Shell Oil Company; Texaco Inc.; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 971-0026]

Shell Oil Company; Texaco Inc.; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before March 2, 1998.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

room 159, 6th St. and Pa. Ave., NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

William Baer, Federal Trade Commission, 6th & Pennsylvania Ave., NW, H-

374, Washington, DC 20580. (202) 326-2932. George Cary, Federal Trade

Commission, 6th & Pennsylvania Ave., NW, H-374, Washington, DC 20580.

(202) 326-3741.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Sec. 2.34 of the

Commission's Rules of Practice (16 CFR 2.34), notice is hereby given

that the above-captioned consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of sixty (60) days. The following Analysis to Aid Public

Comment describes the terms of the consent agreement, and the

allegations in the accompanying complaint. An electronic copy of the

full text of the consent agreement package can be obtained from the

Commission Actions section of the FTC Home Page (for December 19,

1997), on the World Wide Web, at ``http://www.ftc.gov/os/

actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, room H-130, Sixth Street and Pennsylvania Avenue, NW.,

Washington, DC 20580, either in person or by calling (202) 326-3627.

Public comment is invited. Such comments or views will be considered by

the Commission and will be available for inspection and copying at its

principal office in accordance with Section 4.9(b)(6)(ii) of the

Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).

I. Introduction

The Federal Trade Commission (``Commission'') has accepted from

Shell Oil Co. (``Shell'') and Texaco Inc. (``Texaco'') (collectively

``Proposed Respondents'') an Agreement Containing Consent Order

(``Proposed Consent Order''). The Commission has also entered into a

Hold Separate Agreement that requires Proposed Respondents to hold

separate and maintain certain divested assets. The Proposed Consent

Order remedies the likely anticompetitive effects, in seven geographic

markets, arising from certain aspects of Proposed Respondents' joint

venture.

II. Description of the Parties and the Transaction

Shell, which is headquartered in Houston, TX, is one of the world's

largest integrated oil companies. Among its other businesses, Shell

operates petroleum refineries that make various grades of gasoline,

diesel fuel, and kerosene jet fuel, among other petroleum products, and

Shell sells these products to intermediaries, retailers and consumers.

It owns or leases approximately 3,400 gasoline stations nationally and

sells gasoline to jobbers or gasoline dealers that operate another

5,000 retail outlets throughout the United States. During fiscal year

1996, Shell sold about $8.66 billion of gasoline nationally and had

revenues from downstream operations (refining, transportation, and

marketing of petroleum products) of approximately $22.7 billion.

Texaco, which is headquartered in White Plains, NY, is another of

the world's largest integrated oil companies. Among its other

businesses, Texaco operates petroleum refineries in the United States

that make gasoline, diesel fuel, kerosene jet fuel, and other petroleum

products, and sells those products throughout the midwestern and

western United States. Texaco owns one-half of Star Enterprises, Inc.,

a joint venture between Texaco and Saudi Refining, Inc. Star also

operates refineries and markets gasoline and other petroleum products,

under the Texaco name, in the southeastern and eastern United States.

About 14,000 retail outlets sell Texaco-branded

[[Page 67869]]

gasoline throughout the United States. In fiscal year 1996, Texaco and

Star earned about $207 million in profits from their downstream

operations; in 1996, Texaco had worldwide revenues of approximately

$45.5 billion.

On or about March 18, 1997, Shell and Texaco entered into a

memorandum of understanding to form a limited liability corporation

(``LLC''), to be known as ``Westco,'' into which Shell and Texaco would

transfer their refining and marketing businesses and assets in the

midwestern and western United States, together with their pipeline and

other transportation interests throughout the United States. On or

about July 16, 1997, Shell, Texaco and Saudi Refining entered into a

memorandum of understanding to form a second LLC, to be known as

``Eastco,'' into which Shell and Star would transfer their refining and

marketing businesses and assets in the southeastern and eastern United

States. (Eastco and Westco are referred to jointly or separately as

``Joint Venture.'')

III. The Proposed Complaint and Consent Order

The Commission has entered into an agreement containing a Proposed

Consent Order with Shell and Texaco in settlement of a proposed

complaint. The proposed complaint alleges that the proposed Joint

Venture violates Section 5 of the Federal Trade Commission Act, 15

U.S.C. 45, and that consummation of the Joint Venture would violate

Section 7 of the Clayton Act, 15 U.S.C. 18, and Section 5 of the

Federal Trade Commission Act. The proposed complaint alleges that the

Joint Venture will lessen competition in each of the following markets:

(1) Conventional gasoline and kerosene jet fuel in the Puget Sound area

of Washington State (i.e., the cities of Seattle, Tacoma, Olympia,

Bremerton and surrounding areas); (2) conventional gasoline and

kerosene jet fuel in the Pacific Northwest (i.e., the States of

Washington and Oregon west of the Cascade mountains); (3) CARB gasoline

(specially formulated gasoline required in California) in the State of

California; (4) asphalt in the northern portion of the State of

California (approximately north of Fresno); (5) transportation of

refined light petroleum products to the inland portions of the State of

Mississippi, Alabama, Georgia, South Carolina, North Carolina,

Virginia, and Tennessee (i.e., the portions more than 50 miles from

ports such as Savannah, Charleston, Wilmington and Norfolk) (``inland

Southeast''); (6) CARB gasoline in San Diego County, CA; and (7)

conventional gasoline and diesel fuel on the island of Oahu, HI.

To remedy the alleged anticompetitive effects of the Joint Venture,

the Proposed Consent Order requires Proposed Respondents: (1) To divest

Shell's refinery located in Anacortes, WA (``Anacortes Refinery''), and

to allow all of Shell's branded dealers and jobbers in Washington and

Oregon to enter into supply contracts with the acquirer of that

refinery, notwithstanding the existence of any long-term contracts or

termination penalties; (2) to divest either Texaco's interest in the

Colonial pipeline or Shell's interest in the Plantation pipeline; (3)

to divest gasoline stations in San Diego County representing a

sufficient volume to establish a viable wholesale competitor; and (4)

to divest the terminal and retail operations of either Shell or Texaco

on Oahu. Each divestiture must be made to an acquirer that receives the

prior approval of the Commission and in a manner approved by the

Commission, and must be completed within six months of the Commission's

final issuance of the consent order. Proposed Respondents must also

enter into and maintain a ten-year agreement to supply Huntway Refining

Company with undiluted heavy crude oil. The Proposed Consent Order

provides that no amendment to the Huntway supply agreement relating to

price, volume or termination will be effective until approved by the

Commission.

For ten (10) years after the consent order becomes final, the

Proposed Respondents are prohibited from entering into a joint venture

or other affiliation involving or acquiring petroleum refining or

marketing assets in Alaska, California, Oregon and Washington valued at

$100 million or more, without giving prior notice to the Commission,

where such venture would not be subject to the reporting requirements

of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C.

18a.

Proposed Respondents are required to provide the Commission with a

report of compliance with the consent order within sixty (60) days

following the date that the consent order becomes final, every sixty

(60) days thereafter until the divestitures are completed, and annually

for a period of ten (10) years.

Proposed Respondents also have entered into a Hold Separate

Agreement. Under the terms of this Agreement, until the divestiture of

the Shell Anacortes Refinery has been completed, Proposed Respondents

must maintain the Shell Anacortes Refinery as a separate, competitively

viable business, and not combine it with the operations of the Joint

Venture. Under the terms of the Proposed Consent Order, Proposed

Respondents must also maintain the other assets to be divested in a

manner that will preserve their viability, competitiveness and

marketability, must not cause their wasting or deterioration, and

cannot sell, transfer, or otherwise impair the marketability or

viability of the assets to be divested. The Proposed Consent Order and

the Hold Separate Agreement specify these obligations in detail.

The FTC staff conducted the investigation leading to the Proposed

Consent Order in collaboration with the Attorneys General of the States

of California, Hawaii, Oregon and Washington. As part of this joint

effort, Proposed Respondents have entered into agreements with these

States settling charges that the Joint Venture would violate both state

and federal antitrust laws. To avoid conflicts between the Proposed

Consent Order and the State consent decrees, the Commission has agreed

to extend the time for divesting particular assets if all of the

following conditions are satisfied: (1) Proposed Respondents have fully

complied with the Proposed Consent Order; (2) Proposed Respondents

submit a complete application in support of the divestiture of the

assets and businesses to be divested within four months after the

Commission's final approval of the consent order (two months before the

required divestitures must be completed); (3) the Commission has in

fact approved a divestiture; but (4) Proposed Respondents have

certified to the Commission within ten days after the Commission's

approval of a divestiture that a State has not approved that

divestiture. If these conditions are satisfied, the Commission will not

appoint a trustee or seek civil penalties for an additional sixty days,

in order to allow Proposed Respondents either to satisfy the State's

concerns or to produce an acquirer acceptable to the Commission and the

State. If the State remains unsatisfied at the end of that additional

period, the Commission may appoint a trustee and seek penalties.

IV. Resolution of the Competitive Concerns

The Proposed Consent Order alleviates the alleged competitive

concerns arising from the Joint Venture in seven geographic markets,

which are discussed below.

A. Refining of Conventional Gasoline, Kerosene Jet Fuel, and CARB

Gasoline

Four companies operate refineries in and around Seattle, WA, and

one

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company operates a small refinery in Tacoma, WA. Shell and Texaco

operate refineries in Anacortes, WA, and produce conventional gasoline

and kerosene jet fuel, among other products. Shell also produces CARB

gasoline. Conventional gasoline and kerosene jet fuel are each product

markets, because operators of gasoline-fueled automobiles and of jet

aircraft are unlikely to switch to other fuels in response to a small

but significant and nontransitory increase in the price of gasoline or

kerosene jet fuel, respectively.

Puget Sound is a relevant antitrust geographic market for

conventional gasoline because the refiners in this market can

profitably raise prices by a small but significant and nontransitory

amount without losing significant sales to other refiners. The five

Seattle refineries supply virtually all of the conventional gasoline

consumed in the Puget Sound market. The nearest refineries, located in

California, Alaska, and Canada, are unlikely to divert gasoline from

their current markets into Puget Sound in response to a small but

significant and nontransitory increase in price because of

transportation costs and limited access to a sufficient number of

independent retail outlets. A Puget Sound price increase likely would

not be defeated even if Puget Sound refiners were unable to raise price

in Portland, OR, since Puget Sound refiners could price discriminate

between Puget Sound and Portland.

The Joint Venture may also adversely affect competition in the

broader geographic market of the Pacific Northwest. This market is

supplied by the refiners in Washington, one refinery in San Francisco,

and one refinery in Alaska. Other refiners are unlikely to enter this

market. Customers in the Pacific Northwest will not practicably turn

outside the market to obtain supplies for a small but significant and

nontransitory increase in price. After the Joint Venture, the Puget

Sound refiners could coordinate their prices. As measured by refinery

capacity, the Joint Venture will increase the Herfindahl-Hirschman

Index (``HHI'') for conventional gasoline in Puget Sound by 1318 points

to 3812, and increase the HHI in the Pacific Northwest by 561 points to

2896.

The refiners in Puget Sound also supply all of the jet fuel used by

airlines at the Seattle-Tacoma International Airport. Three refiners

bid to supply the airlines flying into that airport, which receives all

of its jet fuel supplies by the Olympic Pipeline. Only four refiners,

including Shell and Texaco, practicably can send jet fuel through that

pipeline. These refiners thus have a cost advantage over more distant

refiners. The Joint Venture will eliminate one of these firms as an

independent bidder, raising the likelihood that the incumbents could

raise prices by a small but significant and nontransitory amount before

alternative supplies flow into the market. The Joint Venture will raise

the HHI in this market by 481 points to 5248.

Airlines in Portland can and do obtain fuel supplies from the

refiners that use the Olympic Pipeline as well as from a refinery in

the San Francisco area. The Joint Venture will eliminate one of these

firms as an independent bidder, thus allowing the remaining bidders to

raise prices above competitive levels. Accordingly, for airlines in

Portland, the relevant geographic market is the Pacific Northwest. The

Joint Venture will raise the HHI in this market by 258 points to 2503.

California requires a special formulation of gasoline, known as

``CARB gasoline,'' which is more expensive to produce than conventional

gasoline. The product market in California is therefore CARB gasoline

because, by law, consumers in that state have no alternative. Most

refiners in California, as well as Shell's refinery at Anacortes, can

make CARB gasoline. Shell and Texaco both market CARB gasoline in

California. Prices would have to rise by more than a small but

significant amount over current and projected levels to induce refiners

outside the West Coast to make CARB gasoline and transport it to

California by tanker. The market is moderately concentrated and will be

moderately concentrated after the Joint Venture. The proposed

transaction will raise the HHI by 154 points to 1635.

For all three fuels in all the geographic markets, the products are

homogeneous, and wholesale prices are publicly available and widely

reported to the industry. Refiners therefore readily can identify firms

that deviate from a coordinated or collusive price. Existing exchange

agreements likely will facilitate identifying and punishing those

deviating from a coordinated or collusive price. Industry members have

raised prices in the past by selling products outside the market,

sometimes at a loss, in order to remove supplies that had been exerting

downward pressure on prices. Entry by a refiner is unlikely to be

timely, likely, and sufficient to defeat an anticompetitive price

increase because of environmental constraints and because new refining

capacity requires substantial sunk costs. The transaction could raise

the costs of conventional and CARB gasoline and kerosene jet fuel in

these markets by more than $150 million.

To remedy the harm, Section II of the Proposed Consent Order

requires the Proposed Respondents to divest Shell's Anacortes refinery,

which refines all of the products at issue (including CARB gasoline)

and sells into all of the relevant markets (including California). This

divestiture will eliminate the refining overlap in the Puget Sound and

Pacific Northwest markets, and reduce the increase in concentration

(HHI) in the California CARB gasoline market to less than 100 points.

The Proposed Consent Order also requires Shell to allow its dealers and

jobbers in Washington and Oregon the opportunity to become affiliated

with the acquirer. This will increase the likelihood that a viable

competitor has access to gasoline and retail outlets from which it can

sell the gasoline.

B. Transportation of Undiluted Heavy Crude Oil to the San Francisco Bay

Area

Texaco owns a heated pipeline (``THPL'') that carries undiluted

heavy crude oil from the San Joaquin Valley of California to refineries

in the San Francisco Bay area. THPL is the only source of undiluted

heavy crude into that area. Huntway Refining Company is an asphalt

refiner in the Bay area, and Shell is the only other refiner of asphalt

in northern California. Shell and Huntway together make about 85

percent of the asphalt used in northern California. Both Shell and

Huntway buy undiluted heavy crude from Texaco, transported by the THPL,

and refine that oil into asphalt (among other products). Northern

California (north of Fresno) is the relevant geographic market for

asphalt because asphalt refineries outside the region are not

competitive alternatives for most customers. The transaction would

allow the Joint Venture to raise Huntway's costs by increasing prices

of undiluted heavy crude to Huntway relative to the price charged to

Shell. (Huntway's costs would increase if it were required to purchase

more expensive lighter crudes or diluted heavy crudes). Shell could

therefore raise prices of asphalt to consumers or prevent Huntway from

cutting its price. Entry is unlikely to defeat this price increase. In

the absence of the Proposed Consent Order, the Joint Venture could

raise costs to asphalt buyers in northern California by more than

three-quarters of a million dollars.

Section VII of the Proposed Consent Order eliminates this risk by

requiring the Proposed Respondents to enter into a 10-year supply

agreement with Huntway, the terms of which must be approved by the

Commission. The

[[Page 67871]]

parties have in fact entered into such an agreement, which constitutes

a confidential exhibit to the Proposed Consent Order. The Proposed

Consent Order prohibits the Joint Venture from increasing the price or

reducing the volume of crude oil supplied to Huntway, and also

prohibits Proposed Respondents from terminating the supply agreement

(except on terms identified in that agreement). The Proposed Consent

Order also provides that any amendment relating to an increase in

price, a decrease in volume, or termination is ineffective until

approved by the Commission.

C. Transportation of Refined Light Petroleum Products to the Inland

Southeast

The inland Southeast receives essentially all of its refined light

petroleum products (including gasoline, diesel fuel and jet fuel) from

either the Colonial pipeline or the Plantation pipeline. These two

pipelines basically run parallel to each other from Louisiana to

Washington, DC, and directly compete to provide petroleum product

transportation services in the inland Southeast. Texaco owns

approximately 14 percent of Colonial and has representation on the

Colonial board of directors. Shell owns approximately 24 percent of

Plantation and has representation on Plantation's board.

The proposed transaction would put the Joint Venture in a position

to influence the decisions of both pipelines. The Proposed Respondents

would also be privy to confidential competitive information of each

pipeline. The effect of the Joint Venture might be substantially to

lessen competition, including price and service competition, between

the two pipelines. The Commission has previously recognized that

control of overlapping interests in these two pipelines might

substantially reduce competition in the market for transportation of

light petroleum products to this section of the country. Chevron Corp.,

104 F.T.C. 597, 601, 603 (1984). To prevent the competitive harm from

the Joint Venture, Section V of the Proposed Consent Order requires the

Proposed Respondents to divest to one or more third parties either

Texaco's interest in Colonial or Shell's interest in Plantation.

D. Local Gasoline Distribution in Oahu, HI

Gasoline and diesel fuel are supplied to Hawaii either by two

refineries on Oahu (owned by Chevron and BHP) or by tanker. Most of the

gasoline consumed on Oahu is produced in the two Oahu refineries.

Shell, Texaco, Tosco, and the two refinery owners buy gasoline from the

refineries and sell gasoline and diesel fuel at wholesale on Oahu.

Terminal capacity on Oahu is essential to wholesale operations on that

island; it is not economically feasible to sell directly from a

refinery or a tanker or from a terminal on another island. Also,

consumers of gasoline on Oahu have no alternative but to buy gasoline

there. Accordingly, the relevant market in which to analyze the

transaction is the wholesale sale (including terminal operations) and

the retail sale of gasoline on Oahu. The markets are highly

concentrated. As measured by gasoline sales from the terminal, the

Joint Venture will raise the HHI by 267 points to 2160.

The market is susceptible to collusion or coordination. The Joint

Venture will reduce the six competitors to five; the product at

wholesale is homogeneous; and product exchanges enable the oil

companies to share cost information and facilitate detection and

punishment of any deviations from prices that might be coordinated. New

entry is unlikely to defeat an anticompetitive price increase. An

entrant would require sufficient terminal capacity and enough retail

outlets to be able to buy gasoline at the tanker-load level, or 225,000

barrels (about 9.5 million gallons). Terminal capacity of this scale is

unavailable in Oahu, and less than 2 percent of existing retail

gasoline stations are available to affiliate with a new entrant at the

wholesale level.

Section IV of the Proposed Consent Order restores competition by

requiring Proposed Respondents to divest either Shell's or Texaco's

terminal and retail assets on Oahu to a third party. In the absence of

such relief, consumers in Hawaii are likely to pay over $2 million more

for gasoline and diesel fuel.

E. Local Gasoline Distribution in San Diego County

Six vertically integrated oil companies control approximately 90

percent of the gasoline sold at both wholesale and retail in San Diego

County. These oil companies require their branded retailers to buy

gasoline at San Diego terminals, where these companies set the

wholesale price. On average, San Diego wholesale prices exceed those in

Los Angeles by more than the cost of pipeline transportation from Los

Angeles to San Diego. There is no bottleneck at the pipeline preventing

additional gasoline from flowing into the market to reduce the price

difference between San Diego County and Los Angeles, suggesting that

prices in San Diego can be and have been affected by the firms in that

market. The wholesale and retail markets in San Diego County will be

highly concentrated as a result of the Joint Venture, which will raise

the HHI by 250 points to 1815.

There are barriers to entry at the retail level because of slow

population growth, limited availability of adequate retail sites,

permitting requirements, and the need to obtain a ``critical mass'' of

stations to compete in the market. Furthermore, the extensive degree of

vertical control, combined with barriers at the retail level, raises

entry barriers at the wholesale level. The Joint Venture likely will

enhance the prospects of collusion and tacit coordination, which could

raise

Section III of the Proposed Consent Order restores competition by

requiring the Proposed Respondents to divest to a single entity

gasoline stations representing enough volume to create a viable

competitor at the wholesale level and reduce concentration levels to

within the thresholds of the Merger Guidelines.

V. Opportunity for Public Comment

The Proposed Consent Order has been placed on the public record for

sixty (60) days for receipt of comments by interested persons. Comments

received during this period will become part of the public record.

After sixty days, the Commission will again review the Proposed Consent

Order and the comments received and will decide whether it should

withdraw from the Proposed Consent Order or make final the agreement's

consent order.

The Commission anticipates that the Proposed Consent Order will

cure the competitive problems alleged in the complaint. The purpose of

this analysis is to invite public comment on the Proposed Consent

Order, including the proposed divestitures, to aid the Commission in

its determination of whether to make final the Proposed Consent Order.

This analysis is not intended to constitute an official interpretation

of the Proposed Consent Order, nor is it intended to modify the terms

of the Proposed Consent Order in any way.

Donald S. Clark,

Secretary.

Separate Statement of Commissioner Mary L. Azcuenaga; Concurring in

Part and Dissenting in Part; in Shell/Texaco/Star, File No. 9710026

Today, the Commission accepts for comment a consent order resolving

allegations that the proposed joint venture of Shell Oil Company with

Texaco Inc. and Star Enterprises would

[[Page 67872]]

violate Section 7 of the Clayton Act and Section 5 of the Federal Trade

Commission Act. I find reason to believe that the joint venture, if

consummated, would affect competition adversely in the refining of

asphalt in Northern California and, therefore, support Paragraph VII of

the order, which provides relief in that market. I do not find reason

to believe the other violations of law alleged in the complaint and,

therefore, dissent from Paragraphs II, III, IV and V of the order,

which require divestitures in other markets. Although the allegation

relating to refineries in the northwestern United States is arguably

valid, on balance, I cannot support it and, therefore, cannot support

Paragraph II of the order. The complaint allegations that support

Paragraphs III, IV and V of the order seem to me far removed from our

usual analysis under the merger guidelines.

I understand that the parties have negotiated identical relief with

various state attorneys general and that the divestitures in the

proposed Commission order will be required in any event. My obligation,

however, is to apply federal law as I see it.

[FR Doc. 97-33872 Filed 12-29-97; 8:45 am]

BILLING CODE 6750-01-M