BP Amoco might want to change its name to BP, Etc. now that ithas announced plans to acquire Los Angeles-based Atlantic RichfieldCo. (Arco) in a $26.8 billion deal. The news comes only monthsafter the closing late last year of the marriage of BP and Amoco.

Acquiring Arco would make BP Amoco the biggest non-state ownedoil producer with a combined market capitalization of about $190billion. BP Amoco CEO John Browne said the merger is the outcome ofnegotiations begun in January after Arco management approached thecompany to consider options for closer co-operation.

Onshore in the United States and the Gulf of Mexico, Arco willadd 360,000 Boe to BP Amoco’s daily output – half of it gas,chiefly from Arco’s 82% interest in Vastar, one of the mostprofitable operators in the Lower 48. Arco’s proven gas reservestotal 9.8 Tcf, mainly in the Gulf of Mexico, the UK North Sea andthe South China Sea, but it holds un-booked gas volumes of afurther 15 Tcf, mainly in Indonesia, Thailand, Malaysia and Qatar.In 1998 it produced 2.1 Bcf of gas, mainly from the Gulf of Mexico,the UK North Sea and Indonesia.

In Alaska, Browne said the deal could help unlock the potentialfor large volumes of gas “which are currently uneconomic to developbut could make an enormous contribution to the energy needs of theU.S. in the next century. BP Amoco and Arco are two of the threeowners of North Slope gas. Exxon is the third.

“We have proprietary BP Amoco technology which we believe mayallow us to convert some of that gas into liquids that can betransported through the existing oil pipeline. We have plans tobuild a $70 million pilot plant on the North Slope to test thattechnology and if it is successful, we will consider full-scaledevelopment.”

The addition of Arco strengthens BP Amoco’s gas holdingsdomestically in the San Juan, Arkoma, and Hugoton basins and in theGulf of Mexico, said BP Amoco spokesman John Lloyd. “It’s going togive us a more abundant set of distinctive assets. I’d say that BPAmoco would continue over time to optimize its portfolio, so we’renot going to rule out divestments, but at this time we don’t have areal good understanding of where those might be.”

The merger announcement will mean bad news for about 2,000employees who are expected to lose their jobs, mainly in the Lower48 states. In the months following the completion of the BP Amocomerger, 10,000 employees of the combined company got their walkingpapers. “It’s an asset play. They don’t want any of the people,”said Carol Freedenthal, principal with Houston-based Jofree Corp.”I think they’ll have to sell some things and do some adjustmentsin order to get it to go through [the Federal Trade Commission].”Freedenthal said he doesn’t expect many Arco people to remain withthe combined organization.

“There’s no question that BP wants to be big.”

With this latest deal and the Exxon-Mobil pairing, the ranks ofthe majors are thinning. Freedenthal said he thinks down the roadindustry players will either be very large majors or smallindependents, with the smaller majors and larger independentshaving been gobbled up along the way. Freedenthal noted rumors thatTexaco is going to buy Burlington Resources and that Chevron andTexaco are rumored to be considering a combination of theircompanies.

As for the majors as they stand now, the big three are thecombining Mobil-Exxon, BP Amoco/Arco, and Shell, in that order,according to Freedenthal. “That says that Shell is going to wake upand do something, too. Don’t think they’re out of the game. Whenyou get into that group of society the mentality is mine’s biggerthan yours.”

BP Amoco said the $1 billion in expected synergies – which areon top of $500 million in cost-savings already targeted by Arco -would be achieved from a mix of organizational efficiencies, morefocused exploration, improved business processes including IT, andrationalization of operations. The company said that it expected totake a restructuring charge of $1 billion on the transaction.

Some $710 million of the synergy savings are expected fromexploration and production, including $200 million fromstreamlining Alaskan operations. Some $110 million are targetedfrom refining and marketing and $180 million from corporate costs.

The all-share transaction, approved by the boards of bothcompanies, will involve exchange of 0.82 BP Amoco AmericanDepositary Shares (ADS) for each Arco share. At BP Amoco’s closingprice of $100.44 per ADS on March 26, this valued Arco at $26.8billion, representing a premium of 26%. Based on the closing pricesof the two companies Wednesday the premium was 13%.

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