Alaska's North Slope is one of the largest sources of crude oil in the world. Crude oil extracted from Alaska's North Slope ("ANS crude oil") is transported through the Trans-Alaska Pipeline System ("TAPS") to the warm water port of Valdez, Alaska. From Valdez, large oil tankers transport ANS crude oil to refineries, most of which are located on the West Coast of the United States. The West Coast refineries process ANS crude oil and other crude oils to produce gasoline that ultimately is sold to consumers located on the West Coast.
The three main producers of ANS crude oil are British Petroleum/Amoco Oil Co., Inc. ("BP"), Atlantic Richfield Corporation ("ARCO"), and ExxonMobil Corporation ("Exxon"). BP produces about 45% of ANS crude oil, ARCO about 30%, and Exxon about 22%. Each of these producers owns interests in TAPS and the oil tanker fleet that are roughly proportionate to its share of ANS crude oil production. Because BP currently does not own any refineries on the West Coast, it sells most of its ANS crude oil to other West Coast refiners. In contrast, ARCO and Exxon use most of their ANS crude oil in their own West Coast refineries.
BP's proposed merger with ARCO would give the merged firm about a 75% share of exploration, production, and transportation of ANS crude oil. The complaint alleges that the proposed merger is likely substantially to lessen competition in the market for the sale of ANS crude oil to West Coast refineries. The basic theory is that prior to the merger BP has been able to exercise market power in sales of ANS crude oil to West Coast refineries, i.e., BP has been able to profitably maintain prices above competitive levels for a significant period of time. BP's acquisition of ARCO would increase BP's ability to exercise market power, which could cause West Coast refineries to pay more for ANS crude oil. While the case raises complex market definition and other issues, we have reason to believe that the proposed merger, absent the contemplated relief, is likely substantially to lessen competition as alleged in the complaint.
Traditionally, if a merger raises competitive concerns, the Commission requires the merging parties to divest assets to eliminate the competitive overlap before allowing the merger to be consummated. Consistent with this approach, in this case the Commission has accepted a proposed order requiring BP and ARCO to divest all of ARCO's assets in Alaska to Phillips Petroleum Company ("Phillips"). We believe that this divestiture will remedy the antitrust concerns raised by the proposed merger. In fact, as the concurring statement of Chairman Pitofsky and Commissioner Thompson points out, the consent agreement has the potential to "actually improve upon the level of competition" in the West Coast market. As a result of the planned divestiture, Phillips will have about a 30% share of ANS crude oil exploration, production, and transportation, and Phillips will have even more crude oil to sell on the open market than ARCO has today. Phillips appears to have the financial resources and experience to be a vigorous competitor in the exploration, production, and transportation of ANS crude oil.
In addition to this structural relief, Chairman Pitofsky and Commissioner Thompson would favor "behavioral" relief that would require the Commission to engage in extensive monitoring of ANS crude oil exports and prices for the next decade. Specifically, they support a provision that would prohibit BP and Phillips, for 10 years, from "knowingly and intentionally" exporting ANS crude oil outside the West Coast of the United States "for the purpose of increasing the Spot Price of ANS crude oil" on the West Coast. The proposed export restriction also would include a presumptive safe harbor if an export sale were made at a "price reasonably anticipated to produce a higher profit than a contemporaneous sale" on the West Coast. We believe that this over-regulatory export restriction would be unnecessary, unenforceable, and otherwise inappropriate.(1)
It is unnecessary to impose the proposed export restriction on BP because BP is highly unlikely to engage in exports following the merger. There is some evidence that, prior to the merger, BP occasionally exported ANS crude oil to the Far East in order to increase spot prices for ANS crude oil on the West Coast. It is important to emphasize that BP's unilateral actions were not illegal under the antitrust laws - and, indeed, the complaint makes no allegation that the exports were illegal.(2) In any event, however, BP's incentives to export will change as a result of the proposed divestitures. Before the merger, BP sold most of its ANS crude oil to other West Coast refiners because it did not own refineries on the West Coast. BP benefitted from higher spot prices because of its status as a merchant marketer, and also because Alaska's royalty scheme for ANS production was tied to ANS spot prices on the West Coast. After the merger, BP will acquire two West Coast oil refineries that were part of ARCO, and BP likely will need to use most of its ANS crude oil production to operate these two refineries. Since BP will be consuming most of its ANS production internally, BP will now benefit from lower royalty payments to the extent that the ANS spot price drops. Therefore, as a result of the new market structure created by the proposed divestitures, BP is extremely unlikely to resume exporting ANS crude oil to the Far East (or elsewhere) to increase spot prices for ANS crude oil on the West Coast.
Nor is it necessary to impose the export restriction on Phillips. Phillips is purchasing ARCO's assets in Alaska lock-stock-and-barrel, i.e., Phillips is assuming ARCO's position as an explorer, producer, and transporter of ANS crude oil. There is no evidence that ARCO ever engaged in strategic ANS exports for the purpose of increasing West Coast spot prices. Granted, it might appear that Phillips will have a greater incentive than ARCO did to increase spot prices for ANS crude oil, because Phillips, like the pre-merger BP, will sell its ANS crude oil to West Coast refineries on the merchant market (whereas ARCO consumed most of its production in its own West Coast refineries). However, Phillips will have a much smaller share of ANS crude oil production than did BP - approximately 30% for Phillips versus 45% for BP - which makes it quite unlikely that Phillips could successfully engage in exports to increase spot prices for ANS crude oil on the West Coast.
Not only is the export restriction unnecessary, it also would be extremely difficult to enforce because it would require proof of BP's or Phillips's knowledge and intent. We cannot rely on the companies to create an unambiguously inculpating "paper trail," and in the face of ambiguous evidence, the Commission's burden of proof would be very high indeed. We do not think that the public interest would be well served by including an order provision that is so obviously difficult to enforce that it would have little or no practical effect. Moreover, the proposed safe harbor would complicate enforcement proceedings even further by introducing additional factual issues that would be difficult to resolve.
We do not believe the export restriction is an appropriate measure for the Commission to impose in the context of a merger settlement, especially when the proposed structural relief fully restores, and may even improve upon, the status quo ante. The export restriction would address a pre-existing market condition, under which BP allegedly, unilaterally, and sporadically exported ANS crude oil with some slight effect on West Coast prices.(3) We acknowledge the public concern over the relatively high price of gasoline on the West Coast, but people will be cruelly disappointed if they are led to believe that the export restriction would have a detectable effect on the situation. Moreover, it is not the Commission's mandate to use merger enforcement as a vehicle for imposing its own notions of how competition may be "improved." Instead, Congress has directed the Commission only to prevent any harm to competition that is likely to flow from a merger. We believe that the planned divestitures already accomplish that goal.
We acknowledge that the parties are willing to sign an order with an export restriction. We need not speculate about whether they were induced to do so because of a compelling need to strike a deal promptly, or because they believe the restriction is unnecessary or unenforceable. Whatever the reason, in light of the structural relief the proposed order achieves, we see no need to bind the parties to an unnecessary behavioral provision.
For the reasons set forth above, we do not believe that the export restriction should be included in the proposed order.
1. It bears noting that in 1995, Congress explicitly repealed the then-existing ban on ANS exports. If Congress were to determine that the ban should be reinstated, it could so act. In addition, the 1995 legislation lifting the export ban granted the President, in consultation with the Secretary of Energy, the power to reimpose the export ban upon a determination by the Secretary of Commerce that "exporting oil . . . has caused sustained oil prices significantly above world market levels . . . ." (30 U.S.C. 185(s)(5)) Such a ban would apply equally to all producers, and would not leave some producers under the restrictions of the Commission's order while permitting other producers to export without inhibition.
2. Rather, the exports are cited as evidence that pre-merger BP had existing market power with respect to ANS sales on the West Coast. (Complaint ¶¶ 24-26) Therefore, the Commission alleges, it would be unlawful for BP to acquire its closest competitor in this market, and thereby enhance its market power.
Of course, if two or more producers appeared to engage in such exports through coordinated or other illegal action, the Commission could initiate an investigation of such unlawful conduct and take appropriate enforcement measures.
3. We have reason to believe that the upward price effects of these sporadic sales amounted to no more than one-half cent per gallon at the pump.