Behind each deal is the same motivating factor: the drive to build economies of scale in an increasingly cost-intensive business. The merger of Exxon and Mobil in 1998 is estimated to have saved as much as $10 billion, in part by reducing the work force. The company employs 80,000 people, compared with the combined 130,000 or so at the time of the merger. In contrast, a BP-Shell marriage would create a company with operations larger than ExxonMobil’s and a payroll of some 200,000 people that could easily be reduced by a quarter, say analysts. That could deliver cost savings of $5 billion annually. “This is a commodity business,” says Fadel Gheit, an analyst with Oppenheimer & Co. in New York. “There is room to improve economies of scale at every level of the business, from leases to production to refining.”
There are also many lesser deals in the rumor mill, including possible bids for a smaller independent like Marathon Oil. That would follow the model of Chevron’s merger with Unocal, which extended its presence in Asia, the Caspian region and the Gulf of Mexico. It was from a Unocal lease that Chevron in September discovered a massive oil and gas reserve in the deep waters off Louisiana, which allows Chevron to run its operations in triple shifts from offices in Europe, Asia and the United States. “With this kind of global coverage and knowledge of energy markets,” says David Nissen, director of the Center for Energy, Marine Transportation and Public Policy at Columbia University, “staff in London can decide whether a supply of crude oil should be refined in the Persian Gulf or the Gulf of Mexico. This is economy of scope as much as economy of scale. It’s not just about larger generators.”
Size also matters in an era when all but 18 percent or so of the world’s energy reserves are controlled by governments, many of which are becoming increasingly protectionist. With countries such as Russia, Venezuela and Bolivia revising or even canceling contracts with independent oil companies, say analysts, it takes the resources of a megamerger to overcome both the political risks and the costs of developing new energy reserves. “I have heard discussion by principals involved in major mergers who say the costs of big projects in places like Russia mean you’re betting the company,” says Columbia’s Nissen. “A lot of managers and shareholders won’t tolerate that.”
The bigger the player, the more likely it is to get a helping hand when contract negotiations get tough, say analysts. Over the past 12 months ExxonMobil was competing with BP for 28 percent of the United Arab Emirates’ Zakum oilfield. Though BP thought it had the most competitive bid, it lost out to its larger rival at the last minute. Many analysts suspect that the U.S. government, which has strong security ties with the emirates, intervened on ExxonMobil’s behalf. In the energy world, as with other earthly pursuits, size matters.
