[Federal Register Volume 62, Number 249 (Tuesday, December 30, 1997)]
[Notices]
[Pages 67868-67872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33872]


=======================================================================
-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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 ``<a href="http://www.ftc.gov/os/
actions97.htm">http://www.ftc.gov/os/
actions97.htm</a>.'' 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

[[Page 67870]]

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