Impact of horizontal mergers on supply chain performance: The case of the upstream oil and gas industry

Mergers are complex, and expected gains and success are highly dependent on different factors and drivers that affect supply chain efficiency. This paper describes a mathematical programming approach to address potential synergistic gains after horizontal mergers in the upstream Crude Oil Supply Chain (COSC). A supply chain optimization model is used to evaluate the extent to which economies of scope and economies of scale favorably impact potential mergers. The problem is formulated as a mixed-integer linear programming (MILP) model that determines the investment level and efficient implementation of operational strategies at shared services, as well as production and processing of oil and gas. A real case example from the oil and gas industry in the Middle East region is used to validate the model. The experimental studies examine three scenarios: merger under economies of scale, merger under economies of scope, and merger under the joint economies of scope and scale. Results reveal the impact of different operational strategies on potential synergistic gains. For this case study, computational results show that when only economies of scale are performed, the COSC fails to achieve the targeted cost/barrel (cost/bbl) after the merger. The joint performance of economies of scale and scope in reducing shared services costs at different supply chain echelons leads to a substantial synergy gain. It reduces the cost/bbl to below the target value.