Divestiture Required to Maintain Competition and Prevent Increased Prices in U.S. and Canadian Market for Group II Paraffinic Base Oils
Addressing concerns that Shell Oil Company's (Shell) proposed $1.8 billion acquisition of Pennzoil-Quaker State Company (Pennzoil) would lead to reduced competition and higher prices in the U.S. and Canadian market for Group II paraffinic base oil, the Federal Trade Commission today conditionally approved the transaction, while requiring certain divestitures to ensure continued competition in this market in the future. Under the terms of the proposed consent order, Shell and Pennzoil would sell Pennzoil's interest in its Excel Paralubes joint venture with Conoco Inc. (Conoco) to a Commission-approved buyer and would freeze Pennzoil's ability to obtain additional Group II supply under an existing agreement with ExxonMobil Corporation (ExxonMobil) at approximately current levels.
Group II base oil is one of three types of paraffinic base oils produced in the United States and Canada. Paraffinic base oil is used to produce motor oil and other lubricants, and is needed to meet current performance standards for lighter-viscosity motor oil formulations, such as 5-W20 and 5-W30, as well as requirements for other lubricants.
"As new performance standards are adopted, there will be an even greater demand for Group II base oil in the production of motor oil and other lubricants," said Joe Simons, Director of the FTC's Bureau of Competition. "Without the conditions of this order, direct competition between Shell and Pennzoil in the production of Group II base oils would be eliminated, with the significant potential for reduced competition and higher prices for consumers."
Parties to the Transaction
Shell Oil Company, headquartered in Houston, Texas, is the U.S. operating entity for the Royal Dutch/Shell Group of Companies (collectively referred to as Shell). Shell is engaged in nearly all aspects of the energy business, including exploration, production, refining, transportation, distribution, and marketing. During fiscal year 2001, Shell had worldwide revenues of approximately $135.2 billion and net income of approximately $10.9 billion.
Pennzoil, also headquartered in Houston, manufactures and markets lubricants, branded and unbranded motor oils, transmission fluids, gear lubricants, greases, automotive polishes, automotive chemicals, car care products, other automotive products, and specialty industrial products. Pennzoil makes and markets conventional and synthetic motor oils, primarily under the Pennzoil and Quaker State brands. Pennzoil also is involved in the franchising, ownership, and operation of Jiffy Lube quick lube oil change centers. In fiscal year 2001, Pennzoil had worldwide revenues of approximately $2.3 billion.
Under the terms of the proposed merger, Shell would acquire all outstanding voting securities of Pennzoil. The transaction is structured so that Shell ND, a wholly-owned subsidiary of Shell, would acquire the Pennzoil shares and then be merged into Pennzoil, with Pennzoil then becoming a wholly-owned subsidiary of Shell.
Relevant Joint Venture and Agreement
Pennzoil has a 50/50 joint venture with Conoco Inc., (now ConocoPhillips, as a result of a proposed consent order with the FTC announced on August 30, 2002) called Excel Paralubes, that operates a base oil refinery in Westlake, Louisiana. Pennzoil gets a substantial portion of its base oil requirements from its interest in Excel Paralubes. It also has a 10-year base oil supply agreement with ExxonMobil Corporation, which became effective on August 1, 2000, as a result of the FTC order that allowed the merger of Exxon and Mobil. Under the terms of that agreement, Pennzoil is entitled to up to 6,500 barrels of base oil per day from ExxonMobil, in grades and quantities that are in proportion to ExxonMobil's Gulf Coast base oil production. Part of this volume consists of Group II paraffinic base oil.
The Commission Complaint
According to the FTC's complaint, the merger of Shell and Pennzoil would violate Section 7 of the Clayton Act and Section 5 of the FTC Act by substantially lessening competition in the refining and marketing of Group II paraffinic base oil in the United States and Canada. Shell and Pennzoil are competitors within this highly concentrated market, and following the merger as proposed, Shell would control at least 39 percent of Group II refining capacity in the United States and Canada. There is little Group II production outside of the defined market.
Further, the complaint contends that entry into the market by another competitor would not be timely, likely, or sufficient to remedy the likely anticompetitive effects of the proposed merger. Constructing a new Group II base oil refining facility (or converting a Group I base oil facility) would require a significant investment, would be subject to regulatory obstacles, and would take several years to complete. Absent such entry, the FTC anticipates that the post-merger price of Group II base oils would increase by a substantial amount, especially as new motor oil standards are developed that require even greater use of Group II base oil.
Absent the relief provided in the proposed order, the complaint alleges that the elimination of direct competition between Shell and Pennzoil would lead to higher Group II base oil prices, stemming from the new company's ability to exercise unilateral market power and the increased likelihood of coordinated interaction.
The Proposed Consent Order
Under the terms of the proposed order, Shell and Pennzoil would be required to divest Pennzoil's 50 percent interest in Excel Paralubes, and to freeze Pennzoil's right to obtain additional Group II supply under the contract with ExxonMobil at approximately current levels. If the required divestiture has not occurred within the required time, the companies would be required to transfer Pennzoil's interest in Excel Paralubes to a trustee, who will be responsible for accomplishing the divestiture. As Conoco is the only other party in the Excel Paralubes joint venture and is one of the few other producers of Group II base oil, the order specifically states that Pennzoil's interest may not be divested to Conoco. The proposed order also contains language designed to ensure compliance with its terms. It would terminate 10 years from the date it becomes final.
Finally, the proposed order contains an Order to Hold Separate and Maintain Assets. The purpose of this order is to ensure that all assets to be divested are maintained as viable and competitive pending their sale to a Commission-approved buyer.
The Commission vote to accept the proposed consent order and place a copy on the public record was 5-0. The proposed consent order will be subject to public comment for 30 days, until October 28, 2002, after which the Commission will determine whether to make it final. Comments should be sent to: FTC, 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, proposed consent order, and an analysis 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. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: email@example.com; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.
(FTC File No.: 021-0123)
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