Shell, Mobil to Combine Oil Fields in State

Shell Oil Co. and Mobil Corp. announced Monday that they are combining their California oil fields in a joint venture that will surpass Chevron Corp. to become the state’s largest producer of crude oil.

The deal is designed to cut costs and foster entrepreneurship in an increasingly competitive oil market, they said. It will save the companies a combined $1 per barrel in production costs over time, according to Gene Voiland, chief executive of the venture.

The new entity, called Aera Energy and based in Bakersfield, will have 1 billion barrels of proven oil reserves and about 11,600 oil wells on 90,000 acres of jointly owned land, mostly in Kern County, Voiland said.

Voiland said the merger will save the two companies $100 million a year, giving it an important competitive edge in California. In addition to Kern County, the new company has offshore oil reserves near Long Beach and Huntington Beach.

Shell, whose California operation was known as CalResources and was the state’s second-largest producer, would own 59% of the new company. Mobil, which was third, would own 41%.

The companies didn’t release a value for the merger. But applying an industry standard of between $3 and $5 per barrel of reserves, the combined company would be worth between $3 billion and $5 billion. Employees will total about 1,200. Some layoffs are expected, but “not a a great deal,” Mobil executive Michael Yaeger said.

The merger is part of a trend in which major oil companies are selling off or breaking out exploration and production, or “upstream,” segments of their business and making them quasi-independent to promote entrepreneurship, said oil analyst John Hervey of Donaldson Lufkin & Jenrette. Last year, Shell formed a similar partnership with Amoco Corp. that combined both firms’ Midwest oil assets.

Amoco took another step down the same road Monday, announcing that it will sell about one-third of its U.S. oil and gas properties to cut costs and focus on Gulf of Mexico and offshore drilling. Analysts valued the holdings at up to $2.5 billion. California has seen the entry of several spinoffs and newcomers in recent months that have taken over mature oil fields and applied high-technology and low-cost operating approaches to try to maximize output.

They include Nuevo Energy of Houston, which last year acquired Unocal’s California oil fields, with about 120 million barrels of proven reserves, for $492 million, and Monterey Resources, a new entity spun off by Santa Fe Energy last year to develop its California reserves.

One of the biggest spinoffs was Arco’s 1993 creation of Vastar Resources, a unit made up of the Los Angeles-based company’s natural gas and oil production in the Midwest and Gulf of Mexico. Vastar subsequently sold 18% of its shares to the public.

Voiland said there are no plans to sell stock to the public but wouldn’t rule it out later. Before the merger, CalResources provided Shell with about 19% of its domestic U.S. oil production, while Mobil’s statewide operation represented 20% of its U.S. operation.

In 1995, Shell’s California operation produced 140,000 barrels of crude oil daily, second only to Chevron’s 152,700 barrels, according to the state Conservation Department. That year, Mobil produced 105,000 barrels of crude daily.

The firms said the combined daily production of about 250,000 barrels of oil will vault it over Chevron and account for about 25% of the 1 million barrels of oil produced in the state every day.