STATEMENT OF

JAY HAKES

ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION

DEPARTMENT OF ENERGY

BEFORE THE

COMMITTEE ON ENERGY AND NATURAL RESOURCES

U.S. SENATE

JUNE 24, 1999

 

BP AMOCO PLC AND ARCO MERGER

I wish to thank the Committee for the opportunity to testify today on impacts of the proposed merger between BP Amoco PLC and Atlantic Richfield Company (ARCO). My testimony will focus on the business environment leading up to the proposed merger of BP Amoco and ARCO and highlight where overlaps of operations occur.

What is Behind Recent Mega Mergers?

Prior to the Arab Oil Embargo in 1973, mergers between British Petroleum (BP) and Amoco, between Exxon and Mobil, and now between BP Amoco and ARCO would have been unthinkable due to the sheer sizes of these entities (Figure 1). In the upstream or exploration and production business segment in 1972, Exxon ranked first in world production, supplying almost 11 percent of the world’s crude oil, and British Petroleum was not far behind with about 10 percent of world crude oil production (Table 1). Mobil ranked seventh and produced about 5 percent of the world’s oil supply. Amoco and ARCO each produced 2 percent and 1 percent, respectively, of world crude oil. Had the BP-Amoco-ARCO and Exxon-Mobil combinations occurred in 1972, the two resulting organizations would have controlled 29 percent of world oil production.

Up until the early 1970's, virtually all non-communist areas in the world had been open to U.S. major oil companies. But later, in the 1970’s, many of the major oil companies’ producing assets abroad were nationalized, and state-owned oil companies were formed to carry on the production. Private oil companies not only lost assets, but also access to some of the world's lowest-cost producing areas. North America and Europe are high-cost regions in which to explore and produce.

In 1997, state-owned or national oil companies represented the world’s top 6 producers. British Petroleum ranked 13th with 1.9 percent of the world’s production (1.3 million barrels per day), and Amoco and ARCO were not even among the top 20 producers. The combined production of BP Amoco and ARCO in 1997 was only 53% of BP's production alone in 1972.

Strongly limited access to exploration and production activities in low-cost foreign areas continued until around the time of the oil price collapse in 1986, when some countries again began to open to private investment. With the opportunities increasing to expand into other geographic areas, the oil companies that are merging indicate that they will be better able to compete in the global upstream market as larger organizations.

In the short term, the recent crude-oil price decline hurt oil company cash flow and profitability and increased already existing pressures to cut costs. The merging companies indicate that they can achieve economies of scale and cost efficiencies through the mergers.

As in the case of the prior mergers, BP Amoco and ARCO have indicated they expect to achieve synergies and cost savings from this merger, as well as the potential for growth.

Complementary Refining and Marketing Regions

If this merger takes place, BP Amoco, currently the largest refiner in the country, would grow from 1.4 million barrels per day of capacity to almost 1.9 million barrels per day, which represents an expansion from 9 percent to almost 12 percent share of U.S. capacity (Table 2). Exxon is the second largest refiner behind BP Amoco with 1.1 million barrels, but should the Exxon-Mobil merger be approved, that new organization’s capacity might exceed the BP Amoco-ARCO combination in size. The combined capacities of Exxon and Mobil are almost 2.0 million barrels per day. Chevron is the third largest refiner with capacity of just over 1.0 million barrels per day, followed by USX (Marathon Ashland Petroleum) at 0.9 million barrels per day. Table 2 shows that BP Amoco and ARCO do not overlap in any regional refining areas, so the addition of ARCO does not increase refinery capacity concentration in any one region.

To consumers, gasoline is the most visible petroleum product and is the focus of many concerns over the impacts of mergers. There are no overlaps in gasoline markets between BP Amoco and ARCO (Figure 2). The addition of ARCO would increase BP Amoco's share of U.S. retail outlets from 8.7 percent to 9.6 percent. The next highest U.S. branded marketer in terms of share of gasoline outlets is Citgo Petroleum (wholly owned subsidiary of Venezuela’s national oil company), which supplies 7.9 percent of branded retail outlets, followed by Texaco with 7.4 percent of branded retail outlets.

In summary, the BP Amoco ARCO merger would increase the U.S. market share of BP Amoco, but there is no change in regional downstream concentrations as a result of this proposed merger.

Overlaps in U.S. Production and Crude Markets

If BP Amoco, the top U.S. producer of crude oil and natural gas liquids, combines with ARCO, the second highest producer, they would account for 17 percent of total U.S. crude oil and natural gas liquids production of 8.0 million barrels per day (Table 3). Both of these companies are large producers in Alaska, which represents about 16 percent of U.S petroleum production. In 1998, BP Amoco produced 42 percent of total Alaskan oil, and ARCO produced 27 percent (Figure 3). Thus, together they account for 69 percent of total oil production in Alaska.

Alaskan crude oil is used mainly in refineries on the West Coast. This is a prime market for Alaskan crude oil 1) because of its close proximity relative to other refining regions, 2) because Petroleum Administration for Defense District 5 (PADD 5) refineries can handle the oil's relatively high specific gravity and sulfur content, and 3) because until 1995, a ban on exports limited its use in other markets. Since the export ban was lifted at the end of 1995, only a small amount of Alaskan crude oil has been exported to Asia -- primarily by BP Amoco (Table 4). Currently the West Coast demand for crude oil exceeds Alaskan production, and thus is able to absorb the Alaskan volumes.

While essentially all of Alaskan crude production ends up in PADD 5, it only represented 45 percent of all crude oil received in that region in 1998. Individual refiners use of Alaskan crude varies widely. Refiners in California have easy access to California crude oil production. Lower 48 crude oil meets about half of California refinery requirements. Most of the lower 48 crude oil run in California refineries comes from California production. Alaskan crude oil fills about 1/3 of California refinery needs, and imports supply the remainder. If you assume that BP Amoco and ARCO shares of production are representative of their share of sales in California, they represent 13 and 9 percent of the California crude oil market respectively (Figure 4). Together, their Alaskan production supplied over 20 percent of crude oil received by California refineries.

PADD 5 refiners outside of California (Alaska, Hawaii, Nevada, Oregon, Washington) as a group use proportionally more Alaskan crude oil than California refiners. Alaskan crude oil receipts for these refiners in 1998 averaged 73 percent or almost 3/4 of their total receipts. The remaining 1/4 of their needs were met with imported crude oils. They use very little if any domestic crude oils outside of Alaskan. For these refiners, BP Amoco and ARCO probably supply about 50 percent of their total needs, again assuming that BP Amoco and ARCO's production shares translate to sales market shares.

While BP Amoco has no refineries on the West Coast and sells its Alaskan crude oil to third parties, ARCO probably uses most if not all of its Alaskan crude oil production in its own refineries. Its refinery runs of 450 thousand barrels per day were larger than its Alaskan crude oil production of 347 thousand barrels per day. Thus, while BP Amoco is an important third party supplier of crude oil to the West Coast, ARCO is not.

Transportation

Two major areas of crude oil transportation would likely see changes as a result of this merger: the Trans-Alaska Pipeline System (TAPS) and the tanker market. TAPS, which was built to move crude oil from the North Slope production areas across Alaska to Valdez, is owned and used by the major producers in Alaska. BP Amoco has a 50-percent ownership share and ARCO a 22-percent share. If joined, they will represent 72 percent of the pipeline ownership. However TAPS is a common carrier and rates are regulated.

Currently ARCO transports its crude oil from Valdez to the West Coast with its own fleet of six U.S.-flag crude oil tankers. It also owns two U.S.-flag product tankers. Foreign-owned companies cannot own U.S.-flag ships to transport petroleum between U.S. ports. Furthermore, U.S.-flag ships are the only vessels that can be used to transport crude or product between U.S. ports. Thus, since BP Amoco is a foreign-owned company, these ships will likely be sold. The six crude-oil tankers represent 18 percent of the total U.S.-flag crude-oil tanker fleet of 33 vessels. The ARCO crude oil will then have to be moved by contract to third parties from Alaska to the West Coast, which could increase their transportation costs.

Impact on Foreign Ownership

Since 1980, a number of foreign-producing countries (e.g., Venezuela, Mexico, Saudi Arabia) have invested in the U.S. downstream to provide outlets for their crude oil. In addition, BP has had ownership in the U.S. downstream first through BP America (formerly Standard Oil of Ohio), and more recently through its Amoco merger. The foreign-affiliated companies’ share of U.S. refining capacity has increased from 11 percent in 1980 to 30 percent in 1998 (Figure 5). If the BP Amoco-ARCO merger takes place, the foreign-affiliated companies’ share of capacity will increase to 33 percent. BP’s recent interest in the U.S. downstream through Amoco and ARCO runs counter to its prior U.S. actions when the company sold U.S. refineries.

The upstream shows an increase in foreign affiliates’ share of U.S. oil production from 13 percent in 1980 to about 17 percent, including the transfer of Amoco's production to BP. With the ARCO merger, foreign ownership in U.S. production will increase to about 23 percent.

Conclusion

In summary, the proposed merger between BP Amoco and ARCO promises no overlap in their downstream segments -- the business area usually of most concern to the public in petroleum company mergers. However, the merger reveals a more complicated picture in U.S. upstream activities. BP Amoco and ARCO together represent 69 percent of Alaskan crude oil and natural gas liquids production, most of which supplies the West Coast. Alaskan crude oil provides 45 percent of the crude oil used in West Coast refineries. Thus, BP Amoco and ARCO are supplying nearly 1/3 of that market through their Alaskan production.

In spite of the Alaskan crude oil volumes flowing to the West Coast, more economic options may exist for California refineries than exist for Alaskan producers. California refineries can probably run any crude oil in the world and do run a variety of international crude oils. But Alaskan crude oil export data indicate that currently not many refiners outside of the West Coast find Alaskan crude oil to be economically attractive.

This concludes my testimony before the Committee. I will be glad to answer any questions the members may have.

"Table 1. Worldwide Crude Oil Production of 20 Leading Companies, 1972 and 1997

(Thousand Barrels per Day)

1972

1997, pre-mergers

1997, post-mergers

Company

Produc-tion

Percent of World-wide Total

Company

Produc-tion

Percent of World-wide Total

Company

Produc-tion

Percent of World-wide Total

Exxon Corp

4,968

10.8%

Saudi Arabian Oil Co.

9,052

13.6%

Saudi Arabian Oil Co.

9,052

13.6%

British Petroleum

4,664

10.1%

National Iranian Oil Co.

3,755

5.7%

National Iranian Oil Co.

3,755

5.7%

Royal Dutch/Shell

4,169

9.0%

Petroleos de Venezuela

3,424

5.2%

Petroleos de Venezuela

3,424

5.2%

Texaco, Inc.

3,777

8.2%

Petroleos Mexicanos

3,410

5.1%

Petroleos Mexicanos

3,410

5.1%

Chevron Corp.

3,232

7.0%

China National Petroleum

2,884

4.3%

China National Petroleum

2,884

4.3%

Gulf Oil

3,214

7.0%

Kuwait Petroleum Corp.

1,976

3.0%

Exxon Mobil

2,526

3.8%

Mobil Corp

2,316

5.0%

Exxon Corp.

1,599

2.4%

BP Amoco ARCO

2,484

3.8%

Communist Bloca

1,301

2.8%

Nigerian Nat'l Petroleum

1,417

2.1%

Kuwait Petroleum Corp.

1,976

3.0%

CFP (Total - France)

977

2.1%

Royal Dutch/Shell

1,328

2.0%

Nigerian National Petroleum

1,417

2.1%

Sonatrach (Algeria)

925

2.0%

Sonatrach (Algeria)

1,318

2.0%

Royal Dutch/Shell

1,328

2.0%

Amoco Corp

815

1.8%

Abu Dhabi National Oil Co.

1,310

2.0%

Sonatrach (Algeria)

1,318

2.0%

ARCO

652

1.4%

Libya National Oil Co.

1,259

1.9%

Abu Dhabi National Oil Co.

1,310

2.0%

DuPont (Conoco)

594

1.3%

British Petroleum

1,251

1.9%

Libya National Oil Co.

1,259

1.9%

USX Corp. (Marathon)

453

1.0%

Iraq National Oil Co.

1,248

1.9%

Iraq National Oil Co.

1,248

1.9%

Petroleos Mexicanos

440

1.0%

Chevron Corp.

1,071

1.6%

Chevron Corp.

1,071

1.6%

Occidental Petroleum

443

1.0%

Pertamina (Indonesia)

1,028

1.6%

Pertamina (Indonesia)

1,028

1.6%

Getty Oil

443

1.0%

Lukoil (Russia)

1,024

1.5%

Lukoil (Russia)

1,024

1.5%

Sun Co.

369

0.8%

Mobil Corp.

927

1.4%

Petrobras

916

1.4%

Unocal Corp

365

0.8%

Petrobras

916

1.4%

Texaco Inc.

833

1.3%

Phillips Petroleum

337

0.7%

Texaco Inc.

833

1.3%

Elf Aquitaine

795

1.2%

Top 20 Total

34,434

74.6%

Top 20 Total

41,030

61.9%

Top 20 Total

43,058

64.9%

Worldwide Total

46,170

100.0%

Worldwide Total

66,317

100.0%

Worldwide Total

66,317

100.0%

Note: a For 1972, only non-Communist world oil production and Communist bloc (including China) exports to the non-communist world are included, while 1997 includes total world production. Sum of components may not equal totals due to independent rounding. Shares were calculated based on un-rounded data.

Sources: Company data 1972: Jacoby, Neil H., Multinational Oil (New York, 1974, pp. 192-192) and company annual reports. 1997: Company annual reports and Petroleum Intelligence Weekly.

 

Table 2. U.S. Refining Capacity (Atmospheric Distillation Capacity 1/1/99)

BP Amoco PLC

ARCO

Combination of BP Amoco & ARCO

Total U.S. (Excluding Puerto Rico & Virgin Islands)

Percent of Total

(Barrels per Calendar Day)

(%)

PADD 1

58,600

0

58,600

1,690,600

3.5%

PADD 2

620,000

0

620,000

3,619,065

17.1%

PADD 3

688,000

0

688,000

7,410,950

9.3%

PADD 4

53,000

0

53,000

528,120

10.0%

PADD 5

0

457,000

457,000

2,931,805

15.6%

U.S. Total

1,419,600

457,000

1,876,600

16,180,540

11.6%

Note: PADD – Petroleum Administration for Defense Districts. PADD 5 and U.S. Total exclude 80,750 barrels per calendar day of distillation capacity used in Alaska to produce some distillate to run the pipeline and other operations. This capacity comes from the following facilities: ARCO Kuparauk (Anchorage) 14,000; ARCO Prudhoe Bay 15,000; Petro Star North Pole 13,750; Petro Star Valdez 38,000.

Source: Energy Information Administration, Form EIA-820, Biennial Refinery Report

.

Table 3 U.S. Oil and Gas Production for BP Amoco - ARCO Merger
U.S. Crude Oil and Natural Gas Liquids

(Thousand Barrels per Day)

Percent of U.S. Total U.S. Ranking
BP Amoco ARCO Com-bined U.S. Total BP Amoco ARCO Com-bined BP Amoco ARCO Com-bined
Production 859 528 1387 7996 10.7% 6.6% 17.3% 1st 2nd 1st
U.S. Natural Gas

(Million Cubic Feet per Day)

Percent of U.S. Total U.S. Ranking
BP Amoco ARCO Com-bined U.S. Total BP Amoco ARCO Com-bined BP Amoco ARCO Com-bined
Production 2,649 1,175 3,825 51,797 5.1% 2.3% 7.4% 1st 7th 1st
Sources: Company information -- 1998 annual reports; U.S. totals -- Liquids production: Energy Information Administration Petroleum Supply Monthly, April 1999, Table S1; Gas production: Energy Information Administration, Natural Gas Monthly, April 1999, Table 1.

 

 
Table 4. Destinations for Alaskan Crude Oil (Thousand Barrels per Day)Destination

1994

1995

1996

1997

1998

CA & WA

1,279

1,229

1,205

1,113

1,026

Hawaii

53

49

50

39

43

Alaska

28

32

34

36

26

U.S. Gulf Coast via Panama

75

62

4 (a)

0

0

U.S. Virgin Islands (b)

95

88

48

5 (a)

0

Asia

0

0

36 (a)

68

53

Total

1,530

1,460

1,377

1,261

1,149 (c)

Notes: (a) On a full-year basis; for the partial year during which volumes where shipped, per-day volume was higher. (b) All shipments were made on foreign-flag tankers.

(c) Does not add due to rounding.

Source: Provided by the General Accounting Office. Original source was U.S. Maritime Administration.

 

Figure 1.

 

Sources: Company data 1972: Jacoby, Neil H., Multinational Oil (New York, 1974, pp. 192-192) and company annual reports. 1997: Company annual reports and Petroleum Intelligence Weekly.

 

Figure 2.

Note: The numbers in parentheses are the numbers of states in each share category. The District of Columbia is also included. BP Amoco has no stations in the states where ARCO has retail outlets.

Source: National Petroleum News, 1997 data.

 

Figure 3.

 

Note: BP Amoco and ARCO’s combined share of U.S. production is 17.3%. The chart has rounded the individual figures.

Sources: 1998 U.S. Crude and NGL Production – Energy Information Administration, Petroleum Supply Monthly, April 1999, Table S1; 1998 Alaskan Crude Oil Production -- Petroleum Supply Monthly, Table S2; 1998 Alaskan NGL Production -- estimated as equal to 1997 NGL production published in the Energy Information Administration’s U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves, 1997 Annual Report, Table 15. 1998 Company Alaskan Production taken from 1998 Annual Reports.

 

Figure 4.

Source: 1998 PADD 5 Crude Oil Receipts at Refineries – Energy Information Administration, Form EIA-810, Monthly Refinery Report. BP Amoco and ARCO shares estimated as their respective shares of Alaskan production times the share of Alaskan crude receipts in California and in PADD 5 area outside of California.

 

Figure 5.

Source: Energy Information Administration, Performance Profiles of Major Energy Producers, 1997, Table 7, 9, and 11 and various back issues; U.S. Department of Energy Annual Report to Congress, September 1984; Energy Information Administration, Profiles of Foreign Direct Investment in U.S., various issues.