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The Federal Trade Commission today announced it will seek a preliminary injunction in federal District Court to prevent the merger of BP Amoco p.l.c. and Atlantic Richfield Company (ARCO). The Commission will allege the deal would violate antitrust laws by lessening competition in the exploration and production of Alaska North Slope (ANS) crude oil and its sale to West Coast refineries, and in the market for pipeline and storage facilities in Cushing, Oklahoma, thereby raising prices for crude oil used to produce gasoline and other petroleum products throughout North America.
"The proposed merger of BP Amoco and ARCO violates the antitrust laws. We will prove in federal court that BP has market power and that it has used that market power to maintain higher prices on the West Coast by exporting crude oil to the Far East. This deal will cement that market power and harm competition by creating a significant risk that crude oil prices would be higher on the West Coast than they would be without the deal," said Richard G. Parker, Director of the FTC's Bureau of Competition. "In addition, the merger would enable BP to manipulate trading in crude oil futures and affect crude oil prices throughout the country."
According to the FTC, the proposed transaction would create the third-largest private petroleum company in the world and the largest U.S. oil producer and refiner. The deal would combine companies that are by far the two largest producers of crude oil on the North Slope of Alaska, the two largest suppliers of ANS crude oil to refineries in California and Washington that depend upon Alaskan crude oil for a substantial portion of their supply, and the two most successful competitors in bidding for exploration leases on the North Slope. Combined, BP and ARCO also would have a dominant interest in the oil pipeline and storage facilities that serve the crude oil marketing center in Cushing, Oklahoma, the FTC said.
The Commission will argue in court for a preliminary injunction on grounds that if the merger were allowed to proceed, BP alone would control 75 percent of the production of ANS crude oil. The effect would be to lessen competition in the production and sale of ANS crude to West Coast refiners and increase the market power that BP already exercises. Substantial, timely and effective entry into the relevant markets is unlikely, the agency said.
According to the FTC, certain West Coast refineries are designed and equipped to process only ANS crude oil for a substantial portion of their supply. The agency will argue that BP discriminates in price among these refiners, charging the highest price to refiners that have the least ability to substitute for ANS crude while charging lower prices to those that have more flexibility. The agency also will allege that BP exercises market power by exporting ANS crude to the Far East at a lower price in order to restrict the supply of ANS on the West Coast and elevate prices to West Coast customers.
This evidence will support the FTC's allegation that BP exercises market power in a market that is narrower than a worldwide crude oil market. If the market encompassed all world crude oil supplies, imports would flow into the West Coast to defeat BP's price discrimination and export strategy, the agency said.
Pre-production activities in ANS crude oil principally consist of bid competition for leases to state and federal lands, exploration for new reserves on the leased properties, and development of new fields for production, the FTC said. BP and ARCO are the two largest and most knowledgeable competitors in each of these activities - together successfully bidding for 71 percent of the leases auctioned by the U.S. Department of Interior last summer. BP and ARCO have comparable winning records in state lease sales over the last decade. After the merger, BP would control a dominant share of exploration and development and lessen competition by eliminating ARCO as an effective competitor, the agency will allege. Substantial, timely and effective entry is unlikely, the agency said.
The proposed merger would substantially increase market concentration in an already highly concentrated market for pipeline and storage facilities in Cushing, Oklahoma, the agency said. Cushing is a major crude oil marketing hub in the United States. After the proposed merger, BP would control more than 40 percent of the pipeline and storage capacity serving Cushing.
A substantial portion of the crude oil trade in Cushing consists of West Texas Intermediate (WTI) crude, which arrives from pipelines originating in Texas and New Mexico, and imported crude, which is offloaded from tankers on the Gulf Coast and transported to Cushing by another pipeline. WTI crude oil delivered at Cushing is the world's most actively traded futures contract on the New York Mercantile Exchange (NYMEX). Prices for WTI crude traded in Cushing serve as a benchmark for the pricing of many other crude oils around the world and for crude oil futures trading on NYMEX.
According to the FTC, efficient and competitive functioning of the pipeline and oil storage facilities in and around Cushing is critical to the fluid operation of both the trading activities in Cushing and the trading of crude oil futures contracts on the NYMEX. Restriction of pipeline or storage capacity can affect the deliverable supply of crude oil in Cushing, and consequently affect both WTI cash prices and NYMEX futures prices.
Market power over the pipeline and storage facilities in and around Cushing likely would enable BP to manipulate NYMEX trading in crude oil futures by restricting or otherwise manipulating the deliverable supply of crude oil in Cushing, the agency said.
The preliminary injunction would prevent the merger from going forward until the conclusion of an administrative trial or any appeals on the legality of the merger. If the court grants the FTC's motion, the Commission will have 20 days to determine whether to issue an administrative complaint. The administrative complaint would mark the beginning of the administrative trial process.
BP's principal place of business is London, England. Its principal business offices in the United States are in Chicago, Illinois. ARCO is based in Los Angeles, California.
The Commission vote to authorize the filing of a preliminary injunction was 3-2 with Commissioners Orson Swindle and Thomas B. Leary dissenting. Commissioners Swindle and Leary said, without expressing any views on the merits of this proceeding or any proposed settlement, we believe that it is premature to seek preliminary injunctive relief.
Copies of the FTC complaint seeking a preliminary injunction will be available upon filing in federal District Court 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. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC File No. 9910192)