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Predicting a Different Kind of Oil Deal

FEBRUARY 3, 2009, 11:25 AM

Tony Hayward, BP’s chief executive, played down talk of consolidation between Western oil majors Tuesday, as his company announced its first quarterly loss in seven years. But he did say that the crash in oil prices might spark another kind of energy transaction: deals with state-owned oil companies. 

“I’m not certain that the industrial logic is terribly compelling,” he said Tuesday on a conference call with reporters, referring to a merger between two of the oil majors, which in addition to BP include ExxonMobilChevronTexacoTotalEni andConocoPhillips. “It may be more sensible to think about combining I.O.C.’s” — meaning international oil companies — “with technology and capability, with N.O.C.’s” — or national oil companies — “with resources,” he added.

That notion is bound to shock many in the energy industry. The thought that France’s Total or ExxonMobil of the United States could one day be controlled by companies owned by, say, the Saudi, Venezuelan or Russian governments, is apt to cause government officials in Western capitals some severe heartburn.

Any such merger, if it happened, would surely see the national oil company control the international oil company, as most governments would never relinquish control of such a powerful state asset to a foreign corporation.

Such a deal would shift the balance of power firmly away from the West and would consolidate power into the hands of the oil producers.

Though they may prove controversial, Mr. Hayward’s statements also have a certain logic to them. State-owned oil companies like Aramco of Saudi Arabia and KPC of Kuwait control well over 90 percent of the world’s energy resources, leaving a handful of publicly traded international oil companies to fight over the rapidly dwindling scraps.

“The concept is ideal, but the devil is in the details,” Fadel Gheit, Oppenheimer’s oil analyst, told Dealbook. He said he believes that an outright merger would be a near impossibility because of the complicated ownership and control issues. Any deal struck between the two camps would most likely be some sort of joint venture as opposed to a full merger, he said.

“Many national oil companies are not public companies,” he said. “They are owned by the state.” So the market values of entities such as Aramco, the Abu Dhabi National Oil Company or the Korea National Oil Company are highly unclear, he said.

Competition for resources has been too much to bear at times for the international oil companies. When oil prices skyrocketed recently, many countries ripped up their production-sharing agreements with the major international oil companies and forced them to take a smaller piece of the profits. While the oil majors still made money hand over fist when oil prices were high, the recent crash in oil prices is exposing their weakness.

Because of precipitous fall in oil prices, BP just reported its first quarterly loss in over seven years. The company lost $3.3 in the fourth-quarter of last year after earning $4.4 billion in the previous quarter. Its rival, Shell, reported a $2.8 billion loss last week.

– Cyrus Sanati

NEW YORK TIMES ARTICLE

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