Analysis of the Proposed Consent Order to Aid Public Comment

The Federal Trade Commission ("Commission") has accepted for public comment an
Agreement Containing Consent Order with Agrium, Inc. (“Agrium”) and Union Oil Company of
California and Unocal Corp. (“Unocal”). The purpose of the agreement is to remedy the
anticompetitive effects of Agrium’s proposed acquisition of Unocal’s nitrogen fertilizer business.
The proposed order would require that Agrium divest assets that are integral to the sale of
nitrogen fertilizers in the Northwest (Washington, Oregon, and Idaho).

Nitrogen fertilizers are used by farmers around the world to improve crop yields by
supplying the nitrogen essential to plant growth. Agrium, with production facilities in Texas and
near its headquarters in Alberta, Canada, is one of the world’s largest producers of nitrogen
fertilizers. In 1998, Agrium’s wholesale sales of nitrogen fertilizers were $501 million. Unocal
produces and sells nitrogen fertilizers through its subsidiaries Alaska Nitrogen Products LLC and
Prodica LLC, which have production and distribution facilities in Alaska, Washington, Oregon
and California. Unocal’s 1998 wholesale sales of nitrogen fertilizers were approximately $377
million.

Agrium and Unocal are the leading sellers of anhydrous ammonia, urea, and UAN 32%
solution, which are the most popular nitrogen fertilizers in the Northwest. Substitution among
these fertilizers, and between them and other nitrogen fertilizers, is limited because of
agricultural considerations (they differ in their suitability for particular crops, soils, weather
conditions, etc.) and commercial factors (e.g., each of these fertilizers requires different storage
and application equipment). In the manufacture of an important resin, there is no substitute for
urea.

The complaint alleges that Agrium’s proposed acquisition of Unocal, if consummated,
may substantially lessen competition in violation of 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 identifies three relevant lines of commerce (product markets) in
which to analyze the effects of this acquisition: urea, ammonia, and UAN 32%. The relevant
section of the country (geographic market) alleged in the complaint is the Northwest, which
consists of the states of Washington, Oregon, and Idaho. In urea, Agrium’s acquisition of Unocal
would result in an increase in the Herfindahl-Hirschman Index (commonly referred to as “HHT”)
from 2200 to over 4800; in ammonia, the HHI rises from 1922 to over 4200; and in UAN 32% it
rises from 1560 to over 3800. By eliminating competition between Agrium and Unocal, who are
the top two suppliers of each of these products in the Northwest, the acquisition would enable
Agrium to unilaterally increase the prices of ammonia, urea, and UAN 32% in that geographic
market.

It is unlikely that the competition eliminated by the proposed acquisition would be
replaced by new entry into the Northwest. The construction of a new nitrogen fertilizer plant to
supply the Northwest appears to be uneconomic. One recent attempt at building a plant in the
region was abandoned four years after it was first announced. Design, site selection, permitting
and construction of a new plant to supply the Northwest would require considerably more than


two years. Producers with plants in the Northwest cannot expand output because these plants are
operating at capacity. Importers of offshore fertilizers are unlikely to ship significantly more to
the Northwest because the transfer and storage terminals they need are either unavailable or more
expensive to use than Unocal’s Rivergate terminal. Midwest producers face obstacles to
increasing shipments to the Northwest, including high transportation costs, commitments to local
customers, the attractiveness of netbacks closer to their plants, and differences in seasonal
demand that often make California a better market for their product.

The proposed consent order would require that Agrium divest Unocal’s deepwater
terminal at Rivergate, part of its upriver terminal at Hedges (containing urea storage and land for
expansion and road access), and leases on three UAN terminals (including one with deepwater
access) to J.R. Simplot Company. The order would also require Agrium to provide Simplot with
a long-term lease on the ammonia storage at Hedges and perpetual access to the Hedges dock,
roadway, rail spur and weight scales.

The Commission is preliminarily satisfied that Simplot is well qualified to reproduce
Unocal’s competitive role in the Northwest. Simplot is a $2.8 billion agribusiness that, among
other things, produces, wholesales and retails nitrogen and other fertilizers around North
America. It operates a large nitrogen fertilizer production facility in Manitoba, numerous
phosphate plants, and a chain of retail outlets. In the Northwest, Simplot is a substantial source
of phosphate fertilizers, but its wholesaling of nitrogen fertilizers is very limited. The proposed
divestiture would enable Simplot to become a major wholesaler of nitrogen fertilizers in the
Northwest.

The proposed order requires that respondents divest the specified assets to Simplot, in
accordance with the agreement between Agrium and Simplot, immediately after Agrium acquires
Unocal. If, at the time the Commission decides to make the proposed consent order final, the
Commission notifies the respondents that Simplot is not an acceptable acquirer, or that the
agreement with Simplot is not an acceptable manner of divestiture, the respondents must
immediately rescind the transaction and divest those assets to an acceptable acquirer, and in an
acceptable manner, within four months of the date the proposed consent order becomes final.

For a period of ten (10) years from the date the proposed order becomes final,
respondents are required to provide written notice to the Commission prior to acquiring any
interest in (1) any asset to be divested or (2) any terminal with deepwater access used in the
transfer and storage of UAN 32 in the Northwest. These appear to be the only assets in the
Northwest whose acquisition might substantially affect competition in the sale of the relevant
products but not trigger a reporting obligation under the Hart-Scott-Rodino Act. Respondents are
required to provide to the Commission a report of compliance with the proposed order within
thirty (30) days of the date the order becomes final and every sixty (60) days thereafter until
respondents have complied with the divestiture obligations. Respondents are also required to
provide annual reports during the term of the order. For Agrium the term of the order would be
ten years; for Unocal it would be until the assets to be divested are transferred to Agrium.


The Agreement Containing Consent Order has been placed on the public record for thirty
(30) days for receipt of comments by interested persons. Comments received during this period
will become part of the public record. After thirty (30) days, the Commission will again review
the proposed order and the comments received and will decide whether it should withdraw from
the order or make it final. 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
specified divestitures, to aid the Commission in its determination of whether it should make the
order final. This analysis is not intended to constitute an official interpretation of the proposed
order, nor is it intended to modify the terms of the order in any way.