Team Boston - The Sun August, 2001 Volume 4, Issue 5 Page 4

Shell and Texaco move toward collision in course on JV move. With no pending deal despite months of talks, sources say Texaco is pushing for a liquidation "trust" that would be run by investment bankers, so that the Chevron/ Texaco deal can proceed with the trust eventually looking to get the best deal for the Texaco asset interest.

But insiders say that Shell lawyers are poised to launch a massive contract language in the actual joint venture structure gives them a strong case, but Texaco is equally convinced that they could win a lawsuit if the liquidation trust is adopted. Reports indicate that a clause in the joint venture covenant prohibits for five years the sale of any alliance assets should one partner withdraw, but Texaco believes the terms keep a door open for a quick sale to another party,

If the Federal Trade Commission nixes the idea of a trust, Shell will have a much better bargaining position. Shell has upped its offer for the Texaco JV equity, but the two parties remain nearly $2 billion apart. Texaco’s position may have weakened thanks to the tailspin for U.S. refining margins. Texaco negotiators had raised their asking price on the premise that refining and marketing had entered a new more profitable era. That era has clearly slammed shut for refining, although marketing returns remain outstanding for the most part.

While a $2 billion distance in negotiations is formidable, sources say it reflects a bid/asked range that actually has narrowed. Originally, Shell was only offering to take over Texaco’s debt in the ventures and add about $1 billion.

Meanwhile, Chevron, which hoped to have FTC approval by May, now hopes that Texaco and Shell will come to terms by August, or that the FTC approval by May, now hopes that Texaco and Shell will come to terms by August, or that the FTC will approve the trust idea this summer. The relationship between Chevron and Shell-already somewhat tainted by international rivalry and competition—has had an infusion of extra venom thanks to the perception by Chevron that Shell is looking to pick up joint venture assets at a markdown sale. Chevron’s mien could be critical to the term that it agrees to license the Texaco brand to the joint ventures. That licensing period, once thought to be settled in the five-year neighborhood, now could be as little as 6-12 months sources say.

Timing is critical for the $35 billion Chevron/Texaco acquisition. Sources say that if a deal isn’t struck by October 1, the transaction will get pushed onto 2002 because of accounting rules related to the pooling of assets.