3 OIL GIANTS PONDER OPERATIONS MERGER.

Byline: Karen Schwartz Associated Press 

Three of the world's biggest oil companies - Texaco, Shell and Saudi Aramco - confirmed Monday that they are talking about combining refinery and marketing operations that account for about 15 percent of U.S. gasoline sales.

The announcement follows similar discussions by other oil companies that also are looking for ways to make money with their refineries.

``They can't control the level of product prices so the only thing they can control is their own cost structure,'' said Adam Sieminski, an oil analyst for NatWest Securities. ``They are looking for ways to reduce the cost structure for refining and marketing.''

The newest talks involve combining operations of Texaco with Shell Oil Co., the U.S. unit of Royal Dutch/Shell Group, and Star Enterprise, a joint venture between Texaco and Saudi Aramco, the state oil company of Saudi Arabia.

The companies said they would spend the next few months attempting to reach agreement, and were ``reviewing a range of options,'' Shell said in a statement.

The combined companies would become the largest marketers of petroleum products in the country with combined assets of more than $10 billion. A union could realize cost savings of $2 billion annually, The Wall Street Journal reported, citing sources familiar with the negotiations.

The newspaper said the companies were considering forming two separate entities. One entity would join Star's assets with those of Shell in the eastern United States, and the other would merge Shell facilities with Texaco's refining and marketing operations, which are in the West.

The merger would retain the Texaco and Shell names at service stations, the newspaper said.

Shell, based in Houston, has almost 8,800 gas stations in the United States, accounting for 7.5 percent of U.S. sales. Texaco, headquartered in White Plains, N.Y., has about 14,000 stations, with about 7 percent of the market. The Texaco operations include its 50-50 joint venture with Saudi Aramco.

Texaco stock moved higher in trading on the New York Stock Exchange on Monday, gaining 87-1/2 cents a share to $96.50. Royal Dutch shares gained $1.75 to reach $161.62-1/2 and the other half of Royal Dutch/Shell, Shell Transport, rose $1.25 to $96.50.

Because of its magnitude, a merger probably would attract antitrust scrutiny. In some states, the merged entity would control 5 percent of the petroleum market, while in others the market share could be as high as 30 percent.

Sieminski noted, however, that a 15 percent market share for a combined company isn't considered anti-competitive in other industries like auto manufacturing.

Earlier this year, British Petroleum PLC and Mobil Corp. agreed to combine their refining and marketing operations in Europe. An attempted union between Phillips Petroleum Co. and the Conoco Inc. unit of DuPont Co. failed, apparently when the companies couldn't agree on the values of the refineries involved.

Such deals are being considered because ``downstream'' operations, as the refining and marketing of oil is called, have been losing money.

A Texaco-Shell-Saudi Aramco union would realize most of its cost savings through greater accessibility to pipelines, shared environmental costs and greater flexibility in swapping products and crude oil. The companies have more than 23,500 employees in refining and marketing operations.