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Financial Times: Superiority complex (Shell did not make it to the altar this time…)

Published: July 27 2006 03:00 | Last updated: July 27 2006 03:00

It would have been the deal of the century. Had BP swooped on Royal Dutch Shell, it would have created a behemoth pumping 4.6m barrels of oil a day – more than Iran’s output.

Shell has spent the past couple of years recovering from its reserves scandal. That made it a classic target: a world-class set of assets with a weakened management and valuation. BP’s near-term production growth would fit well with Shell’s longer-term potential.

That BP did not proceed probably has much to do with fears over a regulatory backlash. In global terms, however, the three supermajors, including ExxonMobil, account for less than one-tenth of upstream oil production. Large-scale disposal of refining and marketing assets would be required, but there would have been no shortage of buyers. Equally important, perhaps, were fears that the merger of two oil giants amid surging energy prices would not play well with politicians.

The last wave of oil industry consolidation in 1998-2000 aimed to cut costs in the face of sub-$10 crude. These days, the supermajors are, if anything, too lean – witness BP’s operational problems in the US. A full bank account is of little use if there are no engineers to be had and resource-rich governments will not play ball. The real problem is finding sustainable top-line growth. Just being bigger will not help with this. That is why the supermajors’ shares have been steadily de-rated. More important are relationships with national oil companies. BP, and others, ultimately need more TNKs.

For now, the national oil companies feel secure enough on their own. That means all-share mergers among the western majors still offer some medium-term benefits. Diversifying risk and weeding out the weakest bits of a combined asset portfolio would create value. Just because BP and Shell did not make it to the altar this time does not mean others will not. Total, Chevron and ConocoPhillips all look like obvious candidates. High oil prices help to mask these issues right now, but the pressure for more fundamental industry restructuring will not go away.

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