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Chevron, Texaco Agree to Merge in $36-Billion Deal

Energy: Result would be fourth-largest oil company in the world. Pact is sure to draw fire of consumer advocates, who say too few companies already dominate the industry.


Chevron Corp. and Texaco Inc., deciding merger is better the second time around, agreed Sunday to a long-rumored $36-billion combination of the two oil giants, top company executives confirmed.

The deal, which follows a failed attempt by the two firms to merge last year, comes at a time of soaring oil and natural gas prices, and is sure to attract the scrutiny of regulators and consumer groups.

The transaction, to be formally announced today before the stock market opens, was approved Sunday at separate meetings of the companies' boards of directors, according to senior executives who requested anonymity. The merger would create the world's fourth-largest publicly traded oil company--to be called ChevronTexaco Corp.--with the financial muscle and low cost structure to find and produce oil and natural gas in far-flung corners of the world, analysts said.

In acquiring Texaco, San Francisco-based Chevron could achieve $1.2 billion in savings, including 4,000 expected layoffs, the executives said.

Whatever benefits may await the merger partners, the deal is sure to be opposed by consumer advocates, who contend that the business of producing oil, refining it into gasoline and selling fuel to the public already is concentrated in the hands of too few companies.

Such a merger certainly would be closely scrutinized by the Federal Trade Commission, which is investigating gasoline pricing in California and the Midwest, and California Atty. Gen. Bill Lockyer, who is conducting his own probe of the state's chronically high gasoline prices.

In the last few years, the FTC has delayed but ultimately allowed the creation of "super-major" oil companies through November's merger of Exxon and Mobil, as well as British Petroleum's 1998 purchase of Amoco Corp. and its April purchase of Atlantic Richfield Co. Exxon Mobil and BP, as the companies now are known, were required to sell significant assets to get their deals approved.

"The headline for the average Joe will be: 'Big Oil Merging Again'--one less company and it will be easier for them to gouge the public," said Phil Flynn, senior energy analyst with Alaron Trading Corp. in Chicago. "But the reason oil companies merge is not to fix prices, it's to stay in business."

Combining Chevron and Texaco would enable the companies to leap a big hurdle they can't scale on their own: Both, while large, have not attained the behemoth status of Exxon Mobil, Royal Dutch/Shell Group and BP. And this is an industry in which companies must commit huge sums to the exploration and development of oil and gas fields every year.

"It was inevitable," said Philip K. Verleger Jr., a Newport Beach-based energy economist and a principal with the Brattle Group consulting firm in Boston.

"Putting Texaco and Chevron together, you almost have a super-major. They're an economy-size super-major."

The Texaco acquisition would bring Chevron cost savings--layoffs, elimination of duplicate facilities--but it also would give it greater heft in Kazakhstan, site of the California firm's massive Tengiz project, because Texaco is there too.

The combination would give the resulting company greater strength in Africa. Texaco has a major new offshore development in Nigeria called the Abgami field; Chevron has new developments in Nigeria and Angola. Texaco also is big in Venezuela and has natural gas interests in the Philippines, while Chevron has big gas properties in Indonesia.

$72 Billion in Revenue Between the Two

If they had operated together in 1999, the two companies would have generated $72.3 billion in revenue and would have produced about 2.7 million barrels of oil and natural gas daily. Their proven reserves would be 11 billion barrels, including the largest concentration of oil reserves in the United States of any oil company.

"We will be a strong and formidable upstream competitor," one Chevron executive said. "This is about making our companies more competitive. When you put the two companies together, we are better able to absorb risk."

What the combination would do to refining and retailing of gasoline in the U.S. is unclear. Texaco is the largest seller of gasoline in the nation through two joint ventures: one in the West with Shell, called Equilon, and another in the East with Shell and Saudi Aramco, called Motiva. Chevron is fifth in the nation but is No. 2 in California, where Equilon ranks fourth in terms of gallons sold.

But the Chevron and Texaco executives said Sunday that they expect the FTC to require them to sell off significant refining and retailing assets, and they already have begun talks with Shell about buying the Texaco piece of the joint ventures. If that happened, market concentration in gasoline and refining would remain the same as before the deal.

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