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The Guardian: Desperation may be heating this oil rumour (article speculates on Shell BP mega-merger)

Nils Pratley
Tuesday October 24, 2006

There is no evidence that talks are taking place. There is no suggestion that executives on either side are agitating for it to happen. Yet the idea that BP and Shell could merge to create the world’s largest company refuses to go away. Oppenheimer & Co, a Wall Street investment house with a reputation for being close to the pulse of the oil industry, has published a detailed analysis of a deal it thinks could be “an intelligent, strategic response to a shifting global landscape”.

The oil industry invented mergers and acquisitions, so you never say never, but desperate, rather than intelligent, is the first word to describe a BP-Shell mega-merger. It is hard to think of two large organisations in the same industry with such wildly different cultures. Years of in-fighting among executives would be virtually guaranteed.

Government regulators, reckons Oppenheimer, would “easily” give approval, an heroic assumption. It is more likely that regulators would demand gigantic disposals from a company that would be producing 75% more oil and gas than ExxonMobil, the industry titan. By the end of the process, it is anybody’s guess how much would remain of the supposed $5bn of annual cost savings.

For all that, Oppenheimer is not given to wild flights of fancy for no reason. It has put its finger on why BP and Shell may just be desperate enough. For BP, the next few years will bring official scrutiny of the corroded pipes in Alaska, the Texas City refinery explosion and the delays in restoring the Thunder Horse platform in the Gulf of Mexico. Not much excitement there.

For Shell, there is nothing so specific, just the prospect of operational under-performance against the likes of Exxon and a realisation that the best takeover opportunities were missed in the 1990s.

If the price of oil continues to decline, billions of dollars of cost savings, however uncertain, could seem enticing. Well, that’s the theory, and it is notable that neither side has managed convincingly to quash the speculation sparked by BP’s rumoured approach to Shell last year. BP mumbled that its action was “scenario planning”, but that is some way short of killing the idea.

Ultimately, of course, nothing could happen without the say-so of BP’s chief executive Lord Browne, who, it is easy to forget, has two years left to serve, leaving plenty of time for one last surprise.

He will appear in public today to announce BP’s third-quarter results and could kill the market gossip in one word. Let’s see if he does.

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