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Sunday, May 9, 1999 Published at 13:33 GMT 14:33 UK

Business: The Company File

Oil merger rumours

Partners since 63 years: Chevron and Texaco jointly own Caltex

The oil industry is abuzz with rumours that the next mega merger is in the offing.

US oil giant Chevron is said to be in talks with Texaco on what would be effectively a $37bn take-over.

The two companies are close partners since more than 60 years, jointly owning Caltex Corp., which operates 13 petroleum refineries and 8,500 service stations in the Asia Pacific region, Africa and the Middle East.

When the rumours first surfaced late on Friday, they prompted a sharp rise in the price of Texaco shares, up $4.81 to $67. Chevron's stock, however, fell $3.06 to $94.75.

While Chevron refused to comment on the reports, Texaco spokesman Andy Norman said the talk on the markets was "just speculation and rumour".

However, such a deal would only be the latest in a long list of oil industry mergers during recent months.

Pooling the black gold

  • August 1998: British Petroleum and US oil giant Amoco form a company worth $110bn (£67bn), with headquarters in London. The new company becomes the number three in the oil industry.
  • December 1998: Two of the biggest US oil companies - Exxon and Mobil - join to form a $250bn giant, setting two records: biggest industrial merger in history and biggest oil company in the world.
  • December 1998: France's Total and Belgium's Petrofina join forces to create the world's sixth largest oil company. However, their merger plans are put on hold temporarily during negotiations with competition authorities.
  • March 1999: BP Amoco, still hard at work to make last year's merger work, says it will merge with Atlantic Richfield Co., better known as Arco. The deal promotes BP Amoco to the number two spot in the oil industry, leapfrogging Royal Dutch Shell.
  • April 1999: UK oil company Lasmo announces a merger with Monument Gas & Oil, a sign that smaller oil producers feel the heat from their mighty and rapidly growing competitors.

Price pressure

The wave of oil industry mergers was triggered by last year's slump in oil prices, which sank to a 25 year-low, dropping below $10 per barrel.

[ image: A sharp fall in  oil prices last year forced oil companies to streamline their operations]
A sharp fall in oil prices last year forced oil companies to streamline their operations
The drop in prices had two causes: Demand was weak because of the economic crisis in Asia and a mild winter in Europe and North America. At the same time supply was plentiful as cash-strapped oil-producing countries tried to increase revenue by boosting out-put.

This squeezed the margins and profits of oil companies. To drive down costs, improve market share and gain benefits from economies of scale, firms were forced to either merge or buy up one another.

The price pressure has receded somewhat during recent weeks. A barrel of Brent crude oil now costs just over $16, as a result of production cuts agreed by oil-producing countries.

Nonetheless, companies that have not merged are afraid that they could lose out against their bigger but streamlined rivals.

The figures

Texaco's 24,628 employees last year generated revenues of $31.7bn and a net income of $578m.

The company is exploring new oil fields in the deepwater Gulf of Mexico, Latin America and West Africa. Its core production areas include the United States, the North Sea of the UK, the Middle East, and the Pacific Rim.

Chevron is the larger of the two, with 34,000 employees, revenues of $40bn and a record net income last year of $3.25bn.

The company pumps oil in the United States, Angola, Nigeria, Canada, the North Sea, Australia, Indonesia, Kazakhstan, Venezuela, China and Papua New Guinea. Major exploration areas include the above, as well as Alaska and Azerbaijan.

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