Western, National Oil Firm Partnerships Make Sense

Tony Hayward, BP's Chief Executive
(Click to Enlarge)

LONDON (Dow Jones Newswires), Feb. 3, 2009

Western oil majors might do better to partner with national oil companies in resource-rich nations than to merge with each other the way they did the last time oil prices collapsed, the head of BP PLC said Tuesday.

Tony Hayward, BP's chief executive, was speaking amid rumors that Big Oil might be poised for a round of megadeals comparable to the spectacular mergers of the late 1990s, another time of low oil prices. Then, BP bought Amoco and Arco, Chevron Corp. merged with Texaco, and Exxon acquired Mobil in a $75 billion deal that was at the time the largest takeover in corporate history.

There has been speculation that Exxon Mobil Corp., which built up a huge cash pile last year as oil soared to nearly $150 a barrel, might be considering a bid for a rival like Anglo-Dutch major Royal Dutch Shell PLC or the smaller BG Group PLC.

But Hayward said the logic for such megamergers was not "terribly compelling" since it would not increase the companies' combined resource base -- one of the biggest challenges now facing Big Oil. Combining a major, with its technological expertise, and a national oil company or NOC, with its greater access to reserves, would make a better fit, he said. NOCs control at least three-quarters of the world's natural resources.

"The challenge for all of us today is to continue to capture resource to enable us to grow," he said.

Such partnerships would, in theory, make sense for the NOCs, too. The global slowdown and falling oil price have badly dented the finances of oil exporters from Russia to Venezuela, and many of their national energy champions are short of cash.

Analysts believe some won't be able to fund costly investment programs without outside help. For example, Petroleo Brasileiro SA, or Petrobras, may struggle to pay for the development of a string of huge oilfields recently discovered off the coast of Rio de Janeiro state unless it teams up with a cash-rich major like Exxon.

But a full-scale merger between an NOC and an international oil company is unlikely, "due to the role NOCs play in advancing policy objectives of their respective foreign governments," said Frank Verrastro, director of the energy and national security program at the Center for Strategic and International Studies in Washington, D.C.

Hayward's comments on megamergers reflect a widespread belief in the industry that big is not necessarily beautiful. Though much larger than they were in the 1990s, all the majors have had trouble trying to increase production and reserves.

"When I look at the large companies, I don't see the benefit they've had from the round of mergers 10 years ago," said Stephen Thornber, global equity fund manager at Threadneedle Investments, which owns 1.1% of BP. "All of them are fundamentally short of prospects of opportunities."

He said the sector could still see some consolidation soon, as big companies snap up small independents weakened by the credit crunch. Smaller players focused on exploration and production that need cash to keep drilling have seen their access to capital dry up, and the weakest are now seen as potential acquisition targets for bigger rivals, especially ones with strong balance sheets and an ability to borrow large amounts of cash, like BP.

Hayward was speaking as BP announced a net loss for the fourth quarter of $3.34 billion, compared with a profit of $4.4 billion a year earlier, a reflection of much lower oil prices. Replacement cost profit, a closely-watched metric which strips out the value of inventories, was down 24% at $2.6 billion.

For the full year, net profit stood at $21.2 billion, and replacement cost profit at $25.6 billion -- a 39% increase on 2007. Hayward said with the economic environment deteriorating in 2009, he didn't see the "record financial performance being repeated for some time."

BP said it made a loss of $700 million on its Russian venture, TNK-BP. This was largely due to what Hayward called the "vagaries of the Russian tax system," under which Russian companies paid taxes in the fourth quarter based on prices of the previous third quarter, when the oil price was around $100 a barrel. The Russian government had now fixed the system so that tax calculations are made on a monthly basis, without the lag.  

Copyright (c) 2008 Dow Jones & Company, Inc.

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