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BP Amoco buys ARCO Four decades of North Slope competition, partnership end in buyout as BP Amoco makes offer for Atlantic Richfield Kristen Nelson PNA News Editor
Reports of acquisition talks between BP Amoco p.l.c. and Atlantic Richfield Co. were confirmed April 1 when BP Amoco said it was buying ARCO in an all-paper transaction valued at $26.8 billion.
In Anchorage, Richard Olver, managing director and executive vice president of BP Amoco, called it the “first day of a new future for Alaska. Two great Alaskan companies have signaled their desire to join into one more competitive Alaskan company — a company that’s fit for the 21st century. We both believe,” he said, “that this will be good for Alaska, good for its communities and good for the longterm welfare of our industry in Alaska.”
Olver and Ken Thompson, executive vice president of ARCO, said talks which culminated in the buyout were initiated by ARCO. Thompson said the buyout would allow development of opportunities which ARCO has identified worldwide, but which the company didn’t have the cash to develop at low oil prices. Cost reduction the goal Olver said that BP Amoco estimates it can save $200 million a year in Alaska by combining BP and ARCO’s operations and eliminating an estimated 400 jobs in the state, most of those in Anchorage. Overall savings are estimated at $1 billion a year, with 2,000 positions eliminated worldwide. Thompson said that most of the worldwide job losses are expected to occur at ARCO’s Los Angeles headquarters and at its Plano, Texas, research and technology facility.
Olver said BP Amoco did not expect to make many personnel cuts on the North Slope, but rather in the companies’ Anchorage headquarters offices. In addition to personnel, he said duplication exists in areas such as exploration, information technology and procurement.
Single operator at Prudhoe Bay discussed Richard Campbell, president of BP Exploration (Alaska) Inc., said a single operator at Prudhoe Bay was probably inevitable. It is, he said, “part of the process as an oil province matures..” It “…would have happened. It happened in this way.”
Kevin Meyers, president of ARCO Alaska Inc., said the companies had been moving toward a single operator at Prudhoe Bay “as production declined. We had moved toward that… we had shared services and we do a lot of things jointly now and eventually it would have come… Even without oil prices it would have gotten there because as production dropped it would have eventually reached the point where it made sense to totally merge the operations at Prudhoe Bay.
“And we’ve had discussions off and on about (a single operatorship) over the last couple years — as recently as a few months ago,” Meyers said. “So, one might view this as the ultimate extension of single operatorship at Prudhoe Bay.”
Regulatory approval required Regulatory approval is expected to take six to nine months and until then, both Olver and Thompson said, the companies will continue to be competitors, with Campbell as president of BP Exploration (Alaska) and Meyers as president of ARCO Alaska. Olver said that discussions would certainly be held with the Federal Trade Commission. The governor of Alaska has named a cabinet-level team to look at the merger and Olver said BP Amoco expected to be involved in discussions with that group also.
The trans-Alaska pipeline, in which the combined company will be the dominant owner, is regulated by the Federal Energy Regulatory Commission and by the Alaska Public Utilities Commission. BP has a 50.01 percent interest in the pipeline and ARCO a 22.29 percent interest. Exxon (20.34 percent plus 3.08 percent from Mobil) is the other major owner.
Thompson said that “prior to regulatory approval of this combination, ARCO will operate as an independent company. We will continue to pursue our plans for production goals in Alaska, including no decline after ’99 for our current assets. Capital spending will not be reduced and Alpine will stay on tract. And we will continue to explore for new fields. We will participate in state and federal lease sales.”
Thompson said a clause in the merger agreement addresses the upcoming lease sale in the National Petroleum Reserve-Alaska, specifying that the companies “will not talk to each other, we will not share the information and that if each company chooses to bid then each company bids. So we were very careful on NPR-A — we will remain in competition.”
Campbell said that until regulatory approval is received for the merger, things continue as they are in Alaska. “We go on as we are. I mean obviously, we can get together, we can talk, we can plan things. We just can’t implement things.”
Rich opportunities, reduced cash flow Thompson said that while the bias of ARCO’s management was to remain independent, the company owed it to its stockholders to explore its options, and the best option was a merger.
“Worldwide,” he said, “ARCO is an opportunity rich company. But because of low oil prices and reduced cash flow to our company, we no longer had the cash to pursue all of those opportunities that we have on hand today.”
“ARCO, as you know, has been a major player in Alaska for 45 years,” Thompson said. “Our business here is in excellent shape. We’ve had exploration success. We are developing new fields. We are on track to achieve our North Slope production goal of no decline after ’99.” But, he said, by approaching BP Amoco and proposing an acquisition, ARCO created “more value for our shareholders by lowering costs and creating new opportunities for growth on the North Slope, but importantly also, around the world.
“In Alaska,” Thompson said, “we believe the result will be more capital spending, greater ultimate recovery, higher production, improved earnings and more state revenue.” While record low oil prices have improved in recent weeks, Thompson said, they remain low “and if they cycle up we expect they will cycle back down.” And, he said, ARCO’s management could not ignore recent major consolidations in the industry, the mergers of BP and Amoco and of Exxon and Mobil. “And consolidation in our industry, like many other mature commodity industries, will continue,” he said.
Why ARCO approached BP Thompson said that ARCO looked at a range of companies before approaching BP Amoco and selected that company for a number of reasons, several related to Alaska. “First, our operations are an exceptionally good fit with their operations. We believe the company that emerges from this combination will be the preeminent player in the clean energy industry…. On the flip side of that, BP Amoco will fill a significant gap in their refining and marketing asset base and round out their international E&P portfolio. And in Alaska, the combination will create both economies of scale and efficient alignments, giving Alaska a crucial edge in an increasingly competitive worldwide market.”
Second, Thompson said, “we know BP Amoco very well. We’ve been partners and competitors since the discovery of Prudhoe Bay more than 30 years ago.” The companies share, he said, a commitment “to the development and marketing of our cleaner burning fuels, to oil and gas development in Alaska, to operating in an environmentally responsible way and both our companies are very good corporate citizens.” Respect and fairness for employees And, Thompson said, “BP Amoco has made a commitment to treat our employees with respect and with fairness. All ARCO employees will have the opportunity to compete for positions in a combined company worldwide. Staffing decisions will be made on the basis of merit. Departing employees will receive generous severance and enhanced retirement benefits.”
Thompson said that job losses will occur as the companies consolidate. The reductions, he said, “are necessary and most would have occurred as declining Prudhoe Bay production moved us towards eventual establishment of a single operator at Prudhoe Bay.”
Continuity a factor Olver said that in addition to trying to select the best person for jobs where duplication now exists — looking at experience and merit — continuity will also be important. “Clearly,” he said, “we can’t put all BP Amoco people into Kuparuk or all ARCO people into Milne Point.”
ARCO has about 1,500 people in Alaska, BP Amoco about 750. ARCO and BP each operate half of the Prudhoe Bay field. BP Amoco operates the Badami field on the east side of the slope and the Endicott field east of Prudhoe Bay. To the west, BP Amoco operates the Milne Point field and ARCO operates Kuparuk and is developing Alpine adjacent to NPR-A.
What BP Amoco envisions for Alaska Olver said that BP Amoco has already done a lot of restructuring in the state in order to improve efficiency and make Alaska operations more competitive worldwide.
“But this deal,” Olver said, “will allow another quantum leap towards making Alaska opportunities competitive on a global scale.” If its assets in Alaska perform as expected, he said, the combined companies “will be able to spend $5 billion over the next five years on new attractive capital investment opportunities” in Alaska. That is, he said, more than both companies spent combined over the past five years. While no company can spend more than it earns, Olver said, “the new company will be more robust to low oil prices and therefore investment levels should be higher, even in difficult times.” Over the past five years the combined capital investment of BP and ARCO in Alaska has averaged $900 million a year, BP Exploration (Alaska) spokeswoman Carla Beam told PNA.
Projections by the state of Alaska for production by operator for 1998 — the latest available — show ARCO with 32 percent of statewide production and BP Amoco with 42 percent, giving the two companies a combined total of 74 percent. Exxon and Mobil have 23 percent of statewide production.
Olver said that BP Amoco worldwide — including ARCO — will have about 4 million barrels a day of production, of which 700,000 barrels will be from Alaska.
No tax changes to be requested BP Amoco has said in the last few months that the regressive nature of Alaska’s tax system made the state less attractive for investment because the taxes hit more heavily at the early stages of investment. Olver said that BP Amoco supports Gov. Tony Knowles’ recommendations on a balanced budget.
“We will not,” he said, “be asking for any change in the fiscal system for the oil industry. Indeed, I believe that stability will be necessary to attract consistency of capital investment.”
Olver said that once the merger is complete BP Amoco will exceed the state’s limitation for onshore exploration acreage by about 360,000 acres. “And we are fully prepared to release this acreage back to the state. We will also be an active participant in future lease sales including NPR-A,” he said.
Olver said that BP Amoco would stand by ARCO’s commitments to contractors and suppliers, including ARCO’s order for three new tankers for the Alaska trade. While BP cannot own ships which trade between U.S. ports, it is in the process of establishing an Alaskan Tanker Co. which will bring all of its leased Alaska trade tankers under a single set of operating standards.
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