companies, with the lion's share of global refining and marketing capacity, to help encourage that exploration retrenchment. How? By enticing them with the lure of renewed equity ownership of cheap Saudi oil in the ground, and the threat of losing it-again-to nationalization.
In effect, some sources say, the Saudis are attempting to recreate the controlled pricing conditions of the late 1940s and 1950s, when the Saudis and the Aramco partners (Chevron, Texaco, Exxon and Mobil) combined to open the spigot on the vast reserves there and flood the world with relatively cheap gasoline. That proved to be an era devastating to E&P independents. The essential elements of this strategy were the focus of the secretive Sep 26 meeting outside Washington between Saudi Crown Prince Abdullah, Foreign Minister Saud al-Faisal, Oil Minister Ali Naimi and CEOs of seven major US oil companies. The group included the four former Aramco companies plus three others:
Arco, Phillips and Conoco.
According to sources familiar with the talks, the gathering featured an appearance by none other than former US President George Bush, acting as a defacto lobbyist for the Saudis. A separate meeting was held with Vice-President Al Gore, setting in motion a pending trip to Saudi Arabia by new Energy Secretary Bill Richardson.
“The Saudis were delivering a warning signal of what's about to happen,” says Fahnestock & Co analyst Fadel Gheit, a former Mobil financial analyst. “The message was: We've been friends a long time and we don't want to pull the rug out from under your feet, but we're going for market share-and prices will crash.” They certainly have. From a price of $16.14/bbl Sep 30, NYMEX WTI plunged by one-third to a low of $10.86/bbl Nov 30 before rebounding slightly to close at $11.22, down $0.64/bbl for the day.
The sharp price drop brought immediate accusations from other OPEC members that the Saudis were trashing the market and undermining the fumbling efforts by the rest of the oil group to rein in production and boost prices. Iran's hard-line Jomhuri Islami newspaper blasted the Saudis for “betraying” OPEC by encouraging the price drop. “This sabotage seems to be dictated by the Americans,” the paper said, warning it could snuff out the newly rekindled warming of Iran-Saudi relations: “It is against the spirit of detente.”
But an expected $10-bil or 20% budget deficit this year has prompted the Saudis to play their supply trump card. With more than 260-bil bbl of proved reserves and more than 1-tril bbl of oil in place, the Saudis are no longer content to watch world oil production blossom to nearly 68-mil b/d this year while its own output is now no more than it was 20 years agao, at only 8.5-mil b/d. Its world market share this year has slipped to barely 12% from almost 17% in 1980.
The official Clinton Administration line, reflected in a Nov 30 Wall Street Journal story, is that the current merger and retrenchment wave in the industry is aimed at competing with the Saudis, rather than helping them. The Exxon-Mobil merger, one senior US energy policy official told Platt's, is a “simple” strategy: “I think these mergers are part of a general trend to compete with other big players, not just the Saudis.” Outside the government, however, industry sources familar with the internal workings of Saudi Aramco say the Saudis have “made it clear” consolidation is needed, and that US majors are the ones that will obliged to fund the kingdom's upstream redevelopment. “The forecast for oil prices is so dismal that only the strongest will be able to survive,” one insider noted:
“The Saudis don't want to shoulder that risk on their own.” Some see the move as an effort by Prince Abdullah, set to become the next Saudi king, to cement favorable relations with the US. Though US companies are unlikely to be allowed to regain ownership in existing Aramco fields, they have been invited to make proposals to explore and develop new fields. The US interest in supporting the Saudi regime could also act to ease domestic anti-trust objections to the Exxon-Mobil deal, sources note. National security issues could weigh against relatively minor market concentration problems in Northeast marketing and Gulf Coast refining.
The last time the US government undertook a major anti-trust case against the oil industry, over its alleged collusion with Saudi Arabia to restrict world production, was during the Truman Administration. But that criminal case was dropped for “national security” reasons and the remaining civil case was relegated to the State Department, where it languished for more than a decade before being settled for small sums.
Moreover, US politicians are unlikley to squawk too loudly about mergers and business strategies that promise low and stable oil prices well into the future, analyst Gheit notes. It will take more than a brief price drop to wring out surplus capacity, he warns. With untold tens of billions of dollars already invested in massive heavy oil, offshore and frontier development projects all over the globe, the world oil glut is destined to persist for years until the slowdown in new development gradually takes hold. Low-teens oil prices “will be with us for decades,” he warns, as the Saudis slowly claim their market dominance. The industry prognosis is thus grim. Except for the few anointed majors allowed to buy their way back into Saudi Arabia, and a few other lucky low-cost producers who have avoided taking on heavy debt loads, vast portions of the current world oil industry will be rendered uneconomic. Hence, a breakneck scramble to cut costs, batten down balance sheets and seek refuge in mergers. Who will be the corporate winners? Gheit is convinced the Saudis will revert back to their original Aramco slate. Instead of dealing with a myriad of companies large and small to find and produce its reserves, as has rival Venezuela, the Saudis will be able to deal with just a hand-picked few of the world's strongest companies.
Chevron made the original oil discovery in Saudi Arabia, a country that was in debt to Russia for imported oil in 1931. It brought in Texaco as a partner to expand its marketing outlets. At the behest of the US government, talks began in 1946 to add Exxon (then Standard Oil of New Jersey) and Mobil (then Socony). Exxon ended up with 30% of Aramco and Mobil 10%, with the rest split between Chevron and Texaco.
Gheit and other analysts note that in addition to the possibility of up to $4-bil in cost cuts, or 10% of their overhead costs, the Exxon-Mobil merger talks, expected to result in a record-breaking deal this week, are probably being driven by a desire to be a dominant force in new Saudi investments.
It could also be a factor in renewed market speculation of a possible Chevron-Texaco merger, which was fanned Nov 30 by the unexpected announcement that Texaco has broken off talks with Royal Dutch/Shell over a downstream joint-venture in Europe. Royal Dutch would remain a major Saudi player by virtue of its large petrochemical operations there and its new US downstream link-up with the Texaco-Aramco Star Enterprise venture. BP, now merging with Amoco, would be a major player in neighboring Kuwait, Gheit notes.
With the prospect of directly controlling Saudi reserves again, Gheit says Mobil, Exxon, Chevron and Texaco are likely to make very large reductions in their capital spending elsewhere to focus on Saudi plays. Instead of net capital spending of about $12-bil next year, Gheit expects Mobil and Exxon to spend only about $10-bil, and for industry-wide cap-ex to be off at least 20%. The drop would be even more were it not for long-term projects already in the construction phase, he notes. Mobil CEO Lucio Noto is said to have told analysts Saudi Arabia is about five years too late with its decision to reopen its upstream to outside investment. In that time Venezuela has revived its sagging oil industry by awarding vast concessions. Iran has solicited outside investment. Brazil is privatizing. And even small players like Qatar have become significant producers by farming out E&P to foreign companies.
“If the Saudis had done this five years ago,” concurs Gheit, “you wouldn't have had this huge investment in the former Soviet Union, offshore West Africa and in the deepwater Gulf of Mexico,” much of which could now be rendered unrecoverable and doomed for write-offs if oil prices remain low.
The sure losers, however, are the E&P independents, particularly smaller US companies that have loaded up on debt and embarked on costly frontier exploration. That story is told in the behavior of their stock prices, tumbling to new lows Nov 30 while the majors held steady or rose.
Indeed, whereas the BP-Amoco merger appears to have added about $35-bil in new market value to those stocks, with some $50-bil to $70-bil expected in the Exxon-Mobil deal, the recent stock-swap merger deals between Kerr-McGee/Oryx Energy and Ocean Energy/Seagull Energy have resulted in big declines.
“It's bleak” for the independents, sighs Gheit: “I don't know
where they will go but down.”-James Norman |
