Megamerger May Fall Short Of Goals, Say Analysts

But they wondered just how big the cost savings a merger between Texaco, Royal Dutch/Shell Group and Star Enterprise, a joint venture between Texaco and Saudi Aramco, the state oil company of Saudi Arabia, would be.

The Wall Street Journal reported on Monday that such a deal was under discussion and would create a $10 billion super oil company, the worlds largest oil retailer, with a market share of about 15 per cent in the worlds biggest oil consuming nation.

This is the sort of thing the market should like. The question is whether its really going to happen and what its worth, said Alan Marshall, an analyst at Robert Fleming.

He said the potential savings may be less than the companies hope.

In both Europe and the United States there is a ruthless drive to cut costs, said Peter Bogin of Cambridge Energy Research Associates in Paris. But you can only cut staffing levels so far. After that you have to look at cutting back elsewhere.

A recent deal in Europe merged downstream activities of British Petroleum plc and Mobil Corp to form a $5 billion company with a 10 per cent market share to compete with giants Shell and Exxon in Europe. That merger achieved cost savings for BP of $300 million per year, said one analyst at a Wall Street bank.

Robert Flemings Marshall said the rewards of such a merger may not be as great in the United States and they were in Europe.

Unlike with BP and Mobil where there was vast potential for cost cutting Shell Oil has already been a big turnaround story and one would have thought the scope for cost cutting would be more limited.

Other analysts believe the European merger may have been triggered by a polarisation in downstream operations.

In Europe, the tussle for market share usually sees the major fully intergrated oil companies facing off with the smaller, nationally based organisations in France, Spain or Italy, with modest external ambitions. BP sources said being a middle sized downstream company was becoming increasingly difficult in the highly competitive European market.