Through a proposed consent agreement reached with the Federal Trade Commission and announced today, the $45 billion merger of Chevron Corp. (Chevron) and Texaco Inc. (Texaco), two of the world's largest integrated oil companies, would be allowed to proceed, with significant divestitures required to remedy the likely anticompetitive impacts of the transaction as proposed.
Under the terms of the proposed order, the combined Chevron/Texaco would be required to divest all of Texaco's interests in two joint ventures, Equilon Enterprises, LLC (Equilon), which is currently owned by Texaco and Shell Oil Company (Shell), and Motiva Enterprises, LLC (Motiva), which is currently owned by Shell, Texaco, and Saudi Refining, Inc. (SRI). Outside "the Alliance" defined by these two joint ventures, Texaco would be required to divest assets including its one-third interest in the Discovery natural gas pipeline system in the Gulf of Mexico; its interest in the Enterprise fractionating (raw mix separation) plant in Mont Belvieu, Texas; and its general aviation businesses in 14 states. The proposed agreement also contains a Hold Separate Order that would require the companies to maintain certain assets as viable and competitive businesses pending their divestiture.
"The terms of this order are consistent with the analyses and approaches taken by the Commission in prior major petroleum industry mergers," said FTC Bureau of Competition Deputy Director Sean Royall. "In markets where competitive concerns were identified, those problems have been addressed, with the result being a continuation of the competitive balance that existed in the pre-merger environment." He specifically thanked the attorneys general of Alaska, Arizona, California, Florida, Hawaii, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, and Washington for their participation and assistance in the investigation. Bureau of Competition Director, Joseph Simons, was recused from participating in the matter.
Parties to the Proposed Merger
Chevron, headquartered in San Francisco, California, is directly or through affiliates engaged in the exploration for, and production of, oil and natural gas; the pipeline transportation of crude oil, natural gas, and natural gas liquids; the refining of crude oil into refined petroleum products, including gasoline, aviation fuel, and other light petroleum products; the transportation, terminaling, and marketing of gasoline and aviation fuel; and other related businesses. In fiscal year 1999, Chevron had worldwide revenues of $35.4 billion and net income of $2.1 billion.
Texaco, headquartered in White Plains, New York, conducts many of the same activities as Chevron, including the exploration for, and production of, oil and natural gas; the pipeline transportation of natural gas and natural gas liquids; the pipeline transportation of crude oil; refining of crude oil into refined petroleum products, including gasoline, aviation fuel, and other light petroleum products; the transportation, terminaling, and marketing of gasoline and aviation fuel; and other related businesses. In fiscal year 1999, Texaco had worldwide revenues of $35.7 billion and net income of $1.2 billion.
Through an agreement and merger plan dated October 14, 2000, Chevron agreed to acquire all of the outstanding common stock of Texaco in exchange for stock in Chevron. As a result of the merger, Chevron's shareholders will hold approximately 61 percent, and Texaco's shareholders will hold approximately 39 percent, of the new combined company.
Joint Ventures Comprising the Alliance
In 1998, Texaco contributed its U.S. petroleum refining, marketing, and transportation operations to the Equilon and Motiva joint ventures, and retained an interest in these ventures and the overall Alliance. Equilon consists of Texaco's and Shell's western and midwestern U.S. refining and marketing businesses, as well as their nationwide transportation and lubrication businesses. Jointly controlled by Shell and Texaco, Equilon's major assets include full or partial ownership in four refineries, about 65 terminals, and various pipelines. Equilon markets gasoline through approximately 9,700 branded gas stations nationwide. Motiva consists of Texaco's, Shell's, and SRI's U.S. eastern and Gulf Coast refining and marketing businesses. Jointly controlled by Texaco, Shell, and SRI, Motiva's major assets include full or partial ownership in four refineries and about 50 terminals, with the companies' products marketed through about 14,000 branded gas stations nationwide.
The Commission's Complaint
According to the Commission's complaint, the merger as proposed would violate Section 7 of the Clayton Act and Section 5 of the FTC Act by substantially reducing competition in each of the following markets: 1) gasoline marketing in the western United States (in Arizona, Idaho, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming), the southern United States (in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, Tennessee, Texas, Virginia, and West Virginia), in Alaska and Hawaii, and smaller local areas; 2) the marketing of California Air Resources Board (CARB) gasoline in California; 3) the refining and bulk supply of CARB gasoline for sale in California; 4) the refining and bulk supply of gasoline and jet fuel in the Pacific Northwest (Washington and Oregon, west of the Cascade mountains; 5) the bulk supply of Phase II Reformulated Gasoline (RFG II) in metropolitan St. Louis, Missouri; 6) the terminaling of gasoline and other light petroleum products in Arizona (Phoenix and Tucson), California (San Diego and Ventura), Mississippi (Collins), and Texas (El Paso), and the Hawaiian islands of Hawaii, Kauai, Maui, and Oahu; 7) the pipeline transportation of crude oil from California's San Joaquin Valley; 8) the pipeline transportation of crude oil to shore from portions of the Eastern Gulf of Mexico; 9) the pipeline transportation of offshore natural gas to shore from locations in the Central Gulf of Mexico; 10) the fractionation of raw mix into natural gas liquids products at Mont Belvieu, Texas; and 11) the marketing and distribution of aviation fuel to customers in the western and southeastern United States.
In each case, the Commission contends that new entry is unlikely to constrain anticompetitive behavior in the identified markets, that new entrants typically face significant obstacles to becoming effective competitors, and that it is unlikely that such entry would constrain a price increase resulting from the merger as proposed. According to the Commission, if the transaction were allowed to proceed as proposed, either unilateral behavior by the combined Chevron/Texaco, or coordinated behavior among Chevron/Texaco and other remaining competitors, would lead to higher consumer prices.
Terms of the Proposed Order
The proposed order would require Chevron/Texaco to divest all of Texaco's interest in the Alliance, which includes (among other businesses not relevant here) the following: 1) gasoline marketing in Alaska and Hawaii, in the western United States (including Arizona, Idaho, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming), and the southern U.S. (including Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, Tennessee, Texas, Virginia, and West Virginia); 2) marketing of CARB gasoline in California; 3) refining and bulk supply of CARB gasoline for sale in California; 4) refining and bulk supply of gasoline and jet fuel in the Pacific Northwest; 5) Texaco's interests in the Explorer Pipeline and the bulk supply of RFG II into St. Louis; 6) terminaling of gasoline and other light petroleum products in several metropolitan areas in Arizona, California, Mississippi, and Texas, and on four Hawaiian islands; 7) the Equilon pipeline that transports crude oil from California's San Joaquin Valley; and 8) the Equilon crude oil pipeline in the eastern Gulf of Mexico.
Regarding assets outside the Alliance, Texaco would be required to divest its one-third interest in the Discovery natural gas pipeline system in the Central Gulf of Mexico within six months after the merger; its interest in the Enterprise fractionating plant in Mont Belvieu within six months after the merger, and its general aviation business in 14 states (Alaska, Alabama, Arizona, California, Florida, Georgia, Idaho, Louisiana, Mississippi, Nevada, Oregon, Tennessee, Utah, and Washington) to Avfuel Corporation, an up-front buyer approved by the Commission, within 10 days of the merger. If this is not accomplished, a broader aviation package would be required to be divested within four months of the merger. The Commission could appoint a trustee to divest this broader package if neither the Avfuel divestiture or broader divestiture is not completed in the time allowed.
Regarding the Alliance assets, Texaco is to divest its interests in the Alliance to Shell and/or SRI on or before the date of the Chevron/Texaco merger. If Texaco has not done so, the Texaco subsidiaries that hold its interest in the Alliance are to be transferred to a trustee, who will have eight months to divest the interests, at no minimum price, to Shell and/or SRI, or to another buyer approved by the Commission. The order specifically provides that Chevron and Texaco may not consummate the merger until Texaco has either divested its interests in the Alliance to Shell and/or SRI, or has transferred the subsidiaries that hold its interests in the Alliance to the trustee.
Shell's and SRI's rights under the agreements establishing the Alliance are protected by the order at all stages of the divestiture process. Consistent with this protection, respondents must provide Shell and SRI with a copy of the proposed order, including all non-confidential attachments, no less than 30 days before the merger is consummated.
In order to prevent the possibility of interim competitive harm pending the required divestiture, the proposed order also contains a hold separate order designed to ensure that any assets that may be retained by Texaco pending divestiture (including Texaco's interests in the Alliance if the trust is dissolved for any reason prior to accomplishing the required divestiture) will be maintained separately and apart from Chevron.
Record-keeping and Compliance
The proposed order also contains general requirements to ensure proper reporting and compliance by Chevron and Texaco. These terms would require the companies to provide the Commission with a compliance report every 60 days until all of the divestitures are completed. They would also be required to allow the FTC to access their facilities and meet with their employees to determine or secure compliance with the order's terms. Finally, the order provides for Commission notification regarding any changes in the corporate respondents.
The Commission vote to accept the consent order and place a copy on the public record was 4-0, with Chairman Timothy Muris recused. The order will be subject to public comment for 30 days, until October 9, 2001, after which the Commission will decide whether to make it final. Comments should be sent to: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Ave., 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 complaint and consent order 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; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC File No. 011-0011)
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