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Critics Line Up Against Chevron-Texaco Merger

Energy: Consolidation in industry has yet to boost oil explorations, making many wary of latest deal.


As Chevron and Texaco formally announced their $35-billion merger Monday and promised it would benefit consumers, the deal ran into a storm of criticism that it would drive up oil and gasoline prices and further concentrate power in the global oil industry.

Indeed, the deal, which would create the world's fourth-largest publicly traded oil company but cost at least 4,000 jobs, drew a rebuke Monday from consumer groups and suspicion from politicians. Antitrust experts predicted that the companies would be required to sell some refineries and gasoline stations, particularly on the West Coast, to win approval from the Federal Trade Commission.

In addition, Chevron and Texaco may be hobbled by their relatively late entry into the oil industry's race to consolidate, which in the last three years has seen Texaco and Shell bring their refining and marketing operations together, Exxon and Mobil merge to create the world's biggest oil company and British Petroleum buy first Amoco Corp. and then Atlantic Richfield Co., making it No. 3 in the "super major" trio of Exxon Mobil Corp., Royal Dutch/Shell and BP.

Those mergers have yet to produce the anticipated increased spending in exploration and production for oil and natural gas, and each combination has further concentrated the industry and pushed the FTC to take a harder look at each successive matchup.

Past oil industry mergers were approved with the idea that exploration and production would increase because the bigger firms would have better access to capital. But such worldwide spending actually decreased 5% in 1999 despite rising oil prices and energy company profits, said Jim Petrie, a partner with the Arthur Andersen consulting firm in Houston. Part of that reflects a typical time lag, he said.

"You don't turn the capital expenditure faucet as quickly as oil prices go up," Petrie said.

A Closer Look

Nonetheless, given the now well- established track record of Big Oil mergers, Chevron and Texaco can expect to face even more scrutiny than did their predecessors in the bigger-is-better derby.

"Any time you see an industry that's rapidly consolidating, the antitrust regulators tend to get a little more cautious," said William J. Baer, who was director of the FTC's Bureau of Competition until last fall and now is with the Washington law firm Arnold & Porter. "On the other hand, the last guy in has the argument that 'I need to get in, too, or I won't be able to get to the size of my competitors.' "

Chevron Corp. Chief Executive David J. O'Reilly, who would run the merged company, and Texaco Inc. Chief Executive Peter I. Bijur, who would become a vice chairman, hailed their long-rumored merger as good for consumers because the two companies together would be able to more efficiently search for low-cost energy around the globe. The companies pledged to work with regulators and have begun talks to sell some of the controversial refining and market assets in the West.

"We are the company for the 21st century," Bijur said of the proposed combination, which would be called ChevronTexaco Corp. and be based in San Francisco, home of Chevron. The stock deal--which trades 0.77 of a Chevron share for each outstanding Texaco share--would leave Chevron shareholders with 61% ownership of the new company and Chevron would get nine seats on the 15-member board of directors.

In trading Monday, Chevron shares lost $2.25 to close at $82 on the New York Stock Exchange, and Texaco rose $3.88 to $59, also on the NYSE.

The two companies expect to achieve at least $1.2 billion in annual savings within six to nine months of closing the deal, partly by eliminating overlapping operations around the world and by cutting 4,000 of 57,000 jobs. The executives said they have not yet identified where the cuts would be.

Consumer groups were quick to criticize the proposed merger, saying it raises the likelihood of higher gasoline and natural-gas prices.

"We're not pleased to see it," said Wenonah Hauter, director of energy and environment for the watchdog group Public Citizen. "We think this doesn't bode well for consumers, because we'll have fewer competitors. And in the long run, there's the additional problem of the increased political power of these larger, wealthier companies."

Reggie James, Southwest regional director of Consumers Union, said: "We want the FTC to really, really scrutinize this merger. We're getting increasingly concentrated [in the oil industry], and the concern, with gas prices already going up, is that we're going to have a much greater chance that a fewer number of people could curtail production, with immediate consequences for consumers."

Political Hot Potato

High crude oil and gasoline prices have been a hot political issue, and the proposed deal will be eyed with caution by politicians.

California Atty. Gen. Bill Lockyer, whose office is investigating gasoline pricing in the state, will closely examine the combination, spokeswoman Sandra Michioku said.

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