Exxon Corp., et al.; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 991 0077]

Exxon Corp., et al.; 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

compliant 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 January 31, 2000.

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

Room 159, 600 Pennsylvania Ave., NW, Washington, DC 20580.

[[Page 68102]]

FOR FURTHER INFORMATION CONTACT: Richard Parker or Richard Liebeskind,

FTC/H-374, 600 Pennsylvania Ave., NW, Washington, DC 20580. (202) 326-

2574 or 326-2441.

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 complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for November 30, 1999), 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, 600 Pennsylvania Avenue, NW,

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

Public comment is invited. Comments should be directed to: FTC/

Office of the Secretary, Room 159, 600 Pennsylvania Ave., NW,

Washington, DC 20580. Two paper copies of each comment should be filed,

and should be accompanied, if possible, by a 3\1/2\ inch diskette

containing an electronic copy of the comment. 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

Sec. 4.(b)(6)(ii) of the Commission's rules of practice (16 CFR

4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

I. Introduction

The Federal Trade Commission (``Commission'' or ``FTC'') has issued

a complaint (``Complaint'') alleging that the proposed merger of Exxon

Corp. (``Exxon'') and Mobil Corp. (``Mobil'') (collectively

``Respondents'') would violate section 7 of the Clayton Act, 15 U.S.C.

18, and section 5 of the Federal Trade Commission Act, 15 U.S.C. 45,

and has entered into an agreement containing consent orders

(``Agreement Containing Consent Orders'') pursuant to which Respondents

agree to have entered and be bound by a proposed consent order

(``Proposed Order'') and a hold separate order that requires

Respondents to hold separate and maintain certain assets pending

divestiture (``Order to Hold Separate''). The Proposed Order remedies

the likely anticompetitive effects arising from Respondents' merger, as

alleged in the Complaint. The Order to Hold Separate preserves

competition in the markets for refining and marketing of gasoline, and

in other markets, pending divestiture.

II. Description of the Parties and the Transaction

Exxon, which is headquartered in Irving, Texas, is one of the

world's largest integrated oil companies. Among its other business,

Exxon operates petroleum refineries that make various grades of

gasoline and lubricant base stock, among other petroleum products, and

sells these products to intermediaries, retailers and consumers. Exxon

owns four refineries in the United States; those four refineries can

process approximately 1.1 million barrels of crude oil and other

feedstocks daily.\1\ Exxon owns or leases approximately 2,049 gasoline

stations nationally and sells gasoline to distributors or dealers that

operate another 6,475 retail outlets throughout the United States.

During fiscal year 1998, Exxon had worldwide revenues of approximately

$115 billion and net income of approximately $6 billion.

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\1\ A ``barrel'' is an oil industry measure equal to 42 gallons.

``MBD'' means thousands of barrels per day.

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Mobile, which is headquartered in Fairfax, Virginia, is another of

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

businesses, Mobile operates petroleum refineries in the United States,

which make gasoline, lubricant base stock, and other petroleum

products, and sells those products throughout the United States. Mobil

operates four refineries in the United States, which can process

approximately 800 thousand barrels of crude oil and other feedstocks

per day. About 7,400 retail outlets sell Mobil-branded gasoline

throughout the United States. During fiscal year 1998, Mobil had

worldwide revenues of approximately $52 billion and net income of

approximately $2 billion.

On or about December 1, 1998, Exxon and Mobil entered into an

agreement to merge the two corporations into a corporation to be known

as Exxon Mobil Corp. This merger is one of several consolidations in

this industry in recent years, including the combination of British

Petroleum Co. plc and Amoco Corp. into BP Amoco plc; the pending

combination of BP Amoco plc and Atlantic Richfield Co. (which is the

subject of pending investigation by the Commission); the combination of

the refining and marketing businesses of Shell Oil Co., Texaco Inc.,

and Star Enterprises; the combination of the refining and marketing

businesses of Marathon Oil Co. and Ashland Oil Co., and the acquisition

of the refining and marketing businesses of Unocal Corp. by Tosco Corp.

III. The Investigation and the Complaint

The Complaint alleges that consummation of the merger would violate

section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and section 5

of the Federal Trade Commission Act, as amended, 15 U.S.C. 45. The

Complaint alleges that the merger will lessen competition in each of

the following markets: (1) The marketing of gasoline in the

Northeastern and Mid-Atlantic United States (including the States of

Maine, New Hampshire, Vermont, Massachusetts, Rhode Island,

Connecticut, and New York (collectively ``the Northeast''), and the

States of New Jersey, Pennsylvania, Delaware, Maryland, Virginia, and

the District of Columbia (collectively the ``Mid-Atlantic''), and

smaller areas contained therein); (2) the marketing of gasoline in five

metropolitan areas in the State of Texas; (3) the marketing of gasoline

in Arizona; (4) the refining and marketing of ``CARB'' gasoline

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

California; (5) the bidding for and refining of jet fuel for the U.S.

Navy on the West Coast; (6) the terminaling of light petroleum products

in the Boston, Massachusetts, and Washington, DC, metropolitan areas;

(7) the terminaling of light petroleum products in the Norfolk,

Virginia, metropolitan area; (8) the transportation of refined light

petroleum products to the inland portions of the States 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'');

(9) the transportation of crude oil from the north slope of the State

of Alaska via the Trans Alaska Pipeline System (``TAPS''); (10) the

importation, terminaling and marketing of gasoline and diesel fuel in

the Territory of Guam; (11) the refining and marketing of paraffinic

lubricant base oils in the United States and Canada; and (12) the

worldwide manufacture and sale of jet turbine lubricants.

To remedy the alleged anticompetitive effects of the merger, the

Proposed Order requires Respondents to divest or otherwise surrender

control of: (1) All of Mobil's gasoline marketing in the Mid-Atlantic

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(New Jersey, Pennsylvania, Delaware, Maryland, Virginia, and the

District of Columbia), and all of Exxon's gasoline marketing in the

Northeast (Maine, New Hampshire, Vermont, Massachusetts, Rhode Island,

Connecticut, and New York); (2) Mobil's gasoline marketing in the

Austin, Bryan/College Station, Dallas, Houston and San Antonio, Texas,

metropolitan areas; (3) Exxon's option to repurchase retail gasoline

stores from Tosco Corp. in Arizona; (4) Exxon's refinery located in

Benicia, California (``Exxon Benicia Refinery''), and all of Exxon's

gasoline marketing in California; (5) the terminal operations of Mobil

in Boston and in the Washington, D.C. area, and the ability to exclude

a terminal competitor from using Mobil's wharf in Norfolk; (6) either

Mobil's interest in the Colonial pipeline or Exxon's interest in the

Plantation pipeline; (7) Mobil's interest in TAPS; (8) the terminal and

retail operations of Exxon on Guam; (9) a quality of paraffinic

lubricant base oil equivalent to the amount of paraffinic lubricant

base oil refined in North America that is controlled by Mobil; and (10)

Exxon's jet turbine oil business. The terms of the divestitures and

other provisions of the Proposed Order are discussed more fully in

Section IV below.

The Commission's decision to issue the Complaint and enter into the

Agreement Containing Consent Orders was made after an extensive

investigation in which the Commission examined competition and the

likely effects of the merger in the markets alleged in the Complaint

and in several other markets, including the worldwide markets for

exploration, development and production of crude oil; markets for crude

oil exploration and production in the United States and in parts of the

United States; markets for natural gas in the United States; markets

for a variety of petrochemical products; and markets for pipeline

transportation, terminaling or marketing of gasoline or other fuels in

sections of the country other than those alleged in the Complaint. The

Commission has not found reason to believe that the merger would result

in likely anticompetitive effects in markets other than the markets

alleged in the Complaint.

The Commission conducted the investigation leading to the Complaint

in coordination with the Attorneys General of the States of Alaska,

California, Connecticut, Maryland, Massachusetts, New Jersey, New York,

Oregon, Pennsylvania, Texas, Vermont, Virginia and Washington. As a

result of that joint effort, Respondents have entered into agreements

with the States of Alaska, California, Delaware, Maryland,

Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode

Island, Texas, Vermont, Virginia and Washington, and the District of

Columbia, settling charges that the merger would violate both state and

federal antitrust laws.

The Complaint alleges in 12 counts that the merger would violate

the antitrust laws in several different lines of business and sections

of the country, each of which is discussed below. The analysis applied

in each market generally follows the analysis set forth in the FTC and

U.S. Department of Justice Horizontal Merger Guidelines (1997)

(``Merger Guidelines''). The efficiency claims of the Respondents, to

the extent they relate to the markets alleged in the Complaint, are

small and speculative compared to the magnitude and likelihood of the

potential harm, and would not restore the competition lost as a result

of the merger even if the efficiencies were achieved.

A. Count I--Marketing of Gasoline in the Northeast and Mid-Atlantic

Exxon and Mobil today are two of the largest marketers of gasoline

from Maine to Virginia, and would be the largest marketer of gasoline

in this region after the merger, but for the remedy specified in the

Proposed Order. The merging companies are direct and significant

competitors in at least 39 metropolitan areas in the Northeast and Mid-

Atlantic; \2\ in each of these areas, and in each of the States in the

Northeast and Mid-Atlantic, the merger would result in a market that is

at least moderately concentrated and would significantly increase

concentration in that market.\3\ Nineteen of these 39 metropolitan

areas would be highly concentrated as a result of this merger.\4\ On

average, the four top firms in each metropolitan area would have 73% of

sales; the top four firms in the Northeast and Mid-Atlantic as a whole

(Exxon Mobil, Motiva,\5\ BP Amoco, and Sunoco) would on average have

66% of each of these metropolitan areas.

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\2\ Hartford, New Haven-Bridgeport-Stamford-Waterbury-Danbury,

New London-Norwich, CT; Dover, Wilmington-Newark, DE; Washington,

DC; Bangor, Lewiston-Auburn, Portland, ME; Baltimore, MD;

Barnstable-Yarmouth, Boston-Worcester-Lawrence-Lowell-Brockton, MA;

Atlantic-Cape May, Bergen-Passaic, Jersey City, Middlesex-Somerset-

Hunterdon, Monmouth-Ocean, Newark, Trenton, Vineland-Millville-

Bridgeton, NJ; Albany-Schenectady-Troy, Duchess, Nassau-Suffolk, New

York, Newburgh, NY; Allentown-Bethlehem-Easton, Altoona, Harrisburg-

Lebanon-Carlisle, Johnstown, Lancaster, Philadelphia, Reading,

Scranton-Wilkes Barre-Hazelton, State College, York, PA; Providence-

Warwick-Pawtucket, RI; Norfolk-Virginia Beach-Newport News,

Richmond-Petersburg, VA; Burlington, VT. These areas are defined,

variously, as ``Metropolitan Statistical Areas'' (``MSAs''),

``Primary Metropolitan Statistical Areas'' (``PMSAs''), and ``New

England County Metropolitan Areas'' (``NECMAs'') by the Census

Bureau.

\3\ The Commission measures market concentration using the

Herfindahl-Hirschman Index (``HHI''), which is calculated as the sum

of the squares of the shares of all firms in the market. Merger

Guidelines Sec. 1.5. Markets with HHIs between 1000 and 1800 are

deemed ``moderately concentrated,'' and markets with HHIs exceeding

1800 are deemed ``highly concentrated.'' Where the HHI resulting

from a merger exceeds 1000 and the merger increases the HHI by at

least 100, the merger ``potentially raise[s] significant competitive

concerns depending on the factors set forth in Sections 2-5 of the

Guidelines.'' Merger Guidelines Sec. 1.51.

\4\ Hartford, New London-Norwich, CT; Dover, Wilmington-Newark,

DE; Washington, DC; Bangor, Portland, ME; Barnstable-Yarmouth, MA;

Bergen-Passaic, Jersey City, Monmouth-Ocean, Trenton, NJ; Albany-

Schenectady-Troy, Newburgh, NY; Allentown-Bethlehem-Easton, Altoona,

Johnstown, State College, PA; Burlington, VT. In each of these MSAs,

the increase in concentration exceeds 100 HHI points. ``Where the

post-merger HHI exceeds 1800, it will be presumed that mergers

producing an increase in the HHI of more than 100 points are likely

to create or enhance market power or facilitate its exercise. The

presumption may be overcome by a showing that factors set forth in

Sections 2-5 of the Guidelines make it unlikely that the merger will

create or enhance market power or facilitate its exercise, in light

of market concentration and market shares.'' Merger Guidelines

Sec. 1.51.

\5\ Motiva LLC is the refining and marketing joint venture

between Shell Oil Co., Texaco Inc. and Saudi Aramco, and sells

gasoline under the ``Shell'' and ``Texaco'' names in the Eastern

United States. Equilon LLC, a refining and marketing joint venture

between Shell and Texaco, sells gasoline under the ``Shell'' and

``Texaco'' names in the Western United States.

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The Complaint alleges that the marketing of gasoline is a relevant

product market, and that metropolitan areas and areas contained within

them are relevant geographic markets. The Commission used metropolitan

statistical areas (``MSAs'') as a reasonable approximation of

geographic markets for gasoline marketing in Shell Oil Co., C-3803

(1998), and British Petroleum Co., C-3868 (1999). As described below,

the evidence in this investigation suggests that pricing and consumer

search patterns may indicate smaller geographic markets than MSAs as

defined by the Census Bureau. To that extent, using MSAs or counties to

define geographic markets likely understates the relevant levels of

concentration.\6\

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\6\ Exxon and Mobil compete in at least 134 counties in 39 MSAs

in the Northeast and Mid-Atlantic; 61 of those counties are highly

concentrated with significant increases in concentration; 56 are

moderately concentrated with significant increases in concentration;

and in only five counties (if defined as geographic markets) would

the merger not result in increases in concentration exceeding

Guidelines thresholds. See FTC v. PPG Industries, Inc., 798 f.2d

1500, 1505 (D.C. Cir. 1986) (use of data in broader market to

calculate market concentration is acceptable where market of concern

would be more concentrated).

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The Commission has found reason to believe that the merger would

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significantly reduce competition in the moderately and highly

concentrated markets that would result from this merger. A general

understanding of the channels of trade in gasoline marketing is

necessary to understand the Commission's analysis of the competitive

issues and of the Proposed Order. Gasoline is sold to the general

public through retail gas stations of four types: (1) Company-operated

stores, where the branded oil company owns the site and operates it

using its own employees; (2) lessee dealer stores, where the branded

company owns the site but leases it to a franchised dealer; (3) open

dealers, who own their own stations but purchase gasoline at a DTW

price from the branded company; and (4) ``jobber'' or distributor

stores, which are supplied by a distributor.

Branded oil companies set the retail prices of gasoline at the

stores they operate, and sometimes set those prices on a station-by-

station basis. Lessee dealers and open dealers generally purchase from

the branded company at a delivered price (``dealer tank wagon'' or

``DTW'') that the branded supplier likewise might set on a station-by-

station basis. In Northeast and Mid-Atlantic, DTW prices charged by

Exxon, Mobil and their major competitors are typically set using

``price zones'' established by the supplier. Price zones, and the

prices used within them, take account of the competitive conditions

faced by particular stations or groups of stations. There might be 10

or more price zones established by an individual oil company in a

metropolitan area.

Distributors or jobbers typically purchase branded gasoline from

the branded company at a terminal (paying a terminal ``rack'' price),

and deliver the gasoline themselves to jobber-supplied stations at

prices or transfer prices set by the distributor.\7\

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\7\ The Commission has found evidence in its investigations in

this industry indicating that some branded companies have

experimented with rebates and discounts to jobbers based on the

location of particular stations, thereby replicating the effect of

price zone in the jobber class of trade.

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In much of the Northeast and Mid-Atlantic, Exxon, Mobil and their

principal competitors (Motiva, BP Amoco, and Sunoco) use delivered

pricing and price zones to set DTW prices based on the level of

competition in the immediately surrounding area. These DTW prices

generally are unrelated to the cost of hauling fuel from the terminal

to the retail store. Gasoline is a homogeneous product, and retail

prices are observable (wholesale prices and retail sales volumes are

also frequently known to firms in the industry). By monitoring the

retail prices (and volumes) of their competitors in the immediate area,

branded companies can and do adjust their DTW prices in order to take

advantage of higher prices in some neighborhoods, without having to

raise price throughout a metropolitan area as a whole.

The use of price zones in the manner described above indicates that

these competitors set their prices on the basis of their competitors'

prices, rather than on the basis of their own costs. This is an earmark

of oligopolistic market behavior. Thus, Exxon, Mobil and their

principal competitors have some ability to raise their prices

profitably, and have a greater ability to do so when they face fewer

and less price-competitive firms in highly local markets. The effects

of oligopolistic market structures (where firms base their pricing

decisions on their rivals' prices, and recognize that their prices

affect their sales volume) have been recognized in this industry. See

Petroleum Products Antitrust Litigation, 906 F.2d 432, 443, 444 (9th

Cir. 1990) (examining California gasoline market from 1968 to 1973),

cert. denied sub nom. Chevron Corp. v. Arizona, 500 U.S. 959 (1991):

* * * (A)s the number of firms in a market declines, the

possibilities for interdependent pricing increase substantially. In

determining whether to follow a unilateral price increase by a

competitor, a firm in a relatively concentrated market will

recognize that, because its pricing and output decisions have an

effect on market conditions and will generally be watched by its

competitors, there is less likelihood that any shading would go

undetected or be ignored. * * * On the other hand, the firm may

recognize that the higher price (charged by its competitor) is one

that would produce higher profits. It may therefore decide to follow

the price increase, knowing that the other firms will likely see

things the same way * * *

We recognize that such interdependent pricing may often produce

economic consequences that are comparable to those of classic cartels.

Exxon and Mobil are each other's principal competitors in many of

these markets, and the elimination of Mobil as an independent

competitor is likely to result in higher prices.\8\

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\8\ In finding reason to believe that this merger likely would

reduce competition, the Commission has not, in the context of this

investigation, concluded that these practices of themselves violate

the antitrust laws or constitute unfair methods of competition

within the meaning of section 5 of the FTC Act. Rather, evidence of

market behavior provides the Commission with reason to believe that

these moderately and highly concentrated markets are not fully

competitive even prior to the merger, and therefore that the merger

likely would reduce competition in these markets whether or not the

post-merger was highly concentrated.

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Market incumbents also use price zones to target entrants without

having to lower price throughout a broader marketing area. With a large

and dispersed network of stores, an incumbent can target an entrant by

cutting price at a particular store, without cutting prices throughout

a metropolitan area. By targeting price-cutting competitors, incumbents

can (and have) deterred entrants from making significant investments in

gasoline stations (which are specialized, sunk cost facilities) and

thus from expanding to a scale at which the entrant could affect price

throughout the broader metropolitan area.

While branded distributors historically have moderated the effects

of zone pricing through arbitrage, distributors' ability to do so is

increasingly limited to the Northeast and Mid-Atlantic by major branded

companies' efforts to limit their distribution to direct channels,

especially in major metropolitan areas. The merger would reduce

interbrand competition through the elimination of one independent

supplier; the Commission evaluated the effect of that reduction in

interbrand competition in the context of the contemporaneous reduction

in intrabrand competition that it found in these markets.

Entry appears likely to constrain noncompetitive behavior in the

Northeast and Mid-Atlantic. New gas stations sites are difficult to

obtain in the Northeast and Mid-Atlantic, and the evidence in this

investigation suggests that entry through the construction of new

stations is unlikely to occur in a manner sufficient to constrain price

increases by incumbents. As in British Petroleum Co., C-3868, the

Commission has not seen substantial evidence that jobbers or open

dealers are likely to switch to new entrants in the event of a small

price increase. Therefore, the Commission has found it unlikely that a

new entrant might enter a market by converting such stations in a

manner that would meaningfully constrain the behavior of incumbents.

The merger is likely to reduce competition in Northeastern and Mid-

Atlantic gasoline markets and could result in a price increase of 1% or

more. A 1% price increase on gasoline sold in the Northeast and Mid-

Atlantic (and in the Texas and Arizona markets discussed below) would

cost consumers approximately $240 million annually. As described below,

the Proposed Order seeks to preserve competition by requiring

Respondents to divest all branded stations of Exxon or Mobil throughout

the Northeast and Mid-Atlantic: (1) All Exxon branded gas

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stations (company operated, lessee dealer, open dealer and jobber) in

Maine, New Hampshire, Vermont, Rhode Island, Connecticut, and New York,

and (2) all Mobil branded stations in New Jersey, Pennsylvania,

Delaware, Maryland, Virginia and the District of Columbia.

B. Count II--Marketing of Gasoline in Metropolitan Areas in Texas

Exxon and Mobil compete in the marketing of gasoline in several

metropolitan areas in Texas, and in five of those metropolitan areas

(Austin, Bryan/College Station, Dallas, Houston and San Antonio) the

merger would result in a moderately or highly concentrated market. The

evidence collected in the investigation indicates that market

conditions in these Texas markets resemble those found in the Northeast

and Mid-Atlantic, particularly in the use of delivered pricing and zone

pricing to coordinate prices and deter entry. The Proposed Order

therefore required Respondents to divest and assign Mobil's gasoline

marketing business in these areas, as described below.

C. Count III--Marketing of Gasoline in Arizona

Mobile markets motor gasoline in Arizona. Exxon gasoline is

marketed in Arizona by Tosco Corporation, which acquired Exxon's

Arizona marketing assets and the businesses and the right to sell Exxon

branded gasoline in 1994. Gasoline marketing in Arizona is moderately

concentrated.

Pursuant to the agreement under which Exxon sold its Arizona assets

to Tosco, Exxon retains the option of repurchasing the retail gasoline

stores sold to Tosco in the event Tosco were to convert the stations

from the ``Exxon'' brand to another brand (including another brand

owned by Tosco). The merger creates the risk that competition between

the merged company and Tosco (selling Exxon branded gasoline) could be

reduced by restricting Tosco's incentive and ability to compete against

Mobil by converting the stores to a brand owned by Tosco. The Proposed

Order terminates Exxon's option to repurchase these stations.

D. Count IV--Refining and Marketing of CARB Gasoline

Exxon and Mobil both refine motor gasoline for use in California,

which requires that motor gasoline used in that State meet particularly

stringent pollution specifications mandated by the California Air

Resources Board (``CARB,'' hence ``CARB gasoline''). More than 95% of

the CARB gasoline sold in California is refined by seven firms

(Chevron, Tosco, Equilon, ARCO, Exxon, Mobil and Ultramar Diamond

Shamrock), all of which operate refineries in California. Those seven

firms also control more than 90% of retail sales of gasoline in

California through gas stations under their brands.

The Complaint alleges that the refining and marketing of CARB

gasoline is a product market and line of commerce. Motorists of

gasoline-fueled automobiles are unlikely to switch to other fuels in

response to a small but significant and nontransitory increase in the

price of CARB gasoline, and only CARB gasoline may be sold for use in

California. As described below, the refining and marketing of gasoline

in California is tightly integrated; refiners that lack marketing in

California, and marketers that lack refineries on the West Coast, do

not effectively constrain the price and output decisions of incumbent

refiner-marketers.

California is a section of the country and geographic market for

CARB gasoline refining and marketing because the refiner-marketers in

California can profitably raise prices by a small but significant and

nontransitory amount without losing significant sales to other

refiners. The next closest refineries, located in the U.S. Virgin

Islands and in Texas and Louisiana, do not supply CARB gasoline to

California except during supply disruptions at California refineries,

and are unlikely to supply CARB gasoline to California in response to a

small but significant and nontransitory increase in price because of

the price volatility risks associated with opportunistic shipments and

the small number of independent retail outlets that might purchase from

an out-of-market firm attempting to take advantage of a price increase

by incumbent refiner-marketers.

To a much greater extent than in many other parts of the country,

the seven refiner-marketers in California own their stations, and

operate through company-operated stations, lessee dealers and open

dealers, rather than through distributors.\9\ The marketing practices

described in the Northeast and Mid-Atlantic, see Section III.A above,

are employed in California and are reinforced by the refiner-marketers'

more complete control of the marketing channel. One effect of the close

integration between refining and marketing in California in that

refiners outside the West Coast cannot easily find outlets for imported

cargoes of CARB gasoline, since nearly all the outlets are controlled

by incumbent refiner-marketers. Likewise, the extensive integration of

refining and marketing makes it more difficult for the few non-

integrated marketers to turn to imports as a source of supply, since

individual independents lack the scale to import cargoes economically

and thus must rely on California refiners for their usual supply. The

Commission's investigation indicated that vertical integration and the

resulting lack of independent import customers, rather than the cost of

imports, is the principal barrier to supply from outside the West

Coast.

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\9\ Exxon is unique among these firms in operating primarily

through jobbers in California. Exxon also differs from its

competitors in that a substantial portion of its refinery output is

not sold under the Exxon name, but is sold to non-integrated

marketers and through other channels.

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As measured by refinery capacity, the merger will increase the HHI

for CARB gasoline refining capacity on the West Coast by 171 points to

1699, at the high end of the ``moderately concentrated'' range of the

Merger Guidelines. The Guidelines' ``numerical divisions [of HHI

ranges] suggest greater precision than is possible with the available

economic tools and information. Other things being equal, cases falling

just above and just below a threshold present comparable competitive

issues.'' Id. Sec. 1.5.

CARB gasoline is a homogeneous product, and (as in the Northeast

and Mid-Atlantic) wholesale and retail prices are publicly available

and widely reported to the industry. Integrated refiner-marketers

carefully monitor the prices charged by their competitors' retail

outlets, and therefore readily can identify firms that deviate from a

coordinated or collusive price.

Entry by a refiner or marketer is unlikely to be timely, likely,

and sufficient to defeat an anticompetitive price increase because new

refining capacity requires substantial sunk costs. Retail entry is

likewise difficult and costly, particularly at a scale that would

support supply from an out-of-market refinery.

The merger could raise the costs of CARB gasoline substantially, a

1% price increase would cost California consumers more than $100

million annually. To remedy the harm, the Proposed Order requires the

Respondents to divest Exxon's Benecia refinery, which refines CARB

gasoline, and Exxon's marketing in California, as described more fully

below. This divestiture will eliminate the refining overlap in the West

Coast market otherwise presented by the merger.

[[Page 68106]]

E. Count V--Navy Jet Fuel on the West Coast

The U.S. Navy requires a specific formulation of jet fuel that

differs from commercial jet fuel and jet fuel used in other military

applications. Three refiners, including Exxon and Mobil, have bid to

supply the Navy on the West Coast in recent years. The merger will

eliminate one of these forms as an independent bidder, raising the

likelihood that the incumbents could raise prices by at least a small

amount, since other bidders are unlikely to enter the market. The

divestiture of Exxon's Benecia refinery, described below, resolves this

concern.

F. Count VI--Terminaling of Light Petroleum Products in Metropolitan

Boston and Washington

Petroleum terminals are facilities that provide temporary storage

of gasoline and other petroleum products received from a pipeline or

marine vessel, and then redelivers these products from the terminal's

storage tanks into trucks or transport trailers for ultimate delivery

to retail gasoline stations or other buyers. Terminals provide an

important link in the distribution chain for gasoline between

refineries and retail service stations. There are no substitutes for

petroleum terminals for providing terminaling services.

Count VI of the Complaint identifies two metropolitan areas that

are relevant sections of the country (i.e., geographic markets) in

which to analyze the effects of the merger on terminaling: Metropolitan

Boston, Massachusetts and Washington, DC. Exxon and Mobil both operate

terminals that supply both of these metropolitan areas with gasoline

and other light petroleum products.

The Complaint charges that the terminaling of gasoline and other

light petroleum products in each of these metropolitan areas is highly

concentrated, and would become significantly more concentrated as a

result of the merger. Entry into the terminaling of gasoline and other

light petroleum products in each of these metropolitan areas is

difficult and would not be timely, likely, or sufficient to prevent

anticompetitive effects that may result from the merger.\10\ Paragraphs

VII and VIII of the Proposed Order therefore require Respondents to

divest Mobil's Boston and Manassas, Virginia, terminals.

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\10\ The Commission has found reason to believe that terminal

mergers would be anticompetitive on prior occasions. E.g., British

Petroleum Co., C-3868; Shell Oil Co.; Texaco Inc., 104 F.T.C. 241

(1984); Chevron Corp., 104 F.T.C. 597 (1984).

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G. Count VII--Terminaling of Gasoline in Norfolk, Virginia

The Complaint charges that terminaling of gasoline and other light

petroleum products is highly concentrated in the Norfolk, Virginia

area. Exxon currently terminals gasoline in Norfolk, although Mobil

does not. Mobil does terminal other light petroleum products there, and

another terminaling firm, TransMontaigne, on occasion uses Mobil's

wharf to receive gasoline shipments. Since TransMontaigne terminals

gasoline in competition with Exxon, the merger would create or enhance

Mobil's incentive to deny TransMontaigne access to Mobile's dock or

increase the cost of such access, thereby limiting TransMontaigne's

ability to compete against Exxon in the terminaling of gasoline. The

Proposed Order remedies this effect of the merger.

H. Count VIII--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 largely run parallel to each other from Louisiana to

Washington, DC, and directly compete to provide petroleum product

transportation services to the inland Southeast. Mobil owns

approximately 11 percent of Colonial and has representation on the

Colonial Board of Directors. Exxon owns approximately 49 percent of

Plantation, is one of Plantation's two shareholders, and has

representation on Plantation's Board.

The proposed transaction would put the merged entity in a position

to participate in the governance of both pipelines, and to receive

confidential competitive information of each pipeline. Through its

position as one of Plantation's two shareholders, Respondents could

prevent Plantation from taking actions to compete with Colonial. As a

result, the merger is likely substantially to lessen competition,

including price and service competition, between the two pipelines. The

Commission has twice 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. Shell Oil Co., C-3803; Chevron Corp., 104

F.T.C. 597, 601, 603. To prevent competitive harm from the merger,

Section IX of the Proposed Order requires Respondents to divest to a

third party or parties the Exxon or Mobil pipeline interest.

I. Count IX--Transportation of Alaska North Slope Crude Oil

Exxon and Mobil are two of the seven owners of the Trans Alaska

Pipeline System (``TAPS''), which is the only means of transporting

crude oil from the Alaska North Slope (``ANS'') to port in Valdez,

Alaska. ANS crude is shipped primarily (but not exclusively) to

refineries in California and Washington State. A relatively small

amount of ANS crude is used within Alaska, and some ANS is sold to

refineries in Asia. Exxon owns 20% of TAPS, while Mobil owns 3%. The

owners of TAPS are entitled to capacity on the pipeline (which they can

resell) in proportion to their ownership interests. Some TAPS owners--

Mobil, in particular--have discounted their tariffs in an effort to

attract additional shippers.

Exxon and Mobil both have available capacity on TAPS, i.e.,

capacity not needed to carry their own production. Based on available

capacity, the merger would increase the HHI by 268, to 5103. The merger

would eliminate Mobil, a significant discounter on TAPS, as an

independent firm, and reduce Exxon's incentives to discount TAPS

tariffs. Entry is unlikely to defeat this price increase, since a

second crude oil pipeline is highly unlikely to be built. In the

absence of the Proposed Order, the merger could raise costs to

purchasers of ANS crude oil by $3.5 million annually. The Proposed

Order eliminates this risk by requiring the Respondents to divest

Mobil's interest in TAPS.

J. Count X--Terminaling and Marketing of Gasoline and other Light

Petroleum Products in Guam

Gasoline and diesel fuel are supplied into Guam, primarily from

Singapore, into terminals on Guam owned by Mobil, Exxon and Shell, who

are the principal marketers of gasoline on Guam. Terminal capacity is

essential to light petroleum products marketing on Guam. Consumers of

gasoline have no alternative but to buy gasoline on Guam. Accordingly,

the relevant market to analyze the transaction is the importation,

terminaling and marketing of gasoline on Guam. Mobil and Exxon are the

two largest marketers on Guam. The market is highly concentrated. The

merger will raise the HHI by more than 2800 points to 7400, measured by

station count; Exxon Mobil would have 36 of Guam's 43 stations, or 84%

of stations.

[[Page 68107]]

The market is subject to coordination. There are three companies,

and the merger would reduce their number to two. The product is

homogeneous, and prices are readily observed. 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 350,000 barrels. Terminal

capacity of this scale is unavailable in Guam. In 1988 a firm attempted

to enter Guam relying on publicly available terminaling; it exited

within seven years, and sold its four stations to Mobil.

Section III of the Proposed Order restores competition by requiring

Respondents to divest Exxon's terminal and retail assets on Guam.

L. Count XI--Paraffinic Base Oil in the United States and Canada

Paraffinic base oil is a refined petroleum product that forms the

foundation of most of the world's finished lubricants. Base oil is

mixed with chemical additives and forms finished lubricants, such as

motor oil and automatic transmission fluid. Most base oil is used to

make products that lubricate engines, but base oil can be mixed with

additives to create a large variety of finished products like newspaper

ink or hydraulic fluid.\11\

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\11\ Other types of base oil, including naphthenic and synthetic

base oils, are not substitutes for paraffinic base oil because the

users of paraffinic base oil would not switch to other base oils in

the event of a small but significant, nontransitory increase in

price for paraffinic base oils.

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Currently Exxon produces 45.9 MBD of paraffinic base oil in North

America. Mobil controls 23.8 MBD of base oil production. A combined

Exxon-Mobil would control 35 percent of the base oil produced in North

America. As the largest base oil producer in the United States and

Canada, Exxon already dominates the base oil market. With the addition

of Mobil's sizeable capacity, Exxon would have even greater control

over base oil pricing.

Exxon is the price leader in base oil in the United States and

Canada. Other base oil producers do not expand production to take

advantage of Exxon price increases. Imports do not increase when United

States prices increase because transportation costs are too great.

Entry into the base oil market requires large capital investments and

would be unlikely to have any effect within the next two years.

The Proposed Order remedies the likely effects of the likely merger

by requiring Respondents to surrender control of a quantity of base oil

production equivalent to Mobil's production in the United States.

M. Count XII--Jet Turbine Oil

Jet turbine oil (also known as ester-based turbine oil) is used to

lubricate the internal parts of jet engines used to power aircraft.

Exxon and Mobil dominate the sales of jet turbine oil, with

approximately equal shares that, combined, account for 75% of the

worldwide market (defined broadly), and approach 90% of worldwide sales

to commercial airlines.

Entry into the development, production and sale of jet turbine oil

is not likely to occur on a timely basis, in light of the time required

to develop a jet turbine oil and to obtain the necessary approvals and

qualifications from the appropriate military and civilian

organizations. The merger would eliminate the direct competition

between Exxon and Mobil, and create a virtual monopoly in sales to

commercial airlines. The Proposed Order remedies the effect of the

merger by requiring Respondents to divest Exxon's jet turbine oil

business.

IV. Resolution of the Competitive Concerns

On November 30, 1999, the Commission provisionally entered into the

Agreement Containing Consent Orders with Exxon and Mobil in settlement

of a Complaint. The Agreement Containing Consent Orders contemplates

that the Commission would issue the Complaint and enter the Proposed

Order and the Order to Hold Separate.

A. General Terms

Each divestiture or other disposition required by the Proposed

Order 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 nine months of executing the Agreement Containing

Consent Orders (except that the divestiture of the Benicia Refinery and

Exxon marketing in California must be completed within twelve months of

executing the Agreement Containing Consent Orders).

Respondents are required to provide the Commission with a report of

compliance with the Proposed Order every sixty (60) days until the

divestitures are completed, and annually for a period of 20 years.

In the event Respondents fail to complete the required divestitures

and other obligations in a timely manner, the Proposed Order authorizes

the Commission to appoint a trustee or trustees to negotiate the

divestiture of either the divestiture assets or of ``crown jewels,''

alternative asset packages that are broader than the divestiture

assets. The crown jewel for the Exxon Northeastern Marketing Assets is

Mobil's marketing in the same area; for the Mobil Mid-Atlantic

Marketing Assets, Exxon's marketing in the same area; \12\ for the

Exxon California Refining and Marketing Assets, the Mobil California

Refining and Marketing Assets; for the Mobil Texas Marketing Assets,

the Exxon Texas Marketing Assets; for Mobil's interest in TAPS, Exxon's

interest in TAPS; for the paraffinic base oil to be sold, Mobil's

Beaumont Refinery; and for Exxon's Jet Turbine Oil Business, Mobil's

Jet Turbine Oil Business. In each case, the crown jewel is a

significantly larger asset package than the divestiture assets.

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\12\ The ``crown jewel'' divestiture would include the exclusive

right to use the Exxon or Mobil name (as the case may be) in the

pertinent States for at least 20 years. If Respondents fail to

divest both the Exxon Northeast Marketing Assets and the Mobil Mid-

Atlantic Marketing Assets, the Commission may direct the trustee to

divest all of Exxon's marketing from Maine to Virginia.

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Respondents have also agreed to the entry of an Order to Hold

Separate and Maintain Assets, and the Commission has entered that

Order. Under the terms of that Order, until the divestitures of the

Benicia Refinery, marketing assets, base oil production and jet turbine

oil business have been completed, Respondents must maintain Mobil's

Northeastern, Mid-Atlantic and Texas fuels marketing businesses,

Mobil's California refining and marketing businesses, and Exxon's ester

based turbine oil business as separate, competitively viable

businesses, and not combine them with the operations of the merged

company. Under the terms of the Proposed Order, Respondents must also

maintain the assets to be divested in a manner that will preserve their

viability, competitiveness and marketability, and 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 Order and the Hold Separate Order specify these obligations in

greater detail.

To avoid conflicts between the Proposed 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)

Respondents have fully complied with the Proposed Order; (2)

Respondents submit a complete application in support of the divestiture

of the assets and businesses to be divested; (3) the Commission has in

fact approved a divestiture; but (4)

[[Page 68108]]

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 impose penalties for an additional sixty

days, in order to allow Respondents either to satisfy the State's

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

State.\13\ If at the end of that additional period, the State remains

unsatisfied, the Commission may appoint a trustee and seek penalties

for noncompliance.

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\13\ The consent decree between Respondents and the States of

Connecticut, Maryland, Massachusetts, New Jersey, New York,

Pennsylvania, Vermont and Virginia provides that a State that

objects to a proposed acquirer must petition the court before which

the decree is pending to rule on the suitability of the proposed

acquirer. In the event such a motion is made, Respondents' time to

divest under the Proposed Order is tolled until the matter is

resolved.

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B. Gasoline Marketing in the Northeast and Mid-Atlantic

Sections IV and V of the Proposed Order are intended to preserve

competition in gasoline marketing in the Northeast and Mid-Atlantic by

requiring Respondents to divest to an acquirer approved by the

Commission all retail gasoline stations owned by Exxon (or leased by

Exxon from another person) in Maine, Massachusetts, New Hampshire,

Vermont, Rhode Island, Connecticut, and New York (Proposed Order para.

IV.A), and to assign to the acquirer of those stations all dealer

leases and franchise agreements and all supply contracts with branded

jobbers (para. IV.B). The Proposed Order defines ``Existing Lessee

Agreements'' and ``Existing Supply Agreements'' broadly, to include the

totality of the relationship between Respondents and the dealers and

distributors to be assigned.\14\ Respondents will divest and assign

similar interests in all Mobil stations in New Jersey, Pennsylvania,

Delaware, Maryland, Virginia and the District of Columbia (Paras. V.A-

B). The assignment of dealer leases and franchise agreements is

intended not to effect a material change in the rights and obligations

of the parties to those leases and franchise agreements. Exxon and

Mobil will divest approximately 676 owned or leased stores and assign

supply agreements for 1,064 additional stores in the Northeast and Mid-

Atlantic.

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\14\ The assigned relationship does not include business format

franchises for the sale of ancillary products (e.g., restaurant

franchises) other than gasoline and diesel fuel.

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To effectuate the divestiture of stations and assignment of

franchise agreements, Respondents shall enter into an agreement with

the acquirer under which Respondents shall allow the acquirer to use

the Exxon or Mobil name, as the case may be, for up to 10 years (with

the possibility of further use of the name by mutual agreement

thereafter) (Paras. IV.C, V.C.). Pursuant to that agreement, the

acquirer will have the exclusive right to use the Exxon or Mobil name,

as the case may be, in connection with the sale of branded gasoline and

diesel fuel in these states, and will have the right to accept Exxon or

Mobil credit cards and to sell other Exxon or Mobil branded products

(e.g., motor oil) at gas stations in these states. The acquirer will

have the right to expand the Exxon or Mobil network in these states, as

the case may be, by opening new stores or converting stores to the

Exxon or Mobil branch (Paras. IV.C, IV.F, V.C, V.F).

It is the Commission's contemplation that the acquirers will seek

to transition the existing Exxon and Mobil networks to their own

brands.\15\ The Proposed Order requires the respective Exxon and Mobil

packages to be divested to a single acquirer (although both packages

may be divested to the same acquirer). The divestiture and assignment

of large packages of retail gasoline stations should allow the acquirer

the ability to efficiently advertise a brand, develop credit card and

other marketing programs, persuade distributors to market the

acquirer's brand, and otherwise compete in the sale of branded

gasoline.

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\15\ For that reason, the agreement entered into between

Respondents and the acquirer(s) may provide for an increasing fee

for the use of the name after five years. The terms of that

agreement will be subject to Commission approval.

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The acquirer will nonetheless be allowed to continue to offer the

Exxon or Mobil name, as the case may be, to dealers and jobbers in

order to allow the acquirer to preserve the network to the greatest

extent feasible and to comply with the requirements of the Petroleum

Marketing Practices Act, 15 U.S.C. 2801 et seq. (``PMPA''). Thus, the

acquirer will be able to continue to offer Exxon or Mobil branded fuel,

as the case may be, to dealers and jobbers that are today selling Exxon

or Mobil branded fuel and displaying those brands. Over time, the

acquirer in its business judgment may choose to convert the business it

acquires to its own brand name, subject to the requirements of law or

with the consent of the dealers and jobbers in question.

To effectuate the divestiture and allow the acquirers an

opportunity to convert dealers and jobbers to a new brand, the Proposed

Order prohibits Respondents from using the pertinent brand in the sale

of gasoline for at least five (5) and as much as twelve (12) years from

the date of divestiture in the region in question (i.e., Respondents

will not be able to sell gasoline under the Exxon name in New York or

New England, where they are divesting and assigning Exxon stations,

dealers and jobbers). In addition, Respondents will be prohibited from

offering to sell branded fuels for resale at divested or assigned sites

for a period of seven (7) years (Paras. IV.G, V.G).

Respondents' obligations to preserve the assets to be divested and

assigned include the obligation to maintain the relationships with

dealers and jobbers pending divestiture or assignment. Respondents have

agreed to meet this obligation by, among other things, establishing a

fund of $30 million to be paid to distributors who accept assignment of

their supply agreements to the acquirer. The terms of that incentive

program are set forth in Appendix A to the Proposed Order.

C. Marketing of Gasoline in Texas

To remedy the reduction in competition in the five metropolitan

areas in Texas alleged in Count II of the Complaint, Paragraph VI of

the Proposed Order requires Respondents to divest and assign Mobil's

marketing businesses in those five metropolitan areas. Mobil's

marketing assets in those metropolitan areas include interests of Mobil

in partnerships with TETCO Inc. and Southland Corp. The Proposed Order

requires that Respondents divest Mobil's interest in its partnership

with TETCO to TETCO or to another acquirer approved by the Commission,

in either event only in a manner approved by the Commission. The

Proposed Order also requires Respondents to assign their Existing

Supply Agreements to Assignees approved by the Commission, on the same

terms as discussed with regard to Northeastern and Mid-Atlantic

marketing, Part IV.B above. Respondents will divest approximately 10

owned or leased Mobil stores and assign supply agreement for Mobil's

distributor-supplies stores in Texas.

D. Marketing of Gasoline in Arizona

To remedy the reduction in competition in the marketing of gasoline

in Arizona alleged in Count III of the Complaint, Paragraph XI of the

Proposed Order requires Exxon to surrender its right to reacquire

stores sold to Tosco.

[[Page 68109]]

E. Refining and Marketing of CARB Gasoline for California and Navy Jet

Fuel for the West Coast

To remedy the reduction in competition in the refining and

marketing of CARB gasoline and navy jet fuel alleged in Counts IV and V

of the Complaint, Paragraph II of the Proposed Order requires

Respondents to divest Exxon's Benicia refinery and Exxon's owned gas

stations in California, and to assign Exxon's lessee contracts and

jobber supply contracts in California to an acquirer approved by the

Commission (Paras. II.A, II.B). The divestiture of Exxon's Benicia

refinery, with Exxon's California marketing, will not significantly

reduce the amount of gasoline available to non-integrated marketers,

since the refinery likely will continue to produce that gasoline and

need outlets for its sale. Respondents will divest approximately 85

owned or leased Exxon stores and assign supply agreements for

approximately 275 additional stores in California.

As part of its divestiture of the refinery, Respondents shall (at

the acquirer's option) enter into a supply contract with the acquirer

for a ratable quantity of Alaska North Slope (``ANS'') crude oil up to

100 thousand barrels per day (an amount equivalent to the refinery's

historic usage). Exxon is one of the three principal producers of ANS

crude oil (the other two are BP Amoco and ARCO).

The divestiture and assignment of the Exxon stations is generally

under the same terms as described regarding the Northeast and Mid-

atlantic, see Section IV.B above, except that in four PMSAs (San

Francisco, Oakland, San Jose and Santa Rosa) Respondents will terminate

their dealers' contracts and divest the real estate to the acquirer

without authorizing the acquirer to use the Exxon name. Because Mobil

does not market branded gasoline in these PMSAs, Exxon can effectuate a

``market withdrawal'' in these MSAs under the PMPA, 15 U.S.C. 2801 et

seq.

In considering an application to divest and assign Exxon's

California refining and marketing businesses to an acquirer, the

Commission will consider the acquirer's ability and incentive to invest

and compete in the businesses in which Exxon was engaged in California.

The Commission will consider, inter alia, whether the acquirer has the

business experience, technical judgment and available capital to

continue to invest in the refinery in order to maintain CARB gasoline

production even in the event of changing environmental regulation.

F. Count VI--Terminaling of Light Petroleum Products in Metropolitan

Boston and Washington

To remedy the reduction of competition in terminaling of light

petroleum products in metropolitan Boston and Washington, Paragraphs

VII and VIII require Respondents to divest Mobil's East Boston,

Massachusetts, and Manassas, Virginia, light petroleum products

terminals, thereby eliminating the effect of the merger in these

markets.

G. Count VII--Terminaling of Light Petroleum Products in the Norfolk,

Virginia Area

To remedy the reduction of competition in terminaling of light

petroleum products in metropolitan Norfolk, Virginia, Paragraph IX

requires Respondents to continue to offer TransMontaigne access to

Mobil's wharf on the same terms as have been offered historically, for

as long as Respondents own the wharf.

H. Count VIII--Transportation of Light Petroleum Products to the Inland

Southeast

To remedy the reduction of competition in transportation of light

petroleum products to the inland Southeast, the Proposed Order requires

Respondents to divest either Exxon's interest in Plantation or Mobil's

interest in Colonial, and, pending divestiture, not to exercise their

voting rights in connection with ownership or board representation on

Colonial, thereby eliminating the effect of this merger in this market.

I. Count IX--Transportation of Crude Oil from the Alaska Slope

To remedy the reduction of competition in transportation of crude

oil from the Alaska North Slope to Valdez, Alaska, and intermediate

points, Paragraph X of the Proposed Order requires Respondents to

divest Mobil's interest in TAPS (including Mobil's interest in terminal

storage at Valdez and, at the acquirer's option, Mobil's interest in

the Prince William Sound Oil Spill Response Corporation), thereby

eliminating the effect of this merger in this market.

J. Count X--Importation, Terminaling and Marketing of Light Petroleum

Products in Guam

To remedy the reduction in competition in the importation,

terminaling and marketing of light petroleum products in Guam,

Paragraph III of the Proposed Order requires Respondents to divest

Exxon's terminal and marketing in Guam. Essentially all of Exxon's

gasoline marketing in Guam consists of approximately 11 company-

operated retail gasoline stores, which can be divested without the

right to use the Exxon's brand. The Proposed Order therefore does not

provide for the use of the ``Exxon'' brand in Guam. The Proposed Order

does provide that the divestiture of the terminal include Exxon's

rights in its joint terminaling arrangements with Shell and, at the

acquirer's option, Exxon's liquefied propane gas (``LPG'') storage

facilities. The divestiture would thereby eliminate the effect of this

merger in this market.

K. Count XI--Paraffinic Base Oil

The Proposed Order requires Respondents to relinquish control of an

amount of base oil equivalent to the amount controlled by Mobil, in

order to remedy the effect of combining Exxon's and Mobil's base oil

production. First, Respondents must offer to change several terms in

Mobil's contract with Valero, in order to relinquish control over

Valero's base oil production. The terms Respondents must offer are

confidential, and are contained in a confidential appendix to the

order.

Second, Respondents must enter into a long-term supply agreement

(or agreements) with not more than three firms to supply those firms

with an aggregate of 12 MBD of base oil from the merged firm's three

refineries in the Gulf Coast area. The purchaser(s) of this base oil

would purchase this base oil for ten years, under a price formula

agreed to by the parties (and approved by the Commission) that is not

tied to a United States base oil price (e.g., the formula might be tied

to a benchmark price for crude oil). The purchaser(s) could use the

base oil or resell it. Since the price term will be unrelated to any

U.S. base oil price, Respondents would not be able to influence the

price of this base oil. This sales agreement would put the purchaser(s)

in the same position as competing base oil producers.

By changing Mobil's contract with Valero and entering into a Gulf

off-take agreement, Mobil's share of the base oil market will

effectively be given to Valero and some new entrant(s) in base oil

market or other suitable acquirers. The status quo in the base oil

market will be maintained.

If Respondents do not offer the aforementioned terms to Valero

within six months and do not enter into base oil supply contracts with

suitable entities within nine months, they must divest Mobil's

Beaumont, Texas refinery.\16\

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\16\ A divestiture of Mobil's Beaumont refinery would give the

acquirer six percent of North American base oil production and

complete control of a low-cost base oil refinery. The buyer would be

free to make any capital investments to expand capacity it chose to

make. The Commission does not believe, on the facts of this

investigation, that a divestiture of the refinery is strictly

necessary to maintain competition in the paraffinic base oil market.

The Commission might normally believe that divestiture of a refinery

was necessary in order to allow the acquirer to have the ability to

expand production and develop new products. However, the current

trend toward producing higher grade based oils for use in finished

products that need to be replaced less often (i.e., new products

that significantly reduce drain intervals), suggests that the demand

for base oil is likely to contract, making the need for expansion

less significant on the particular facts here.

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[[Page 68110]]

L. Count XII--Jet Turbine Oil

To remedy the effects of the merger in the market for jet turbine

oil, the Proposed Order requires Respondents to divest Exxon's jet

turbine oil business. The Proposed Order defines Exxon's jet turbine

oil business, which must be divested, to include, among other things,

an exclusive, perpetual license to use identified Exxon patents in the

field of jet turbine oil, other intellectual property, research and

testing equipment, and Exxon's jet turbine oil manufacturing facility

at Bayway, New Jersey.

V. Opportunity for Public Comment

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

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

commission, pursuant to a change in its rules of practice, has also

issued its complaint in this matter, as well as the Offer to Hold

Separate. Comments received during this sixty day comment period will

become part of the public record. After sixty days, the Commission will

again review the Proposed Order and the comments received and will

decide whether it should withdraw from the Proposed Order or make final

the agreement's Proposed Order.

By accepting the Proposed Order subject to final approval, the

Commission anticipates that the competitive problems alleged in the

complaint will be resolved. The purpose of this analysis is to invite

public comment on the Proposed Order, including the proposed

divestitures, to aid the Commission in its determination of whether it

should make final the Proposed Order contained in the agreement. This

analysis is not intended to constitute an official interpretation of

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

Proposed Order in any way.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 99-31563 Filed 12-3-99; 8:45 am]

BILLING CODE 6750-01-M