Subject: AFR: $US35 billion deal to reshape Timor Sea

Australian Financial Review November 20, 2001

$67bn deal to reshape Timor Sea

Ian Howarth

Phillips Petroleum and Conoco Inc of the US plan to create the world's fifth-largest oil refiner through a $US35 billion ($67 billion) merger that could alter the precarious balance between the major partners in the Timor Sea gas province. Phillips is a major player in the Timor Sea and is at odds with the Royal Dutch/Shell group over how to develop the vast offshore gas reserves near East Timor, including the $4 billion Sunrise and $1.5 billion Bayu-Undan projects. The Conoco and Phillips merger continues the dramatic consolidation of the global oil industry.

In 1999, Exxon and Mobil completed a $US81 billion marriage and last year Chevron and Texaco Corp created a new company with annual revenue of $US117 billion. The other giant of the industry is BP, which has merged with Amoco and Atlantic Richfield Co (Arco) in the past two years to create a company comparable with ExxonMobil.

The latest merger will elevate the new group to the third-largest oil company in the US and the world's sixth-biggest energy group, and comes as the global price for oil is at its lowest level since June 1999, with the world's major producers showing no signs of curtailing output.

The enlarged ConocoPhillips will have access to much larger markets in the US and globally, and might find it easier to attract alternative buyers for Timor Sea-based liquefied natural gas rather than rely on the offer by Shell.

Shell wants to acquire all the LNG produced from Timor Sea for sale to its own customers, a proposal strongly opposed by Woodside Petroleum, the joint-venture operator of the Sunrise project.

The other partners are Phillips Petroleum and Osaka Gas, with Phillips preferring a $6.8 billion onshore plant in Darwin as opposed to Shell's floating platform in the Timor Sea.

Phillips has already signed a deal with El Paso Energy of the United States to supply Timor Sea LNG to a terminal on the west coast of the US, although that deal could collapse through delays in developing the Timor Sea fields.

Phillips Petroleum chief executive Mr Jim Mulva, who will head the new company, said in a statement yesterday: "We're doing this so we can compete with the biggest [oil] companies."

"For Conoco and Phillips, joining forces is the ideal way to be competitive in the reshaped energy industry," he said.

The two companies have estimated the deal could save $US750 million ($1.4 billion) a year by streamlining operations and eliminating duplicate corporate jobs.

The new ConocoPhillips, will be based in Houston, Texas, but will maintain a presence in Phillips' home of Bartlesville, Oklahoma, although Phillips CEO, Mr Jim Mulva, will head the merged group.

ConocoPhillips will operate 2.6 million barrels a day of refining capacity globally and have operations in 40 countries.

West Texas Intermediate, the global crude oil marker, yesterday closed at $US18.30 a barrel, after dropping to $US17.70 at the weekend as OPEC opted late last week for minimal production cuts, which could have kept crude prices higher.

But opposition from Russia, the world's second-largest producer, to production cuts has forced prices lower as global economic activity weakens, reducing demand for oil.

The crude oil price outlook is weak after OPEC producers said last week they would only cut production by 1.5 million barrels a day if non-OPEC members agreed to reduce output by 500,000 barrels a day.

Both Oman and Mexico, which remain outside the OPEC cartel, have agreed to some production cuts, but Russia has only agreed to a paltry 30,000 barrel-a-day reduction, fuelling expectations that global oil prices will weaken substantially over the next few months.

Russian Finance Minister Mr Alexei Kudrin said Russia might consider a larger cut, but said that any additional reduction would not be profound.

The prospect of weaker crude oil prices forced a substantial sell-off of local petroleum stocks late last week, although most Australian petroleum shares rose yesterday, led by Woodside, which was up 25¢ to $13.13 and Santos, which climbed 18¢ to $6.03.

Woodside shares were higher despite problems within its Timor Sea joint venture with Phillips, Shell and Osaka Gas, which will cause at least a year's delay in development of the rich Sunrise field gas projects that lie close to East Timor.

Yesterday, oil analysts said tensions within the joint venture were unfortunate but not likely to seriously disrupt the eventual development of a major gas and associated liquids project based on the rich petroleum resources of the Timor Sea region.

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