Present Position of MENA Companies with Conclusions.

Several MENA-based companies, including companies from Saudi Arabia, Kuwait and Libya, have established refining and marketing activities in OECD countries.

In the USA, Saudi Arabia has been particularly successful in its joint venture company Motiva. This was formed on 1 July 1998. "Motiva is a joint venture that combines Texaco's and Saudi Aramco's interests and major elements of Shell's eastern and Gulf Coast US refining and marketing businesses. Texaco's and Saudi Aramco's interest in these businesses were previously conducted by Star Enterprise (Star), a joint-venture partnership owned 50% by Texaco and 50% by Saudi Refining, Inc, a corporate affiliate of Saudi Aramco. Texaco and Saudi Refining, Inc, each owns 32.5% and Shell owns 35% of Motiva." (Texaco 1999 Annual Report)

Texaco also has a partnership with Shell in Equilon.

On January 1 1998, Texaco and Shell Oil Company formed Equilon Enterprises LLC (Equilon). Equilon is a joint venture that combined major elements of Shell's and Texaco's western and midwestern US refining and marketing businesses and their nationwide trading, transportation and lubricants businesses. Texaco owns 44% and Shell owns 56% of Equilon.

Texaco's oldest joint venture is of course with Chevron which is a 50/50 ownership of Caltex.

Texaco, in its 1999 annual report described the downstream sector worldwide as "a sector under pressure" and had the following to say about its joint ventures: "The exciting developments in the exploration and production sector are in marked contrast to the challenging conditions in the downstream sector, due to refining overcapacity and consequent weak margins.

Whilst this condition has existed for several years, in 1999 the situation was exacerbated by the steady rise in crude prices through the year, resulting in the lowest industry refining margins since 1987.

We believe, however, that the resilience of our downstream businesses allowed Texaco to perform well against our competitors. At the same time, we continued to make improvements in the business that will be reflected in the bottom line as market conditions improve.

We are encouraged that, compared to the competition, Texaco's domestic downstream performed well last year. Equilon and Motiva, our US alliances with Shell Oil Company and Saudi Refining, Inc, ranked second in earnings growth, due in large part to success in improving efficiencies and reducing costs. Together, Equilon and Motiva captured more than $800 million in pre-tax synergies and cost reductions by year-end. Texaco's share of these savings was $326 million.

Motiva enjoyed improved refinery reliability and cost savings, but this could not make up for weak refining and marketing margins.

Motiva's complex refineries, which are suited for heavier crude feedstock, were particularly affected because the narrowing of the price differential between light and heavy crude oil eroded the economics of heavy oil upgrading. As more heavy crude oil becomes available in the marketplace, these economics should improve.

Equilon's earnings benefited from improved US West Coast refining margins caused by industry refinery outages in that region, while reliability at its own refineries remained strong. An earnings increase of 11% in both its lubricants business and transportation operations also contributed to Equilon's solid performance."

"The poor performance of the refining business around the world is one of the most serious issues confronting Texaco and the industry as a whole. In the face of these conditions, Texaco is committed to maintaining a meaningful downstream presence. There is, however, a shift in our strategy, with a reduced emphasis on refining.

In 1999, Equilon completed the sale of its El Dorado, Kansas, refinery and expects to conclude the sale of its Wood River, Illinois, refinery this year. In addition, Caltex sold its interest in Koa Oil Company, Limited, a Japanese refining company. We will continue to seek ways to free up capital invested in this low-return sector."

It is possible to conclude from Texaco's analysis of the Motiva JV that, although there is presently an inadequate return, the market position is basically a strong one and is actively managed with the Shell and Texaco experience.

If Saudi Aramco intends to stay in the USA downstream market, it could hardly pick anything better than Motiva.

In contrast to the strong Motiva position, Kuwait established a position in several European countries by purchasing refineries and marketing networks which were not of interest to the major oil companies.

In Italy, along with Tamoil (Libya), all the marketing companies have done reasonably well due to a protected market. The privatisation of ENI depended on good margins in Italy and, indeed, ENI's profits are still largely dependent on the Italian market.

Hypermarkets have been kept out of the Italian motor fuels market by political means and that is one of the reasons why marketing margins have been high. Elsewhere in Europe, Kuwait has closed uneconomic facilities.

In the UK, Kuwait has made losses for many years and has declined to become involved in refining in the UK. Kuwait, under the Q8 brand, supplies 400 retail outlets in the UK, of which it owns 95. Q8's market share is near 1%. Also in the UK, the Repsol retail business has been for sale (156 sites supplied, of which 42 are owned) and so has the Save brand (445 sites, 409 of which are owned) but there have been no buyers.

The Kuwait retail business in the UK epitomises the business which has been discarded by the majors and really Kuwait would not now invest in such a business. There is no merit in such a business for any MENA-based oil company.

Conclusions: The way forward for MENA-based companies is to form alliances of any sort with the largest OECD-based oil companies. All the MENA-based oil companies really have the same objectives as the larger OECD-based oil companies.

There is no urgency for MENA-based companies to form alliances but alliances should be part of their strategic plan. Opportunities could be a decade away or could occur any time.

The MENA-based companies should consider what alliances they would favour so that they may act quickly when an opportunity arises.