Andersen Consulting on Exxon-Mobil merger

[Joe Shea <joeshea@netcom.com>]

	I thought this might be instructive as to the business view of the
merger. 

Best,


Joe Shea				|	1812 N. Ivar, No. 5
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REPORTING:  EXXON-MOBIL MERGER
+
American Reporter Staff
Hollywood, Calif.
December 2, 1998
oil
11.99/$11.99

 	OIL MEGA-MERGERS MAY SPUR MORE, ANDERSEN STUDY SAYS
		   Special to The American Reporter

	NEW YORK -- In the wake of the Mobil-Exxon and British
Petroleum-Amoco mergers, "second-tier" competitors are confronting an
increasingly challenging marketplace that may spur more huge mergers,
a new study by the respected Andersen Consulting says.
	The Andersen study indicates that senior oil industry executives
anticipate an increase in strategic alliances to compete in a marketplace
marked by record-low prices and new competitors, including privatized
state-owned oil companies and the newly combined companies able to
leverage scale advantages.
	In the last three years, virtually every major oil company has
engaged in an alliance, and that trend will continue, the study shows.
Seventy percent of senior energy executives anticipate alliances will
drive half or more of company revenues within a decade. 
	But enthusiasm does not always translate into long-term success:
only 30 percent of executives believe their companies are fully realizing
the gains anticipated from alliances.  An overwhelming 90 percent believe
alliance expertise will be a major determinant of future success.
	"The pressure in the oil industry to consolidate is building, and
mergers and alliances offer enormous potential for value creation," said
Eddy Fikse, Managing Partner for Andersen Consulting's Global Energy
industry practice.  "But capturing that value requires new and integrated
business processes, approaches and skills and the technologies to use
them."
	Alliances fall short of expectations for two prominent reasons,
executives said.  First, cost-reduction, as opposed to revenue or market
growth, is the main impetus behind alliances. 
	"At best, cost reduction delivers a short-term boost in
profitability," Fikse said.  "A more comprehensive, long-term strategy
must be put in place or the alliance will run out of steam and its value
will plateau."
	Second, most companies attempt to manage alliances with the same
management approaches used when they own or deploy the assets in
single-operator ventures. 
	"Alliance-based business models are structurally different from,
and infinitely more complex to manage than, own-and-control business
models," Fikse said.  "New managerial skills and approaches are needed to
effectively sustain alliances.  Our research shows companies must improve
how they evaluate deals, tailor governance to the managerial tasks, create
balanced scorecards to measure performance; and manage their alliances as
portfolios."
	In consolidation joint ventures, 90 percent of executives claim
the primary benefit of these alliances has been removing costs.
	"Cost reductions that use economies of scale make perfect sense: BP
and Mobil announced $700 million in savings from two downstream
consolidation joint ventures in Europe, while Conoco expects to save $1.25
billion from its refining joint ventures with Pennzoil and Chevron.  Amoco
and Shell may take out $200 million in costs by combining their upstream
positions in West Texas," Fikse noted.
	"But while focus on costs is understandable in consolidation
ventures, it alone cannot sustain an alliance over the long-term," he
said.  "Being the low-cost producer in a commodity market is a great goal,
but is a limited tool for creating real competitive advantage.  Our
research demonstrates that to realize greater gains alliance partners must
identify and exploit more of the potential growth opportunities."
	For instance, Royal/Dutch Shell is using its venture with Bechtel
to speed its entrance into electric power.  Amoco's venture with Femsa
will allow it to enter the Mexican retailing business.  And ARCO's $500
million equity investment in Lukoil provides a stepping stone to extend
its relationship through new ventures.
	The study also found that information technology, as well as the
convergence of gas and power, have greatly altered all aspects of the
industry -- lower prices and costs, faster timing, better quality,
different products -- and underscore the importance of and business case
for forming alliances.
	"Because no company can possess capabilities in seismic technology,
directional drilling and floating production, they can acquire and
integrate the capabilities of suppliers and other oil companies," Fikse
said.  For example, the Andrew field alliance, a seven-member consortium
of Brown & Root, Saipem, Highland, Allseas, Emtunga, Santa Fe and
Trafalgar developed a previously uneconomic field, shaving one-third of
the costs through knowledge sharing and collaboration.
	Global deregulation of oil and gas markets is spurring the growth
and potential of alliances as well, opening new geologic and marketing
opportunities in countries previously off-limits.
	"In the oil industry, virtually every nation other than Mexico,
Saudi Arabia and Kuwait now allows multinational oil companies to explore
for, develop and produce oil and gas," Fikse said.  With new access to
some of the world's most geologically promising areas (such as Russia,
Kazakhstan, Azerbaijan, Venezuela and Brazil), multinationals have the
flexibility to choose where best to use their capital and know-how to
create the most value.
	In most nations, refining, distribution and/or retail marketing
are also deregulated or are deregulating to permit international
competition.  For example, India now allows foreign companies to operate
refineries and to market lubricants.  While Brazil's retail sector has
been competitive for some time, it is now allowing the importation of
refined products and introducing market pricing. And, Venezuela recently
opened its retail sector to competition.
	Many nations are also privatizing state-owned oil companies
(NOCs). Following the lead of companies like YPF, Elf, and Repsol, within
a year Brazil will limit government ownership of Petrobras to 50 percent
plus one share. Thailand is privatizing PTT and Taiwan has announced plans
to privatize Chinese Petroleum Corporation.  The Czech Republic has sold a
majority interest in its refining company, and Poland will do the same.
	Venezuela's PDVSA has been an active acquirer of refining and
marketing assets in the U.S.  It is now the nation's second largest
refiner and brands more retail sites than any other company in the market.
PEMEX, the Mexican NOC, has alliances involving Shell's Deer Park refinery
and Mobil's Chalmette Louisiana refinery, as well as several alliance-like
long-term supply/purchase arrangements with others.  The opportunity that
deregulation and privatization provides to free NOCs to do more is
dramatically illustrated by Repsol's rapid multi-dimensional expansion
throughout Latin America.
	Andersen Consulting is a $6.6 billion global management and
technology consulting organization whose mission is to help its clients
change to be more successful.  The organization works with clients from a
wide range of industries to link their people, processes and technologies
to their strategies. Andersen Consulting has more than 59,000 people in 46
countries.  Its home page address is http://www.ac.com.

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