M&A wave will hit Asian oil industry

M&A wave will hit Asian oil industry

SINGAPORE (Reuters): A wave of mergers and acquisitions (M&A) will hit the Asian oil industry as profits shrink due to contracting oil demand in the next few years, a U.S. business consultant said on Tuesday.

"I can tell you a number of companies are now running numbers on (different) combinations," Michael Balladon, vice president at A.T. Kearney for Asia oil and gas business told Reuters.

"Everyone has these numbers, it now comes down to the art of the deal."

A.T. Kearney is a Chicago-based consultancy, which advises around 30 multi-million dollar corporations based in Southeast Asia and earned gross fees of $1.1 billion in 1997 for its worldwide consulting.

Balladon cited that the Occidental Petroleum Corp oil and gas asset swap with Royal Dutch Shell Group announced last week was the continuation of a M&A wave.

The process, he said, had begun with smaller deals last year, with British Petroleum selling out its Thai retail chain to Caltex and the Shell/Caltex management tie-up of their joint venture refineries in Thailand.

"What we see is the strong buying over the weak," Balladon said.

Layering in relatively weak assets of someone else, will allow the winner to get even stronger as others pull out of the market, he said.

"The majors will become super-majors in Asia," he predicted. The drive behind the M&A wave will be shrinking profits as many companies were very poorly managed and over-invested in the boom- time, Balladon said.

Asian oil demand, which was forecast to grow at four to six percent annually before the currency crisis, is now expected to remain flat for the next few years.

Balladon said that Japan, Asia's biggest oil market, will see the most severe restructuring and buy-outs.

At least 20-percent of its 5.3 million barrels-per-day (bpd) refining capacity needs to be shutdown, he said, as investors will not rush in until they see actual value in Asian oil asset.

"Quality is the name of the game. I do not see a stampede" to buy, Balladon said.

"The fire sale assets" like that of the retail network in Thailand and South Korean refineries may also remain unsold and go bankrupt, he said.

For buyers in Asia, there are sticky issues like hidden liabilities and the difficulty of buying just the valuable assets from an integrated oil company.

South Korea's Hanwha Energy sold its power generation business in late May but was still openly seeking bids for it's Inchon based 275,000-bpd refinery.

Following the wave of asset consolidation, oil company's management styles will also undergo radical changes, he said.

In the past, national price regulation regimes, have encouraged many oil companies to have a country by country management style, he said.

"But sometimes, you can move products around the region faster than you can from one end of the same country to another. That has been a largely untapped benefit."

Asian crisis had already prompted Caltex, a Chevron/Texaco joint venture to announce in June re-organization along business lines from its current geographic focus, he cited.

"As region is maturing and liberalizing, there is a lot less value in working the regulatory side of the equation and there is a lot more efficiency in management across the region," Balladon said.