Industry Restructuring Accelerates - Exxon Mobil, BP Amoco, Total Fina, Etc.

The structure of the oil industry is changing rapidly, with mega-mergers rushed to cut costs and maximise shareholder value, as oil prices keep falling. The national oil companies (NOCs) of OPEC are watching helplessly; only a few of them have an idea of the likely implications for their governments, which can be summarised as follows:

Between them, the privately owned oil companies control 59% of the world's petroleum business, including European firms being privatised such as the ENI group of Italy. Through mergers and acquisitions, the number of companies is shrinking and the big ones are getting much bigger. This is the first group, with be very big ones being the titans of the top tier.

The rest of the world's petroleum business is controlled by the NOCs of OPEC and non-OPEC countries and some oil importing states. This is the second group, although some of the non-OPEC NOCs tend to identify themselves with the first group. While their numbers have been increasing since the mid-1970s, the NOCs' combined 41% share of the global business will be shrinking in favour of the first group.

Gradually, governments in the second group will be losing shares in the business by inviting the bigger ones of the first group in as partners, be that in the upstream or in the downstream branches of the petroleum business.

Saudi Arabia will be no exception, eventually, though it would rather have the bigger ones in its upstream gas than in upstream oil. They would be turning the kingdom's huge gas resources into top quality diesel, with Shell in line for such projects (see Gas Market Trends). One set of projects to turn Saudi gas to electricity has been proposed by Total of France, which is taking over Petrofina of Belgium to become the third biggest group in Europe and the world's titan No. 6 (see following).

Whether in gas or in oil, it would make no difference to those moving into Saudi Arabia or other Middle East countries. The balance in the world's petroleum business will be shifting to the cleaner source of energy in the next century.

In the first group, the top tier will assume most of the 59% share of the world's petroleum business. At the very top stands the proposed Exxon Mobil conglomerate, with a 28% share of the world's business and a market valuation of $238 billion.

How Asia Will Be Affected: Asia will eventually become the main arena for the fight for market shares among the titans of the first group. Exxon, the brutally efficent major which is taking over Mobil in a $77.2 billion merger deal announced on Dec. 1, will have dominant operations in Asia during the next decade. These will range from Natuna gas and LNG businesses in Indonesia and Sakhalin island, to pipelines, refineries and profitable petrol stations and power plants across the Indian Ocean and the Pacific.

Exxon Chairman Lee Raymond told a press briefing in New York on Dec. 1 that the possibility of collaboration in Asia, especially in Japan, was one of the factors making the match with Mobil so attractive. The economies of scale to be achieved through the merger, provided this is approved by the US and EU anti-trust authorities who want to make sure competition will be maintained, should allow Exxon Mobil to cut costs and lower prices for end-users.

The result will be fierce competition between Exxon Mobil and the other titans of the upper tier, or rather between the titans and the smaller companies.

Eventually, most of the smaller companies will either merge or disappear.

Consumers in Japan, India, China and South Korea should benefit in particular and lower oil prices for end-users will help speed up economic recovery in Asia. But some of the local governments will be hit, particularly in the case of Indonesia and other net oil exporters such as Malaysia and Brunei. Also to be badly affected are areas hoping for foreign help to explore potential oil fields.

Asia is behind in the costs arena, with local oil companies financially weaker after the crisis in that part of the world. Most producers along the oil chain with high debts were looking at the multinational oil companies in the hope of aligning themselves or being acquired. Mega-mergers on the scale of Exxon Mobil, or BP Amoco, will temporarily take the focus out of Asia. Myanmar, Vietnam and the Philippines had all been hoping for foreign help in the oil sector.

The mega-mergers will lead to a shake-up in the global oil industry. This could see Asia lose out still further as companies consolidate overlapping assets in the region. The mergers will be followed by cuts in capital spending on Asian exploration in the next 12 months. With the number of mergers and cost-cutting arrangements increasing, a consolidation of oil refineries would follow.

The titans may be tempted to move refineries closer to big oilfields in the US and the Middle East at the expense of Indonesia and Malaysia. A potential $1 billion investment in a new ethylene cracker in Singapore is at risk, as both Exxon and Mobil have planned separate plants on the island. Mobil's smaller plant would not go ahead and that of Exxon would be built on a larger scale.

The Future Of OPEC: Eventually, the first group will be dominated by six or seven titans, or "new sisters" if one is to evoke the memory of Achnacarry.

Exxon Mobil will produce over 2.5 million b/d of oil and 309 MCM/day. But, more important, the conglomerate will control 28% of the world's petroleum business. OPEC, with a capacity to produce more than 34 million b/d, has less than 30% of the business. Market shares secured through asset acquisition by OPEC NOCs - such as those of Kuwait (KPC), Libya (Oilinvest), Saudi Aramco or Venezuela's PDVSA - may grow if they prove to be as efficient as their competitors from the first group. Otherwise they would shrink and those of the "new sisters" would expand at their expense.

It is doubtful that OPEC would still exist 20 years from now, with its member states having little in common apart from oil ownership. Ownership now simply means the oil is either sold at a price set by the market or kept under- ground. The market is controlled by the first group, with control assumed in a subtle game, and the "new sisters" will make sure no one from the second group will be able to change the rules.

Robert Priddle, executive director of the Paris-based International Energy Agency (IEA), told a conference organised by Shaikh Ahmad Zaki Yamani's CGES in London last September: "The future of OPEC will be determined by the ability of its members to define new goals consistent with today's global economy".

OPEC will never be able to set oil prices or control the supply-demand balance the way it did from late 1973 to the mid-1980s. Nor will there be a macro- cartel between OPEC and the new sisters, or titans, of the first group. Things are no longer as simple as they used to be during the period of OPEC control.