Big energy just got bigger, as it usually does at this stage in the oil price cycle. Royal Dutch Shell’s takeover of BG represents the largest such merger in two decades, and a low oil price seems to encourage such corporate activity. The usual cost-cutting may be expected, with a beneficial effect on returns to shareholders and, less predictably, lower prices for consumers.
Both these businesses are major players on the world stage – Royal Dutch Shell being much the bigger partner – and their activities reach into virtually every nation on earth. When they do combine, as seems very likely, the new company will be the largest in the FTSE. The value of the Shell bid for BG is £47bn – somewhat higher than the UK’s defence budget next year. The new firm will be capitalised at around £200bn, roughly the same as South Africa’s GDP for a year. Companies that big have to be careful not to squash legitimate national concerns or smaller rivals even if they don’t intend to; a hippo sharing a bed with a duckling.
So even in as competitive a business as natural resources, there is a danger that in some markets for some products the new firm may find itself tempted to abuse market power. Not surprisingly, then, this takeover is being examined by competition authorities in Australia and China, and given that both firms are involved in the UK’s North Sea gas supply industry, the British Competition and Markets Authority should at least consider whether its current enquiries into the energy market should take into account what is about to happen on the UK’s continental shelf.
Scale itself is not an objection to this particular mega-merger. Finding sources of energy in ever more hostile environments is a costly and time-consuming business, fraught with risk and littered with failures. Despite the pioneering, buccaneering drilling of a few smaller operators, the oil business is run by companies that can balance those risks internationally and have the heft and presence in capital markets to raise the vast sums required for such investment.
What is structurally at fault in the energy market – apart from the burgeoning market power of these huge corporations, whose revenues exceed those of many a medium-sized advanced economy – is the lack of an inbuilt bias towards greener, sustainable energy. Hardly a thought is given to the future of the planet when these mega-mergers are discussed, and things proceed pretty much as they did in the days of J Paul Getty, give or take a little interference by local competition commissions. They are never considered on an international basis, and the opportunity presented by these mergers to exact a greener bias in their activities is squandered. We would make the planet a lot more secure if we were able, as a condition of allowing these acquisitions to go ahead, to demand a commitment that a larger proportion of the new group’s research and development budget be devoted to new sustainable energy.
Yet that approach faces the same problem that so many do in the world of economics, finance and business: that there is no world authority to match powerful and super-rich banks, companies and individuals. Hence the seemingly endless race to the bottom on corporation tax rates and the way transnational companies switch profits across national barriers. But a utopian world of corporate governance and an international tax regime is not going to arrive soon; in the meantime the rich will just get richer and the mega-companies will get more mega.Reuse content