Shell will hold 88 per cent of the venture. The two companies control, or have stakes in, 19 refineries that process 2.1 million barrels of oil a day, or 15 per cent of Western Europe's oil needs.
"It's a defensive move," said Irene Himona, an analyst with ABN Amro. "It's a way to reduce costs by avoiding duplication and strengthening market share because returns in the European refining business have been so low." Profits earned by Shell's refining business fell 5 per cent in the first half, to $1.28bn.
A year ago, Shell, Texaco and Saudi Arabia's state-owned oil company agreed to combine refining and fuel sales in the US, in a venture that is expected to save $800m a year.
Shell and Texaco said the European combination will lead to pre-tax savings of at least $200m a year, and Shell said job cuts are likely. Regulators must approve the venture, which Shell said could be completed in mid-1999.
Savings from the alliance, which will sell under both the Shell and Texaco brands, will come from job cuts, closing service stations and consolidating fuel-delivery trucking routes in areas with overlap, analysts said.
The venture will combine Shell's 17 refineries in Europe with Texaco's one plant in Pembroke, Wales, and one in Rotterdam, where it owns 35 per cent. Shell has 25,000 employees in its refining and marketing unit in Europe and Texaco has 4,300. Shell has 12,954 fuel stations across the Continent while Texaco has 2,984.