In a bid to improve air quality in large cities, the European Union moved continuously to tighten fuel specifications, leading many refiners to initiate investment programs in 1999.
The year was also marked by massive mergers and acquisitions among the global petroleum companies, and the EU`s competition legislation required concessions from the prospective partners.
The EU`s tighter fuel specifications were drawn up after extensive consultation between the Brussels bureaucracy, the automotive industry, and the refining and marketing sector. The petroleum industry took the view that being in on the debate would lead to more practicable requirements than what would result if the EU made plans for fuels unaided.
After much political in-fighting between the European Parliament and the European Council, with detours for fighting off extreme measures proposed by environment lobbies in countries without major petroleum industries, an EU "conciliation committee" forged an agreement in the summer of 1998 which enabled refiners to plan their investment requirements.
For Jan. 1, 2000, refiners had to be able to meet the following specifications: for gasoline, benzene 1%, aromatics 42%, olefins 18%, sulfur 150 ppm, and oxygen 2.3%; for diesel, cetane number of 51, density 845 kg/cu m, polyaromatics 11%, and sulfur 330 ppm.
While the EU, automakers, and refiners had not agreed even tighter standards slated for introduction in 2005, some limits had been decided on. Gasoline maximums for aromatics and sulfur would be 35% and 50 ppm, respectively, while the sulfur maximum for diesel would be 50 ppm.
Tighter fuel specs
Refiners had met most of the 2000 specification requirements well in advance of the introduction date, and in 1999 they were largely looking ahead to 2005, when the new diesel sulfur limit was thought to provide refiners with a particular challenge.
Wood Mackenzie Consultants Ltd., Edinburgh, said the EU requirements for "greener" gasoline and diesel fuels would lead to a radical shake-up in regional products markets, although the 2000 requirements would not have a significant detrimental effect.
The analyst saw the 2005 specifications as much stricter and anticipated they would lead to the closure of nine refineries.
Petro Finance SA, Paris, said that 17 refineries were at high risk of closure, and a total of 28 were at risk to some degree.
During the year a number of major refiners slated investment programs. For example, in February French refiners earmarked a total 6.7 billion francs during 1998-2001 to meet the 2000 and 2005 EU specifications.
BP Amoco PLC and Mobil Corp. planned to spend 280 million francs at their joint venture refineries, Elf Aquitaine SA set aside 230 million francs for investment at the Donges refinery, and Total Fina SA and Esso SAF also planned capital programs.
Conoco (UK) Ltd., unveiled a plan to spend £700 million ($1.16 billion) over 10 years at its Humber refinery in the UK, to gear it up for producing ultra-low sulfur gasoline and diesel in line with the 2005 specifications.
The investment program was to include £90 million ($150 million) on units to produce clean fuels and £250 million ($415 million) on a combined heat and power plant to meet the refinery`s demands for electric power and steam.
At the same time Repsol-YPF SA announced a plan to invest 28 billion pesetas ($170 million) to build a hydrocracker at its Tarragona refinery in Spain. The unit was slated to begin operation in the first half of 2002.
Repsol-YPF said the hydrocracker would have the capacity to produce 900,000 cu m/year of automotive gas-oil, lubricating oil, and petrochemical naphtha from a throughput of 1.4 million tonnes/year of heavy oil.
The company spent 35 billion pesetas ($215 million) during 1997-99 to meet the new specifications for 2000 but set aside a further 100 billion pesetas ($610 million) to meet the much harsher 2005 specifications.
Earlier, Ireland`s Irish Refining Co. let a $94 million contract to Foster Wheeler Corp., Clinton, NJ, for engineering, procurement, and construction management of upgrades to meet the 2005 EU specification changes.
The plant at Whitegate, Country Cork, had crude distillation throughput capacity of 66,500 bo/d, which was about 40% of the country`s petroleum products requirement. The remainder was imported from the UK.
The upgrade was slated for completion by early 2000 and was to include the construction of a gasoline hydrotreater and isomerization unit along with modifications to the existing plant.
In July Petroleos de Portugal SA (Petrogal) announced a plan to invest $800 million at its Sines refinery to meet tighter EU fuel specifications and to improve the existing refining process.
Sines, south of Lisbon, was the largest of Portugal`s two refineries, with crude distillation capacity of 213,000 b/d. The state firm also operated a second refinery near Oporto, which had throughput capacity of 91,300 bo/d.
Petrogal said that the investment would cover the revamping of some units and the construction of some new ones, with construction work slated for 2000-2003.
The Institut Français du Pétrole, Paris, was contracted for design work to increase the capacity of an existing hydrodesulfurization unit to 37,000 b/d, and UOP LLC, Des Plaines, Ill., was contracted for design work for upgrading a second hydrodesulfurization unit to 35,000 b/d capacity.
Other planned work included a new 26,000 b/d capacity fluid catalytic cracker unit, a new 17,000 b/d hydrodesulfurization unit for a 70°-plus cut, a new 30,000 b/d hydrocracker, and a hydrogen plant and ancillary units, for which required capacities were still under evaluation.
Merger approvals
During 1999 the petroleum industry was rocked by a number of megadeals as major players chased mergers or takeovers in pursuit of economies of scale.
The EU`s competition laws were a significant issue in takeover of Elf Aquitaine by TotalFina, the merger of Exxon Corp. with Mobil, and the takeover of Atlantic Richfield Co. by BP Amoco.
On July 5 TotalFina surprised Elf with a 42 billion euros ($41.2 billion) takeover bid, in which four TotalFina shares would be exchanged for three Elf shares. Later that month Elf countered with its own bid to take over TotalFina, and a battle to impress shareholders got under way.
Elf Chairman and CEO Phillippe Jaffré promptly declared TotalFina`s bid to be hostile, while TotalFina said its offer represented a premium of 15% over Elf`s closing share price preceding the move .
An Elf official explained that the company was required to file a statement with the Paris bourse authorities on July 22 to say whether or not the company would accept TotalFina`s offer.
"Jaffré has said he is going to fight," said the official. "Elf is taking time to plan its defensive strategy, which Jaffré will present to the board for its vote of approval."
However, petroleum industry analysts published their evaluations of the bid, with most seeing TotalFina`s plan as a sound strategic move. Wood Mackenzie saw benefits for combining the two companies in exploration and production, refining and marketing, and also in chemicals, with Elf`s health-care assets ripe for disposal.
The analyst said TotalFina and Elf have combined reserves of 6.3 billion bbl of oil and 19.1 tcf of gas, while combined production at the end of 1998 was 2.04 million b/d of oil equivalent.
In refining and marketing a merged TotalFina/Elf would be the world`s fourth largest player, behind Exxon Mobil Corp., BP Amoco, and Royal Dutch/Shell.
"The merged company," said Wood Mackenzie, "would have shares in 27 refineries with a combined distillation capacity of 2.485 million b/d. However, the company would be primarily a European refiner and would be the largest refiner in Europe with a distillation capacity of 2.098 million b/d, almost 500,000 b/d ahead of the current number-one player, Exxon."
Rationalization of the merged company`s refining capacity in France would be required, said the analyst, to improve the quality of the portfolio and overcome competition concerns.
In France a combined TotalFina/Elf would have seven refineries with a combined distillation capacity of 1.03 million b/d, plus 6,216 gasoline stations with total sales of 1.23 million b/d.
"There does look to be a good synergistic fit between the two companies within the downstream sector outside France, where a high degree of overlap gives scope for considerable portfolio rationalization," said Wood Mackenzie.
"The potential for cost savings and improved efficiency in refining and marketing is significant and must be one of the main attractions of the deal as far as TotalFina is concerned."
Salomon Smith Barney Inc., London, said TotalFina`s bid to acquire Elf was a bold move which would propel the enlarged company within range of the super league of majors: BP Amoco, RD/Shell, and Exxon Mobil.
"The proposed deal," said Salomon Smith Barney, "would alter the European oil sector more radically than did the BP-Amoco marriage. The merger continues the trend towards `big oil` as a means to compete more effectively for the most attractive upstream returns, to reduce costs, and to extract synergies.
"TotalFina/Elf would be on course to become the fourth supermajor. The focus on the large stocks could further sideline the smaller regional players and the independent UK exploration and production stocks. Asset stripping could throw out interesting opportunities for these players, but this might not be enough to captivate investors` interest."
The analyst reckoned that TotalFina/Elf would not need to dispose of refining assets in France, despite a 48% market share, since Italy`s ENI and Repsol SA of Spain maintained similar shares in their home countries.
"We expect a reduced investment burden to meet the 2005 (European Union transport fuel) specification proposals, which is a benefit that would accrue from 2003.
"In marketing, logistics and overheads savings would be captured in a similar manner to the BP-Mobil joint venture. Overall, TotalFina has identified a potential 500 million euros ($490 million) worth of synergies available in R&M from the merger with Elf."
Despite the logic of the takeover, which TotalFina won after upping its offer for Elf, there were concerns over the French government`s action to ensure that whatever happened to the two companies, the resulting combine would be entirely French.
The European Commission decided to bring legal action against the Paris government through the European Court of Justice. The EU was convinced that the government`s "golden share" interest in Elf, taken to ensure that Elf would not be infiltrated by foreign interest holders, was in conflict with EU law. However, the French government`s strong belief that it would be able to defend its actions in court appeared to win out, the complaints died away, and the deal went through.
Yet in September the EC called for the breaking up the European R&M joint venture between BP Amoco and Mobil as a condition for approval of the Exxon-Mobil merger.
BP Amoco was reported to be keen to buy the Mobil stake. Mobil was thought to have wanted to maintain its relationship with BP, but EC officials feared that the rash of megamergers could kill off competition in member countries.
In October the commission rubber-stamped BP Amoco`s absorption of ARCO, providing the two companies sold off some interests in a number of gas export pipelines in the UK`s southern North Sea.
The EC insisted that the enlarged group sell off ARCO`s share in the Thames, Hewett, and Caister-Murdoch pipelines, along with its stake in the gas processing terminal at Bacton.
BP Amoco Chief Executive John Browne said, "The commission`s approval is a significant further step in our progress towards a successful completion of the combination with ARCO.
"In the past few weeks, shareholders of both companies have given overwhelming support to the proposal. We continue our constructive dialogue with the US authorities and remain confident that we can meet our target of completion of the deal before the end of the year."
The first step towards the dissolution of the BP-Mobil refining and marketing joint venture, required by the European Union as a condition for clearing the merger of Exxon and Mobil, came about in early December as BP Amoco bought Mobil`s share in the business.
BP Amoco announced that, under its agreement with Exxon Mobil, it would buy Mobil`s 30% interest in the European fuels business for $1.5 billion. This would include Mobil`s interest in pipelines servicing the UK`s Gatwick airport. Also the partners would divide the assets of their joint lubricants business in line with their equity stakes: Mobil 51% and BP Amoco 49%.
Browne and Exxon Mobil Chairman and CEO Lee Raymond issued a joint statement: "It took a significant amount of dedication and effort on the parts of BP and Mobil employees to develop and then make this joint venture a success.
"However, in this highly competitive industry BP Amoco and Exxon Mobil have each found new opportunities for the next century. This required us to bring the venture to a mutually beneficial close.
"We will end our relationship in a way that brings fair value to both companies for the assets involved and allows both of us to continue to provide our customers with high quality products and service."
The fuels part of the joint venture was operated by BP Amoco and ran about 8,500 retail stations across Europe, representing about 12% of the market. The lubricants part of the venture, operated by Exxon Mobil, had a market share of just more than 18% in Europe.
Under the agreement BP Amoco would receive all the service stations and other marketing assets, along with the refineries at Grangemouth and Coryton, UK; Lavera, France; Nerefco, The Netherlands; and Castellon, Spain. It would also take on the shareholding in the Turkish Mersin, the French Reichstett, and the German Bayernoil refineries. Exxon Mobil would receive the refinery at Gravenchon, France.
On the lubricants side, Exxon Mobil would receive the Dunkirk refinery in France and the lubricants unit at Gravenchon. BP Amoco would retain the base oil refinery at Neuhof, Germany, and the lubricants unit at Coryton, along with the blending plants at Neuhof, Ghent in Belgium, Gemlik in Turkey, Batsons in the UK, Drapetsona in Greece, and a 45% stake in the Turkish Serviburnu plant. The remaining 10 lubricants blending plants would be part of the Exxon Mobil portfolio.
Meanwhile, in November Royal Dutch/Shell and BASF Aktiengesellschaft disclosed they were negotiating a deal to combine their polyolefins businesses into a 50:50 joint venture with a combined turnover of more than $6 billion/year.
The combine, for which Shell and BASF anticipated a deal could be ready for signature by yearend 1999, would be based in The Netherlands and would be the world`s largest producer of polypropylene and the fourth largest polyethylene maker.
The plan was apparently driven by a need to cut unit costs in the face of overcapacity and low margins in the European petrochemicals sector. The JV would comprise the assets of Shell`s Montell subsidiary, BASF`s Targor joint venture, and the Shell/BASF Elenac combine.
Montell was wholly owned by Shell and had 30 manufacturing plants worldwide, with combined capacity to produce 4 million tonnes/year of polypropylene, 270,000 tonnes/year of polypropylene composite materials, and 220,000 tonnes/year of polyethylene.
Targor was a 50:50 European joint venture of BASF and Germany`s Celanese, with capacity to produce a total 1.4 million tonnes/year of polypropylene. The new plan called for BASF to buy out Celanese`s 50% interest.
Elenac, owned equally by BASF, Deutsche Shell, and Shell Chemie, produced more than 2 million tonnes/year of polyethylene from sites in the UK, Germany, France, and Spain.
Evert Henkes, CEO of Shell Chemicals, said, "The proposed merger would bring together established technical strengths, global reach, and an extensive product portfolio."
Negotiations for the JV were said to be at an advanced stage. The companies anticipated that the EU would not throw up insurmountable hurdles for the merger plan. Shell added that, once the discussions were completed, a more detailed announcement would be made.
E&P initiative
While the prescriptive side of the EU was particularly in evidence during 1999 for petroleum companies, the organization`s many departments carried out a number of small projects to encourage oil and gas innovation.
For example, a study carried out by Smith Rea Energy Associates Ltd., Canterbury, UK, and AEA Technology PLC, Didcot, UK, on behalf of the EU, was said in December by SREA to show the benefits of technology in extending oil and gas reserves.
Announcing the study in Brussels, the partners said that among the key findings about the impact of technological innovation on reserves growth was that the application of innovative technologies was responsible for reserves gains on the Northwest European continental shelf of about 12.4 billion boe over the period 1990-97.
SREA attributed 75% of the gains to innovations in three key areas-drilling, seismic survey techniques, and floating-subsea production, in order of importance-and said that the gains resulted mainly from the "enabling" of new fields.
The analyst said that the gains were accompanied by marked improvements in health, safety, and environmental (HSE) protection; also, EU technology support programs proved to be of particular value to small to medium-sized enterprises by helping them to innovate and export in the face of fierce international competition.
"The potential for future reserves gains," said SREA, "could be as much as an additional 19 billion boe, accompanied by further improvements in HSE protection.
"EU technology support programs have made a significant contribution to both reserves gains-estimated at more than 1.3 billion boe in the period-and HSE improvements and should continue to do so."
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The BP Amoco refinery at the Grangemouth refinery and petrochemicals complex near Edinburgh were returned entirely to BP Amoco ownership when the EU required dissolution of a BP/Mobil European R&M joint venture before it would approve the Exxon-Mobil merger plan. Photo courtesy of BP Amoco.
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Mobil`s Coryton refinery in Southeast UK was transferred to BP Amoco as part of the latter`s $1.5 billion purchase of Mobil`s fuels business as required to meet EU merger requirements. Coryton`s lubricants business remained with the newly formed Exxon Mobil company. Photo courtesy of Mobil.
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The face of Europe`s fuels marketing sector changed dramatically in 1999 as the EU approved merger of Total with Fina and TotalFina took over Elf without any major conditions. However, BP Amoco became the sole owner of the former BP-Mobil JV retail chain as the EU sought to prevent market dominance by the newly formed supergiant Exxon Mobil. Photos courtesy of Total, Fina, and BP Amoco.
