The Oil Titans and Global Assets.
To cut costs to the level required of a titan in today's oil business, one has to be as big as possible. To become really bigger one has to acquire the company which is least overlapping, in terms of market shares and upstream assets, and which is the most suitable match in terms of culture. The following is the order of titans today, in terms of size and efficiency:
Exxon Mobil, the biggest remnants of Standard Oil Trust of late John D.
Rockefeller Sr, with a market capitalisation of $238 bn and combined 1997 revenues of $201.6 bn. Assuming the merger will be approved, this biggest titan in the oil world will be called Exxon Mobil Corp. It will be saving about $4 billion per annum and cutting its 122,000-strong workforce by around 12,000. It will have at least five areas of strength in leading the global business during the next century:
1. Exxon's heavy E&P dependence on the US, particularly its mature but large Prudhoe Bay field in Alaska with North America accounting for 44% of its current oil and gas production, will be balanced by Mobil's wider spread of upstream assets across the globe and only a third of Mobil's oil and gas output comes from North America. Exxon has been slow to replace reserves, although its proven and unproven resources have risen by 18% over the past decade to about 40 bn barrels of oil equivalent including gas. Mobil has more than 26 bn barrels of reserves, up 30% from 1995. From 1988 to 1996, Exxon's E&P spending rose 8%, while Mobil's rose 14%. But Mobil's expenditure was much more sensitive to price elasticities of oil than Exxon's, because of its wider geographical spread and operations in relatively more expensive areas.
2. In refining and marketing, however, Mobil's European operations are part of a JV with BP whose fate is yet to be decided, whereas Exxon is more active outside North America with about 33,000 Exxon and Esso branded service stations worldwide. Exxon has 8,500 stations in the US, where it has maintained 27% of its global refining capacity. Half of Mobil's 15,000 stations are in the US, where it has five refineries accounting for 40% of its products output. But in the high-growth lubricants business, Mobil is the market leader in the US with a 12% share, accounting for more than a third of its refining and marketing profits. In its partnership with BP, Mobil has a 51% stake in lubricants and the JV controls about 18% of the European market, while BP has 70% in fuels. Exxon is the world's main producer of lubricant base stocks and has raised sales more than 12% in various markets during the past five years. Exxon Mobil will have a 21% share of the US oil market.
3. In natural gas, both have strong positions in North America and inter- nationally. In the US, they account for about 20% of current production. In Europe, where gas consumption is forecast to rise almost 40% by 2010, Exxon has 60% of its proven gas reserves and a big share in the Dutch field of Groningen which is highly profitable. Demand for gas is expected to grow rapidly in the US and in Asia/Pacific as well. Mobil's profitability has been built on high returns from its Arun LNG business in Indonesia and its LNG business in Qatar is to grow rapidly in the next decade. Exxon, the first US major to venture into the LNG business in Libya where it had a plant built in the 1960s, is yet to develop a big portfolio in liquefied gas. But it is the leader in the LNG mega-projects on Natuna island, Indonesia, and on Russia's Far Eastern island of Sakhalin, both proposed for the next decade. Mobil is Exxon's junior partner at Natuna, where a gas super-giant has a high sulphur content (see survey of Indonesia in Vol. 48).
4. Exxon is the world's third biggest producer of chemicals. Mobil accounts for less than half of Exxon's size in terms of chemicals output. The merger will make Exxon Mobil world leader in key products like olefins. Exxon and Mobil have complementary assets in polyethylene and paraxylene, used in fibre, film and plastic bottles.
5. In Asia/Pacific, where the financial crisis first forced Exxon and Mobil to talk of merger, there are no overlapping interests. Their complementary strengths should yield the earliest benefits after Asia's economic recovery.
Each of Exxon and Mobil has a refinery in Singapore. While Mobil has no refining capacity in South-East Asia, Exxon has plants in Thailand and Malaysia as well as market shares in China and India. In Japan, their retail business is still the most profitable - in relative terms - as their retail system is far more efficient than those of the Japanese competitors. Already before they negotiated the merger, Exxon and Mobil were planning a refining joint venture in Japan. Mobil has expanding assets in Hong Kong, Australia and New Zealand to add to the conglomerate.
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|Publication:||APS Review Oil Market Trends|
|Date:||Dec 7, 1998|
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