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FINANCIAL TIMES: Unocal deal fuels consolidation debate: “…Royal Dutch/Shell has been linked repeatedly with a bid for BG, as it looks to recover from the scandal that forced it to cut its proved reserves by almost one-third last year and part company with its three most senior executives” ( 5 April 05


By James Boxell and Sheila McNulty

Published: April 5 2005


ChevronTexaco's $18bn deal to buy Unocal settongues wagging in the industry yesterday about the possibility of a new wave of consolidation in the oil and gas industry.


But Robin West, chairman of PFC Energy, a consultancy group, says: "The question is: 'Is it the first deal or is it the last?'"


He points out that while the oil majors have enormous amounts of cash to spend, given record-high oil prices, there are not many premier assets to choose from.


National oil companies own 77 per cent of the global resources. In the US, where Unocal is based, the company stands out among independents.


"Unocal is unique," Mr West says. "Although it is an independent, it has big-company assets."


The other independents, such as Anadarko and Devon, mainly have assets concentrated onshore in North America - not where the major oil and gas companies want to spend their money. They are keen to build reserves globally, given that many North American assets, particularly in the US, are maturing.


Unocal, on the other hand, has prime global assets, many of which are concentrated in Chevron's core areas of operation. This makes Unocal an ideal fit for Chevron, which as a rule guards against spreading itself too thin, preferring instead to build strong positions in key areas.


Unocal has a leading position in Asian gas, a strong position in the shelf and deep waters off the Gulf of Mexico, and good assets in the Caspian.


While it is difficult to see what other medium-sized oil and gas independents might prove attractive to Chevron's peers, Derek Butter, analyst at Wood Mackenzie, a consultancy, sees possibilities in UK's BG Group.


Indeed, Royal Dutch/Shell has been linked repeatedly with a bid for BG, as it looks to recover from the scandal that forced it to cut its proved reserves by almost one-third last year and part company with its three most senior executives.


"All the supermajors would love to have BG in their portfolio," Mr Butter says. "The question seems to be what BG shareholders would deem as acceptable."


BG's premium rating when compared with its bigger industry peers has protected it so far from a takeover bid. The high oil price, which is approaching $60 a barrel this week, has been cited often as a reason for the lack of large-scale M&A activity in the sector, because it makes the purchase price too prohibitive.


But Chevron's bid for Unocal shows this may no longer be a barrier to deals. One industry consultant says: "Chevron recently stuck with a $25-$30 planning price [used when making long-term investments] but you would be hard-pressed to use this to justify the Unocal deal. This looks a better deal if you believe oil prices will stay in the $40-$50 range for the foreseeable future."


However, Sam Laidlaw, the executive vice-president who joined the Chevron board two years ago to seek out international opportunities, insists the company used its standard planning price to determine whether the acquisition was economic.


Mr Laidlaw says the deal makes strategic sense for Chevron, particularly because it gives it greater exposure to the lucrative Asian gas market through substantial gas assets in Thailand and Indonesia. It should also offer a short-term fix for its poor reserve recovery rate, which saw it replace just 49 per cent of the oil and gas it extracted last year.


Mr Laidlaw says the addition of such assets will also help Chevron overcome a short-term flattening of production growth.


The combination of the Asian assets of Unocal and Chevron will place the company in the top tier of natural gas producers and marketers in what is both a rapidly expanding and strategically important region. Chevron will become the top oil and gas producer in Thailand. In Indonesia, Unocal's extensive oil and gas producing operations offshore in both the shelf and deepwater areas will augment Chevron's significant oil production, principally onshore.


Analysts say some companies were wary of going after Unocal for fear of offending China, whose state-owned oil group, China National Offshore Oil Corporation, had expressed interest in Unocal, along with Eni of Italy.


But Dave O'Reilly, Chevron's chief executive, says: "It wasn't on our list of considerations. This is a commercial deal. For us, it just made great sense." 


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