Texaco, Shell, Aramco May Combine Units

Three of the world’s biggest oil companies--Texaco, Shell and Aramco--said Monday that they are negotiating to merge their U.S. refining and retail operations into an entity that would command nearly a quarter of the huge California gasoline market and about 15% of the nation’s.

If consummated, the combined company would also put about 16% of the state’s tightly constrained refining capacity under one corporate roof--and 13% nationally. Shell and Texaco would continue to use their brand names.

The merger is prompted by long-term shrinking profit margins in refining and at the pump for major oil companies, forcing them to restructure to cut costs, analysts said. Earlier this year, Mobil and British Petroleum joined European refining operations.

Despite federal regulators’ traditional scrutiny of the oil industry dating to the Standard Oil breakup in the early 1900s, antitrust experts saw little likelihood Monday that the government would intervene to block the deal.

The resulting national market shares of gasoline retailing and refining are well under the combined market share of 30% or higher in any industry that sets off alarms at the Federal Trade Commission and the Justice Department, said Garret Rasmussen, formerly an FTC attorney and now in private practice in Washington.

However, there could be regional over-concentration. According to the industry-tracking Lundberg Survey, the California market share of 23% that would be created by combining Shell and Texaco is the highest of any state except for a 31% share in Delaware, 27% in Rhode Island and 24% in Oregon.

Pump prices and consumer convenience could also be affected. Observers expect massive closures of Texaco and Shell stations in areas where same-brand service stations are located nearby. And high numbers of marketing and administrative personnel could be laid off to cut costs.

“U.S refining is a very poor business characterized by high costs, low returns and heavy environmental liabilities, and it doesn’t surprise me that in a highly competitive commodity market they do everything they can to reduce costs,” said Wertheim Schroder oil analyst Michael Mayer in Burlingame.

Competing oil companies, including Chevron and Atlantic Richfield, declined to comment on the merger negotiations.

Wall Street liked the plan. Texaco shares rose 87.5 cents to a record $96.50 and Royal Dutch shares gained $1.75 to a record $161.625. Both trade on the New York Stock Exchange.

In California, Shell operates 1,239 stations and Texaco has 696. Combined, they would have more stations--but not necessarily more volume--than either Chevron or Arco, the current leading retailers. Nationwide, Texaco operates about 14,000 gas stations, including those partly owned by Star, and Shell has 8,767. Combined, the partners would sell gas in 48 of the 50 states.

Aramco, or Arabian American Oil Co., once a joint venture of the Saudi government and U.S. oil giants Exxon, Mobil, Chevron and Texaco, operates Saudi Arabia’s oil fields. It is now 100%-owned by the Saudis.

Aramco is already a partner with Texaco in Star Enterprise, which refines and sells all Texaco brand gas east of the Mississippi.

The partners will spend “the next few months” hammering out a deal, Texaco said in a prepared statement. A Texaco spokesman said it was too early to say whether Shell credit cards would be good at Texaco and vice versa.

Combined, the two companies’ refining capacity in California would amount to about 293,000 barrels of petroleum products a day, which would move it to second place, ahead of Arco, and behind leader Chevron’s 490,000 barrels, said Purvin & Gertz, a Long Beach consulting firm. Statewide refining capacity is about 1.8 million barrels a day, of which about 60% is dedicated to gasoline.

The merger parties could be forced to sell groups of stations or refineries in specific markets where market power exceeds 30%, said Minneapolis antitrust attorney K. Craig Wildfang, formerly a Justice Department litigator. “It really depends on the terms of the merger.”

Big oil company mergers in the early 1980s--Chevron’s acquisition of Gulf, DuPont’s of Conoco and USX’s purchase of Marathon, to name three of the largest--generally met little regulatory resistance, said attorney Charles F. Rule in Washington.

“With the exception of a refinery that had to be sold here and a group of filling stations there, the deals were allowed to go forward,” he said.

Mayer cautioned that shutting gas stations, a presumed motive of the merger, is almost as costly as building them because of environmental cleanup costs.