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Re: SC45

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July 15, 2007 11:51PM
http://news.independent.co.uk/business/analysis_and_features/article2770906.ece

If you're in a hole, merge. But is it too late for BP and Shell?

With reserves running dry in non-Opec countries, rumours of a marriage could finally come true.....

BP and Shell are finally set to merge. That's if you believe the tittle-tattle in the Square Mile.

Of course rumours that the energy giants might unite are hardly new and have been the stuff of bankers' fevered imaginations for years. But there is now an increasingly compelling case for the two to integrate.

At 4.5 million barrels per day, the oil output of a combined Shell-BP would dwarf that of American behemoth ExxonMobil and even major oil-producing countries such as Iran. Some analysts make a positive case for such a merger on the basis of massive economies of scale, claiming it could save $5bn (£2.5bn). But if and when it happens, the real motivation will be far darker: desperation.

Both companies have suffered a variety of troubles in recent years - Shell in Nigeria, BP in the US, both in Russia - but their fundamental problem is identical: the inability to replenish the oil they produce with fresh reserves. This matters because the replacement ratio is one of the most important factors affecting an oil company's stock market valuation, and a rough-and-ready guide to how long it can survive. Shell's difficulties here are well known - in the five years to 2005 its reserve-replacement ratio was just 67 per cent - but BP is also struggling. Although its own ratio is still positive, it has fallen every year since 2002, and without the contribution of the fabulously risky Russian joint venture, TNK-BP, the figure last year would have been just 34 per cent.

Shell and BP's troubles are neither unusual nor surprising, but they are exacerbated by these groups being some of the biggest fish in a shrinking pond. The fact is they are substantially excluded from Opec countries, which control 75 per cent of the world's proven reserves. And their plight is worsening as resource nationalism takes hold from Russia - where Gazprom has just wrested control of both Shell's Sakhalin II project and BP's Kovykta field - to Venezuela, where international oil interests have simply been expropriated.

So the supermajors - ExxonMobil, Chevron, Shell, BP and Total - are largely restricted to operating in non-Opec countries where oil production is generally already in decline. Speaking in London recently, ExxonMobil chief executive Rex Tillerson (pictured) admitted that continued growth of non-Opec production was now "very challenging" and unlikely to continue past 2010. And last week the International Energy Agency (IEA) predicted a global oil supply "crunch" within five years, driven in part by the crawling pace of non-Opec growth.

In these circumstances, the outlook for the world's biggest oil companies looks dismal. In a recent interview with Le Monde, the IEA's chief economist, Fatih Birol, said: "The supermajors will be in difficulty. They will no longer have access to new production capacity. They must redefine their strategies, or otherwise, if they remain concentrated on oil, they will have to be satisfied with niche markets."

The respected Houston-based consultant Henry Groppe puts it even more bluntly: "The major, publicly traded oil companies are in long-term liquidation."............

........."The oil industry will be facing a very serious test by 2015... the gap between supply and demand will widen significantly."

At which point mega-mergers between the likes of BP and Shell will be exposed as powerless to combat the global energy crisis, whatever its cause..............
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