Shell, Texaco, Aramco To Form Largest Us Refiner

Royal Dutch/Shell Groups Shell Oil Co., Texaco Inc. and Saudi Aramco on Wednesday sealed an agreement to combine their East Coast and Gulf Coast operations to create the largest refiner in the United States.

The new company, which will integrate the three companies refining and marketing operations on the East and Gulf coasts, will control around 13 per cent of US refining capacity.

Saudi Aramco is the government-owned oil company of Saudi Arabia.

The completion of the deal follows the merger earlier this year of Shell and Texacos refining and marketing units on the West Coast. Analysts estimate the combined cost savings from the two ventures could reach $1.0 billion over three years.

While the companies have yet to complete an evaluation of possible savings, they said that they will achieve substantial savings without major plant closures. The new company will continue to market gasoline under both the Texaco and Shell brands, the companies said.

The East-Gulf coast and the West Coast units, which will be run as two separate companies, will have total refining capacity of 1.77 million barrels of oil per day and operate 26,000 retail outlets.

While Shell was already the largest refiner in the United States, the newest venture puts them way ahead of the rest of the pack, where the next biggest players have a capacity of around 1 million barrels per day.

There are natural savings where companies have refineries close proximity it allows you to combine refineries, and the sheer size of Shell and Texaco means (they) can get large contractual sales of refined products and crude, said Bruce Lanni, analyst at Oppenheimer & Co.

The challenge for the U.S. refining industry is to improve its return on capital, analysts said, which at 6 percent to 8 percent is not much more than a typical savings account. Competiton among refiners and gasoline marketers remains fierce, and companies are forced to pass cost savings on to the consumer.

But analysts noted that recent alliances between other big oil companies have been successful.

The European refining and marketing venture between British Petroleum Co. and Mobil Corp. expects $50 million to $100 million in savings in the second half of this year, while Ultramar

Diamond Shamrock and Valero Energy Corp. have both increased expectations from their recent acquisitions.

The latest merger still needs to gain approval from regulators in Washington. The deal is also likely to face opposition from consumer groups.

It will pose significant competitive and consumer problems, said Edwin Rothschild, energy policy director for consumer group Citizen Action.