For Lord John Browne, the former chief of oil major BP, it feels like time has been rolled back 20 years and he is busy doing mega-mergers again.
Browne, who led BP’s transformational acquisitions of Arco and Amoco in the 1990s, has helped with the merger of DEA, a vehicle of Russian billionaire Mikhail Fridman, and Wintershall, the oil and gas unit of chemical giant BASF.
The new firm Wintershall-DEA is still significantly smaller than BP, which in its glory days was producing 4 million barrels per day, or more than five percent of global output, but the deal is still significant.
It will become the biggest independent oil and gas firm in Europe and the first German champion in the sector, with output of around 600,000 barrels of oil and gas equivalent per day and estimated annual earnings of more than 2 billion euros.
Browne told Reuters he saw a need for consolidation in the sector as demand for oil was expected to come under threat by the early 2030s, as the world shifts away from fossil fuel to reduce carbon emissions and fight global warming.
“We were thinking about the future of DEA strategically with oil and gas prices wallowing around and demand which is flat at best over the long term,” said Browne, who bought Amoco and Arco in the 1990s just as oil prices fell below $10 per barrel.
“This is an industry that benefits from economies of scale, as it has in the past, and therefore consolidation. We have concluded that DEA should be part of that consolidation process,” said Browne, who is the executive chairman of LetterOne Energy, which owns DEA.
“Most small oil companies go nowhere in the oil and gas business in today’s environment so you do need scale. If you want to buy that scale it would cost you unimaginable amounts of money,” said Browne.
DEA ALSO FACING CHALLENGES
Fridman and his partners in the LetterOne investment vehicle made billions by selling their Russian oil empire in 2013 but have since struggled to expand due to sanctions imposed on Moscow, though they are not under sanctions themselves.
They bought DEA in 2014 and subsequently appointed Browne, one of the biggest names in the oil industry, to run it. However DEA struggled to buy assets in the UK North Sea and in Texas due to the sanctions on Russia, imposed over the Ukraine crisis.
“The character of Wintershall-DEA is now global, and that is very important,” said Browne when asked whether the merger of DEA was partly driven by a deadlock in its expansion.
BASF will control 67 percent of the new firm while Fridman’s LetterOne will own the remaining 33 percent, making it a largely German-owned company.
BASF could increase its stake at a later stage by folding into it its pipeline business, which was left outside the initial merger. Fridman still has a lot of cash to invest and could help drive the new firm’s expansion into new regions.
“This merger will create a German and European energy champion which can compete with those in France, Italy and Spain,” Browne said. “The company will be able… to compete more successfully against the major groups.”
Winterhall is heavily exposed to Russia, which represents 51 percent of total reserves of the combined firm. The company will extract 42 percent of its output in Russia, 39 percent from Europe, 7 percent from Africa and the Middle East, and 12 percent from Latin America.
Browne declined to discuss his own role in the new company. Sources close to the deal said he would lead the merger process for LetterOne, which will take at least a year.
The new firm will have headquarters in the German cities Hamburg and Kassel, consider a share float after completing the merger and be run by a chief from Winterhall and deputy chief from LetterOne.
“We have agreed the principles of joint leadership, joint governance, and joint headquarters. Through the merger we retain significant interest in the business and control and veto power,” Browne said.