Saudis Will Get a Stake in U.S. in Texaco Deal

Saudi Arabia will get a major stake in U.S. refineries and gas stations under an $800-million joint venture agreement reached Thursday with Texaco.

Under the agreement, Saudi Arabia would apparently become the first member of OPEC to own both refining and distribution assets in the United States, although several other nations have more modest investments. The deal also represents a major step for Saudi Arabia toward its goal of setting up a refinery network in the United States and Europe.

3 Refineries Included

Assets of the 50-50 joint venture will include three refineries, 1,450 owned and leased gas stations and a distribution network consisting of more than 10,000 independently owned Texaco-brand stations, Texaco said. The venture, according to the letter of intent, will operate in a 23-state region in the southern and eastern United States.

For its 50% share, the Saudi government, through a subsidiary of the Arabian American Oil Co. (Aramco), pledged to put up $800 million, plus 75% of the initial inventory of 30 million barrels of crude oil and oil products. Together, the oil and cash would bring the value of the deal to Texaco to about $1.2 billion, estimates Tom Tracy, analyst with the industry consulting firm of John S. Herold, based in Greenwich, Conn.

The $1.2-billion figure is in the price range discussed in earlier reports on the negotiations last winter.

In a statement, Texaco said it “expects to achieve approximately $2 billion in cash benefits and savings from the formation of the joint venture, based on current oil prices.” The company did not provide any breakdown of the $2-billion figure or say over what period those savings would accrue.

Analysts noted the timing of the announcement, on the eve of a meeting in Tulsa at which the final ballots will be cast in the proxy contest between company management and investor Carl C. Icahn. Icahn, the company’s largest shareholder with a 14.8% stake, is running with four allies for the seats on the company board and is pressuring the company to let stockholders vote on his offer to buy the remainder of Texaco.

Analysts suggested that the announcement’s timing and the $2-billion figure may have been aimed at Texaco shareholders.

Texaco management has said it intends to raise $5 billion though asset sales that are, in turn, aimed at boosting the company’s share price above Icahn’s $60-a-share offer. Texaco announced earlier this month that it would sell its West German subsidiary, Deutsche Texaco, for $1.23 billion; it is negotiating to sell reserves of 60 million barrels of oil and natural gas, which the company has estimated will raise another $300 million to $400 million.

Key Restructuring Factor

In a statement, Texaco Chief Executive James W. Kinnear said the deal “represents another major accomplishment in the asset sale portion of our restructuring plan.” The three refineries involved in the joint venture are located in Delaware City, Del.; Convent, La., and Port Arthur, Tex.

Saudi Arabia had reportedly been hesitant to sign the deal, wondering whether Icahn would succeed in his effort to take control of the company. But analysts noted that because the deal is still preliminary, Aramco could presumably still back out if current management loses the takeover fight and Aramco had a change of heart about the joint venture.

Saudi Arabian Oil Minister Hisham Nazer said in Riyadh that the preliminary agreement is “an important step in the kingdom’s continuing program of cultivating oil industry marketing.”

Follows Venezuela’s Lead

With the agreement, the Saudis become the second member of the Organization of Petroleum Exporting Countries with an interest in a U.S. refinery. Venezuela, in a venture with Southland Corp., already owns 50% stakes in refineries in Lake Charles, La., and Corpus Christi, Tex. In addition, Kuwait owns Santa Fe International, a drilling and exploration firm with headquarters in Alhambra, Calif.

There are no legal obstacles to a foreign government owning oil-industry assets in the United States, analysts noted, although they speculated that there might be a sharp political reaction if an OPEC member began acquiring a large share of U.S. refining or marketing capacity.

“If other countries started acquiring a major share, there might be concerns about national security, but we’re a long way from that,” said James Van Alen, an analyst with Janney Montgomery Scott in Philadelphia.

Others Expected to Follow

Analysts do expect other oil-producing nations to seek such deals, however, as they search for a guaranteed outlet for their products in a business currently suffering from overproduction. This deal gives the venture the right to buy up to 600,000 barrels of oil a day from the Saudis.

While Saudi Arabia is now entitled to produce more than 4 million barrels a day under the OPEC quota, “that’s a whole lot of oil,” said analyst Van Alen. He noted that the deal could work to Texaco’s benefit should current conditions end and oil shortages threaten.

The companies said they expect “no significant changes in operations or staffing levels at the Texaco facilities involved” nor any changes in the Texaco products offered to customers in the 23-state region.

Texaco said the deal still must win final approval from the Saudi government and Texaco’s board, as well as government regulators.