The planned $110bn (£69bn) merger of BP and Amoco announced last week may prove the catalyst for the long-discussed restructuring of the international oil industry.
The move will create an integrated oil company with a leading presence in the upstream, downstream and petrochemical markets with the financial strength, scale and global reach to challenge the two industry giants, Shell and Exxon.
Sir John Browne, BP’s chief executive, who will take on the same role at the merged company, said such clout would be a prerequisite for success with fierce competition increasing and oil prices likely to remain depressed.
‘In such a climate, the best investment opportunities will go increasingly to companies that have the size and financial strength to take on those projects that offer a truly distinctive return.’
This reality and the creation of a third industry colossus seems certain to lead other companies in the second tier, such as Mobil, Chevron, Arco and Texaco, to consider similar moves. Rodney Chase, Browne’s deputy at BP, said he had seen ‘concrete signs’ that the industry was going in that direction.
BP and Amoco are a neat fit. Amoco’s powerful presence in the US gas market it is the largest producer in the US and Canada dovetails into an area of relative weakness at BP. The British company’s strength in exploration and production and the management of upstream assets should position the merged venture well for opportunities in emerging countries.
Chemicals will also get a big lift. The new business in this sector will have revenues of about $13bn and give BP a critical mass in a sector where it was relatively small. It will be the number-one producer of five core products acetic acid, acrylonitrile, aromatics, purified teraphthalic acid and polybutene and rank third overall behind Shell and Germany’s BASF.
While Browne emphasised this ‘complementary’ nature of the two companies’ strategic and geographical strengths, further cost cuts are a key driver behind the initiative. Synergies are expected to add at least $2bn to the bottom line by the end of 2000 on top of savings the companies have planned individually.
‘The $2bn target is a very serious commitment,’ said Browne, adding that senior management pay would be linked to its achievement.
Job cuts of about 6,000 will meet half the target. The balance will come from focusing exploration activities more tightly ($300m), the adoption of common business processes ($200m), and further efficiencies in procurement ($250m) and operations ($250m).
The US will bear the brunt of job losses, with the consolidation of three large offices in Houston, Texas, into one and the relocation of the BP office in Cleveland, Ohio, to the Amoco headquarters in Chicago. At least 1,000 of the 2,000 staff in Ohio are not expected to make the move.
BP said it hoped that natural wastage would account for most of the cutbacks given that oil companies typically experience a 10% annual staff turnover but did not rule out compulsory redundancies.
By contrast, the UK should emerge reasonably unscathed, as there is no significant duplication in the two companies’ activities.
On the upstream side, Amoco is mainly focused on gas developments in the southern basin of the North Sea, while BP although a leading gas producer on the UK Continental Shelf is concentrating on oil developments further north and west of the Shetland Islands.
So while Amoco’s 500-strong operation in Aberdeen will almost certainly be absorbed into BP’s set-up there, there should not be much rationalisation of project staff.
No manufacturing overlap
On the petrochemicals side, there is no UK manufacturing overlap, with BP’s operations at Grangemouth, Hull and Wilton on Humberside the only production facilities.
The same is true with the downstream end of the business, where Amoco has had no UK presence since it sold its interest in the Milford Haven refinery and its chain of petrol stations to Elf in 1990.
The only vulnerable unit is Amoco’s head office in Ealing, west London, which employs 500 staff and a further 100 contractors.
In terms of the workload the two companies provide for UK contractors and suppliers, not much is expected to change. ‘I can’t see a reason why the joint company would lead to more work for us,’ said a spokesman at Brown & Root, which has been BP’s leading contractor on new developments over the last two years.
British contractors and suppliers will of course have to take on board BP Amoco’s intention to squeeze a further $250m of savings out of the procurement process over the next two and a half years.
But there could be an upside, as BP’s philosophy on procurement, which favours more outsourcing, seems certain to be extended to Amoco’s operations.
Under the terms of the merger, BP is paying a 15% premium to Amoco shareholders to acquire control it will appoint 13 of the 22 board directors, including six of the eight executives and the British company’s management policies are expected to prevail.
The broad strategy will involve the outsourcing of non-core activities and the imposition of a flat management structure based on asset groups. At the project level, contracting alliances and partnerships with which BP has made large savings against budget on two North Sea developments in the past two years, to the benefit of oil company and contractors are likely to feature on future Amoco projects.
Suggestions that BP-Amoco will take a more global perspective to the detriment of investment in the UK do not appear well founded. BP is committed to increasing its UK production from 500,000 barrels a day of oil equivalent, but the continuing strength of its presence in the Organisation for Economic Cooperation & Development countries 80% of profits now come from the US and Europe is seen as the key to funding its ventures in the emerging markets.
‘It gives us a very strong base to go forward,’ said Browne.