Chevron Corp’s proposed agreement to acquire Texaco Inc. for$35.7 billion in stock would, if given the go-ahead by federalregulators, put the merged company into the “Super Major” League ofproducers worldwide and domestically. It would create the thirdlargest natural gas and oil producer in the United States.

A combined ChevronTexaco would have total domestic production of1.1 million barrels of oil equivalent (BOE) per day, lagging behindBP Amoco Plc and ExxonMobil. It also would hold the third largestreserve position in the nation at 4.2 billion BOE. Globally, themerged company would produce 2.7 million BOE daily, and would ownreserves of 11.2 billion BOE.

The combined company would have the “No. 1 position in thedeep-water Gulf of Mexico.” and an “excellent position” in thePermian Basin, San Joacquin Valley and Canada in the “near term aswell as long term,” said Chevron Chairman David O’Reilly, who wouldbe chairman of ChevronTexaco.

In Canada specifically, the merger partners have “greatexploration positions” in the Northwest Territories and in theMacKenzie Delta, and have existing and future prospects forexploration and production of natural gas in offshore easternCanada, he noted during a teleconference with energy reportersMonday. “So all in all, this is a very powerful combination inNorth America.”

In addition to the U.S. and Canada, the proposed combinationwould create “complementary growth opportunities” in the upstreamthroughout the world; an integrated and worldwide refining andmarketing business; a global chemicals business; significant growthplatforms in natural gas and power, according to SanFrancisco-based Chevron and Texaco of White Plains, NY. The boardsof directors of both companies approved the transaction Sunday.

While the average energy consumer may view the proposed mergeras further shrinkage of the oil and gas industry, O’Reilly believesthe deal will be good for them. The “combination is going toimprove energy supply to the U.S. consumers because we’ll havestronger positions, we’ll be better able to invest in growth.”

He vowed the two producers would continue to grow their oil andgas production while they are trying to integrate their twooperations, which he estimates will take six to nine months tocomplete after the transaction is closed. “I don’t anticipatethings [upstream growth] coming to a stop. In fact, we’re confident[that] because of our historical relationship we have an [merger]execution advantage.”

Worldwide, Chevron and Texaco produce a total of about 4.5 Tcf/dof natural gas, and about two million barrels of gas liquids. Lastyear, the two companies had combined natural gas sales of 8.88Tcf/d. The global oil production of the two companies was notbroken out separately.

The announcement of the Chevron and Texaco deal comes more thana year after merger talks between the two companies fell apart overprice. “We didn’t have a deal a year ago. The circumstances, thetiming, the situation then simply was not right to make a deal,”said Texaco Chairman Peter Bijur, who will be vice chairman of thenew company.

Turning to the companies’ marketing operations, O’Reilly wassomewhat evasive when asked how Dynegy Inc., a Houston-based gasand power marketer in which Chevron has a 26% interest, and TexacoNatural Gas, an international gas and power operation, would beconsolidated.

“We’re very satisfied with Dynegy’s performance; Texaco has hadexcellent position. It gives us some options for the future. Wehave to look at what those potential growth opportunities will be.That’s something we’ll evaluate during the merger integrationprocess,” he said.

When asked which operations might be divested, O’Reilly pointedto the companies’ refining and marketing operations. “We arecertainly aware that there is a concentration issue in the UnitedStates downstream, and we anticipate the FTC will require us to dosomething about it,” O’Reilly said. The companies plan to submit afiling to the Federal Trade Commission “right away,” he noted,adding that he was “confident that this issue [would] be resolved.”

Under the merger agreement, Texaco shareholders will receiveapproximately $64.87 for each Texaco share they own based onChevron’s closing stock price of $84.25 last Friday (Oct. 13),which is an 18% premium over Texaco’s closing stock price on thatsame day. Chevron shareholders would hold approximately 61% of thecombined equity of the new company, while Texaco stockholders wouldown about 39%. The enterprise value of a combined ChevronTexacowould be more than $100 billion.

As part of the merger, O’Reilly estimated that about 4,000 jobswould be cut. But he said it was too early to determine whatportion of the job cuts would be in the merged company’s U.S.operations.

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