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Topics: Exxon, Mobil
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| Agency: Federal Trade Commission
Date: 30 November 1999 |
"Because Exxon and Mobil are such large and powerful competitors, and because they now compete in several product and geographic markets in the United States, the Commission insisted on extensive restructuring before accepting a proposed settlement," said FTC Chairman Robert Pitofsky. "This settlement should preserve competition and protect consumers from inappropriate and anticompetitive price increases."
According to the Commission, the proposed merger poses competitive problems in "moderately concentrated" markets (California gasoline refining, marketing and retail sales of gasoline in the Northeast, Mid-Atlantic and Texas) and in "highly concentrated" markets (e.g., jet turbine oil). The most substantial portions of the proposed settlement would resolve the problems in the "moderately concentrated" markets. "Moderately concentrated" markets have more competitors and lower market shares than "highly concentrated" markets, and have been the subject of antitrust challenges less frequently than markets with fewer competitors and higher market shares. "This agreement will stand as the Commission's most significant enforcement effort in moderately concentrated markets in many years," Pitofsky said.
The Commission conducted an extensive investigation of the deal, analyzing competition and the likely effects of the merger in every oil market -- "from the well to the pump." The investigation was coordinated with the European Commission and the Attorneys General of several states. Alaska, California, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Virginia and Washington and the District of Columbia have entered into agreements with Exxon and Mobil settling charges that the merger would violate both state and federal antitrust laws.
The Commission alleged that the merger would lessen competition in the following markets: (1) the marketing of gasoline in the northeastern and mid-Atlantic United States; (2) the marketing of gasoline in five metropolitan areas in Texas; (3) the marketing of gasoline in Arizona; (4) the refining and marketing "CARB" gasoline (specially formulated gasoline required in California) in California; (5) the 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, D.C., metropolitan areas; (7) the terminaling of light petroleum products in Norfolk, Virginia; (8) the transportation of refined light petroleum products to the inland portions of Mississippi, Alabama, Georgia, South Carolina, North Carolina, Virginia and Tennessee; (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 manufacture and sale of jet turbine lubricants.
The proposed settlement would remedy the alleged anticompetitive effects of the merger by requiring Exxon/Mobil to divest: (1) all of Mobil's gasoline marketing in New Jersey, Pennsylvania, Delaware, Maryland, Virginia and the District of Columbia (the Mobil Mid-Atlantic Marketing Assets) and all of Exxon's gasoline marketing in Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut and New York (the Exxon Northeast Marketing Assets); (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 in Benicia, California, and all of Exxon's gasoline marketing in California; (5) the terminal operations of Mobil in Boston and 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 in Guam; (9) a quantity of paraffinic lubricant base oil equivalent to Mobil's North American market share; and (10) Exxon's jet turbine oil business.
The Commission noted that the decision whether to approve the proposed acquirers of the divested assets will be made after careful consideration of the refining and marketing experience, financial viability, business plans and environmental records of the acquiring companies. "We want to assure ourselves that in approving the buyers we accomplish the purposes of the remedy contained in the consent order to restore the competition lost by the merger," it said.
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, the agency said. The merging companies are currently direct and significant competitors in at least 40 metropolitan areas in those states. The Commission alleged that the merger would significantly reduce competition in these moderately and highly concentrated markets where major oil companies use price zones to set wholesale and retail prices neighborhood by neighborhood. Entry appears unlikely to constrain noncompetitive behavior -- new gas station sites are difficult to build or obtain and open stations are unlikely to switch to brands that are new to the market, the agency said. If not restructured, the merger could result in a significant gas price increase, the Commission said. Each one percent price increase would cost consumers approximately $240 million annually.
The proposed settlement order would preserve competition in the Northeast and Mid-Atlantic by requiring Exxon/Mobil to sever its relationships with 1,740 gas stations, including all of Exxon's company-operated, lessee-dealer, open-dealer and jobber-supplied gas stations in New York, Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire, and Maine and all of Mobil's company operated, lesser dealer, open dealer and jobber supplied gas stations in New Jersey, Pennsylvania, Delaware, Maryland, Virginia and the District of Columbia.
According to the Commission, gasoline is sold to the general public through four types of retail gas stations: (1) company-operated stores, where the branded 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, who purchases gasoline from the branded company at a delivered price ("dealer tank wagon" or "DTW" price); (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 who purchases branded gasoline from the branded company at a terminal, and delivers the gasoline itself to the stations.
Under the proposed consent order, Exxon/Mobil would be required to sell the gas stations it owns or leases and assign their franchise and supply agreements with open dealers and jobbers to acquirers approved by the Commission. Exxon and Mobil would sell approximately 686 owned or leased stores and assign supply agreements for l,054 additional stores in the Northeast and Mid-Atlantic.
Exxon and Mobil would have to enter into an agreement with the acquirer under which Exxon/Mobil would allow the acquirer to use the Exxon or Mobil name for up to 10 years (with the possibility of further use of the name at mutual agreement). The acquirer would have the exclusive right to use Exxon or Mobil branded products (e.g., motor oil) at gas stations in these states and a nonexclusive right to accept and process Exxon or Mobil credit cards. The acquirer would also have the right to expand the Exxon or Mobil network in these states by opening or converting new stations to the Exxon or Mobil brand, the agency said. The acquirer could maintain the stations as Exxon or Mobil stations or convert them to the acquirer's brand, subject to applicable law.
The proposed settlement order would require the respective Exxon and Mobil packages to be divested to a single acquirer (although both packages may be divested to the same acquirer). In effect, the agency said, the acquirer of the assets would obtain the brand and would step into the shoes of Exxon and Mobil. The divestiture and assignment of large packages of retail gasoline stations should allow the acquirer 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, the FTC said.
Refining and Marketing of CARB Gasoline in California
Exxon and Mobil both refine gasoline for use in California, which requires motor gasoline used in that state to meet particularly stringent pollution specifications mandated by the California Air Resources Board (CARB), the agency said. The complaint outlining the charges against Exxon and Mobil alleges that CARB gasoline is a product market and line of commerce, because 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.
More than 95 percent of the CARB gasoline sold in California is refined by seven firms in what the agency determined is a moderately concentrated market. To a much greater extent than in other parts of the country, these seven companies own their stations or operate through open dealers rather than through jobbers, the agency said. The refineries carefully monitor the prices charged by their competitors' retail outlets and therefore readily can identify firms that deviate from a coordinated or collusive price.
According to the Commission, the merger could raise the cost of CARB gasoline substantially; a one percent price increase would cost California consumers more than $100 million annually.
To remedy the reduction in competition in the refining and marketing of CARB gasoline and navy jet fuel, the proposed settlement would require the companies to divest Exxon's Benicia refinery, which refines CARB gasoline, and Exxon's marketing in California. The company would divest approximately 85 owned or leased Exxon stations (in the San Francisco, Oakland, San Jose, and Santa Rosa metropolitan areas) and assign supply agreements for approximately 275 additional stores throughout California. Exxon would be prohibited from using the Exxon name to sell gasoline or diesel fuel in California for up to 12 years, the FTC said. The divestiture of Exxon's California refining and marketing to a single purchaser should allow the acquirer to efficiently build a new brand presence in California that would add new competition to the marketplace.
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 areas (Austin, Bryan/College Station, Dallas, Houston and San Antonio) the merger would result in a moderately or highly concentrated market, the Commission said.
The proposed settlement order would require Exxon/Mobil to divest and assign Mobil's gasoline marketing business - 10 owned or leased Mobil stores and supply agreements for 309 additional stores in Texas. Mobil's marketing assets in the five metropolitan areas include interests in partnerships with TETCO, Inc. and Southland Corp. The proposed order would require that Exxon/Mobil divest Mobil's interest in its partnership with TETCO to TETCO or to another acquirer approved by the Commission.
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. 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.
According to the Commission, a combined Exxon/Mobil would control 35 percent of the base oil 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 prices, the agency charged.
Exxon produces base oil at two refineries in the United States (Baytown, Texas, and Baton Rouge, Louisiana) and in Canada. Mobil produces base oil at the Beaumont, Texas refinery, and has an offtake agreement with Valero Energy Corporation at Valero's Paulsboro refinery in New Jersey. The proposed settlement order would require Exxon/Mobil to relinquish control of an amount of base oil equivalent to the amount refined by or under Mobil's control. The goal of this provision is to maintain the status quo in base oil production and sale.
General Terms
According to the proposed order, each divestiture or other disposition must be made to an acquirer that would receive the prior approval of the Commission, and must be completed within nine months (except that the divestiture of the Benicia refinery and Exxon marketing in California may be completed within 12 months).
If Exxon/Mobil fails to complete the required divestitures and other obligations in a timely manner, the proposed order would authorize the Commission to appoint a trustee to negotiate the divestiture of either the divestiture assets or of "crown jewels," alternative asset packages that are significantly broader than the divestiture assets.
Exxon, headquartered in Irving, Texas, is one of the world's largest integrated oil companies. Exxon operates petroleum refineries that make various grades of gasoline and lubricant base stock, among other petroleum products. It sells its products to intermediaries, retailers and consumers. Exxon owns four refineries in the United States that can process approximately 1.1 million barrels of crude oil and other feedstocks daily. Exxon owns or leases approximately 2,049 gasoline stations nationally and sells gasoline to distributors or dealers that operate 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.
Mobil, headquartered in Fairfax, Virginia, is another of the world's largest integrated oil companies. Mobil operates petroleum refineries in the United States that 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 800,000 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.
The Commission vote to authorize the proposed settlement agreement was 4-0-1, with Commissioner Orson Swindle concurring in part and dissenting in part and Commissioner Thomas B. Leary not participating. In a separate statement, Chairman Robert Pitofsky and Commissioners Sheila F. Anthony and Mozelle W. Thompson explained why restructuring of the original transaction was necessary, and why the restructuring arrangements would be adequate to protect competition and the welfare of consumers. They noted that some 60 percent of the transaction involved assets located outside the United States; oil industry refining and marketing, despite a trend toward concentration, is still only moderately concentrated in the United States; and that principal overlaps in the transaction had been addressed through requirements that refining and retail assets be divested to new competitors. The statement added that the Commission, in deciding to approve or disapprove possible buyers, would take into account the impact of divestiture on dealers and gas station owners, including particularly independent station owners and lessees who play an important part in preserving competition in the retail sector of the gasoline markets. The statement concluded: "Increasing concentration in the oil industry may simply reflect the needs of firms competing in a global market. With the recent mergers in the industry, however, concentration has significantly increased. Accordingly, the Commission has been demanding in its requirements for restructuring this transaction, and will review any future proposed mergers in this industry with special concerns."
Commissioner Swindle issued a separate statement indicating his views. He offered the observation that, "Although the public may perceive that allowing the merger of Exxon and Mobil is an ominous sign that the government is allowing the Standard Oil Trust to be reassembled," because of the extraordinary changes in the oil industry, "the merger is not, as Yogi Berra once said, 'deja vu all over again.'" Commissioner Swindle further emphasized that the proposed merger may allow Exxon and Mobil to become a more effective competitor against the oil companies of other nations (e.g., Saudi Arabia's Aramco) - which collectively own 90 percent of the world's oil reserves and which produce 70 percent of the world's oil - in the oil exploration and production, thereby benefitting American consumers and the America economy.
Although he generally supported the Commission's action, Commissioner Swindle dissented from the provisions of the complaint and proposed consent order concerning the wholesaling and retailing of gasoline in markets that would be only moderately concentrated after the merger. He concluded that, except for highly concentrated markets, the proposed merger between Exxon and Mobil is not likely to lead to consumer harm in the form of higher prices for gasoline because of the difficulties that oil companies would face in coordinating their prices. Commissioner Swindle thus would not have required that Exxon and Mobil divest or assign their retail gasoline stations that are not located in highly concentrated markets.
A summary of the proposed agreement will appear in the Federal Register shortly. The agreement will be subject to public comment for 60 days, until January 31, 2000, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.
Copies of the Commission statements, complaint, proposed consent agreement, and the analysis of the proposed consent order to aid public comment are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. Consent agreements subject to public comment also are available by calling 202-326-3627. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC File No. 9910077)