Auers: Marathon, Andeavor merger sign of ongoing refining trend

By Patrick C. Miller | May 15, 2018

While the $23.3 billion merger agreement announced earlier this month between Marathon Petroleum Corp. and Andeavor won’t go down as one on the biggest mergers in the history of the oil business, it will be the biggest downstream industry deal to date, according to John Auers, executive vice president of Turner, Mason & Co.

In a recent blog for the Dallas-based engineering consulting firm, Auers noted that the merger between Exxon and Mobil was worth $74 billion, BP and Amoco was $48 billion and Chevron and Texaco was $45 billion. Nonetheless, he wrote, “In addition to creating the largest U.S. refiner, it would also continue several trends which have drastically transformed the U.S. refining industry over the last few decades.  One of the key shifts has been a movement away from being dominated by integrated majors to one where independent refiners (companies with no crude producing assets) operate the lion’s share of U.S. capacity.”

Auers said the merger also confirms the trend of refiners seeking to leverage their logistics assets. For example, he said “both Andeavor and Marathon have been active in developing and capturing value from midstream facilities, particularly those that allow their refineries to more cost effectively access crude oil, particularly the growing volumes coming from U.S. tight oil basins.”

Auers, who leads the Turner Mason’s activities in forecasting and writes its weekly “Turning Point” blog, discussed with North American Shale Magazine the trends within the U.S. refining industry that began more than 30 years ago and have resulted in a more flexible and competitive industry.

Is there any reason to think the merger between Marathon and Andeavor won’t be approved?

I would be shocked if it didn’t go through. It doesn’t seem like there are any impediments from the FTC or another standpoint that would cause it not to go through. You have an administration that’s friendly to the energy business. Maybe in a different administration, you might have some questions asked in that direction. The refining operations aren’t located in the same regions, so they’re complementary. I just don’t see any FTC issues.

Do you think U.S. consumers are generally aware of how trends in the refining industry have affected them?

I don’t think the average consumer really knows what’s gone on with the business side of refining from majors to independents. You still see the major brands out there—the Exxon and Chevron brands. You still see Shell out there, even though Shell has definitely shrunk. BP has shrunk the most from a refining standpoint. Consumers mostly buy gasoline at their neighborhood gas stations. I don’t know that they know what’s been happening in the industry. In general, I think it’s had a positive effect on consumers. The refineries are more efficient, although the competition is still there.

The whole refining industry has changed its mode of operation. It’s much more responsive, as a result, to market trends and market developments. Refiners will cut back runs or increase runs to respond to the market quicker and more efficiently than they used to. That’s been a positive trend overall. It’s certainly been positive for the performance of the business. Now, the companies that can’t compete, we’ve had a lot of refineries shut down in the last 30 years. It really has been a survivalist kind of environment. That breeds strong and efficient survivors, and that’s what we have. Even the majors have moved toward operating their refining divisions as an independent segment, much more so than it used to be in the 80s and into the 90s.

You wrote in your blog that an attractive part of the planned Marathon and Andeavor merger is the synergy between Andeavor’s crude gathering and delivery assets in the Permian Basin and Marathon’s Gulf Coast refineries. Why is that important?

Marathon and Andeavor both have significant logistics assets as part of their portfolios. That’s a synergistic part of this merger that’s very complementary. Andeavor’s got significant crude gathering assets out in west Texas and the Permian that they use to support their El Paso refinery. Those are also going to fit in well with the Marathon Texas City refinery.

How did it come about that the refining industry has developed such a flexible response to market forces? Was it planned or a happy coincidence?

Deregulation was one of President Ronald Regan’s most under-appreciated moves. He did a lot of things that he is remembered for—like beefing up the defense budget and getting the Iron Curtain to fall and cutting taxes—but deregulation of the oil business was a very substantive and important accomplishment for Reagan. If you’re a free-market economist, you would say this is exactly what happens when you open markets. You definitely have some losers in a protected market. There are some companies and entities that survive purely on government subsidies. When you remove those protections, some refineries shut down. Half the refineries that were open in the 1980s are shut down, but our capacity is higher. We’re much more efficient and more competitive. When you deregulate markets, it’s almost inevitable that you’re going to come up with a more competitive industry. It’s going to be constantly adjusting to market trends and reacting to them.

Why haven’t the refining industries in other countries been as successful at implementing the U.S. model?

The big reason is that there aren’t many places in the world where you have truly deregulated markets. Governments have a finger in the pie there in terms of prices, subsidies and taxes. It’s part of the reason that shale oil has taken off in the U.S. and it hasn’t in other places like China and Russia where they have the same geology. They don’t have the same free-market ownership incentives to develop those resources properly in the same financial markets to help support investors. With refining, there’s some similarities, but having the free market underpinning is most important. Other countries, such as Brazil and Japan, are moving toward reform. It’s making Japanese refiners more efficient. In the long run, it makes the industry more competitive. The U.S. was way ahead of the game when we deregulated our oil business back in 1982.