[Federal Register Volume 67, Number 197 (Thursday, October 10, 2002)]
[Notices]
[Pages 63100-63103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25756]


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FEDERAL TRADE COMMISSION

[File No. 021 0123]


Shell Oil Company and Pennzoil-Quaker State Company; Analysis To 
Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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[[Page 63101]]

SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint that accompanies the consent agreement and the terms of the 
consent order--embodied in the consent agreement--that would settle 
these allegations.

DATES: Comments must be received on or before October 28, 2002.

ADDRESSES: Comments filed in paper form should be directed to: FTC/
Office of the Secretary, Room 159-H, 600 Pennsylvania Avenue, NW., 
Washington, DC 20580. Comments filed in electronic form should be 
directed to: [email protected], as prescribed below.

FOR FURTHER INFORMATION CONTACT: Dennis Johnson, FTC, Bureau of 
Competition, 600 Pennsylvania Avenue, NW., Washington, DC 20580, (202) 
326-2712.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and section 2.34 
of the Commission's Rules of Practice, 16 CFR 2.34, notice is hereby 
given that the above-captioned consent agreement containing a consent 
order to cease and desist, having been filed with and accepted, subject 
to final approval, by the Commission, has been placed on the public 
record for a period of thirty (30) days. The following Analysis to Aid 
Public Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for September 27, 2002), on the World Wide Web, at ``http://
www.ftc.gov/os/2002/09/index.htm.'' A copy can be obtained from the FTC 
Public Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., 
Washington, DC 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. Comments filed in paper form should 
be directed to: FTC/Office of the Secretary, Room 159-H, 600 
Pennsylvania Avenue, NW., DC 20580. If a comment contains nonpublic 
information, it must be filed in paper form, and the first page of the 
document must be clearly labeled ``confidential.'' Comments that do not 
contain any nonpublic information may instead be filed in electronic 
form (in ASCII format, WordPerfect, or Microsoft Word) as part of or as 
an attachment to email messages directed to the following email box: 
[email protected]. Such comments will be considered by the 
Commission and will be available for inspection and copying at its 
principal office in accordance with Section 4.9(b)(6)(ii) of the 
Commission's Rules of Practice, 16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

I. Introduction

    The Federal Trade Commission (``Commission'' or ``FTC'') has issued 
a complaint (``Complaint'') alleging that the proposed merger of Shell 
Oil Company (``Shell'') and Pennzoil-Quaker State Company 
(``Pennzoil'') (collectively ``Respondents'') would violate section 7 
of the Clayton Act, as amended, 15 U.S.C. 18, and section 5 of the 
Federal Trade Commission Act, as amended, 15 U.S.C. 45, and has entered 
into an agreement containing consent orders (``Agreement Containing 
Consent Orders'') pursuant to which Respondents agree to be bound by a 
proposed consent order that requires divestiture of certain assets 
(``Proposed Consent Order'') and a hold separate order that requires 
Respondents to hold separate and maintain certain assets pending 
divestiture (``Hold Separate Order''). The Proposed Consent Order 
remedies the likely anticompetitive effects arising from Respondents' 
proposed merger, as alleged in the Complaint, and the Hold Separate 
Order preserves competition pending divestiture.

II. Description of the Parties and the Transaction

    Shell Oil Company, headquartered in Houston, Texas, is the United 
States operating entity for the Royal Dutch/Shell Group of Companies 
(collectively referred to as ``Shell''). Shell is engaged in virtually 
all aspects of the energy business, including exploration, production, 
refining, transportation, distribution, and marketing. As part of the 
relief ordered by the Commission in Chevron/Texaco, Docket C-4923 (Jan. 
2, 2002), Texaco divested its interest in Equilon Enterprises LLC to 
Shell and its interest in Motiva Enterprises LLC to Shell and Saudi 
Refining Company. Equilon and Motiva are engaged in the production, 
distribution and marketing of refined products, including base oil, 
gasoline, diesel fuel, and other products. During fiscal year 2001, 
Shell had worldwide revenues of approximately $135.2 billion and net 
income of approximately $10.9 billion.
    Pennzoil, headquartered in Houston, Texas, is engaged in the 
business of manufacturing and marketing lubricants, car care products, 
base oils, branded and unbranded motor oils, transmission fluids, gear 
lubricants, greases, automotive polishes, automotive chemicals, other 
automotive products, and specialty industrial products. Pennzoil 
manufactures and markets conventional and synthetic motor oils 
primarily under the Pennzoil and Quaker State brands. Pennzoil is also 
engaged in the franchising, ownership and operation of quick lube oil 
change centers under the Jiffy Lube name. During fiscal year 2001, 
Pennzoil had worldwide revenues of approximately $2.3 billion.
    Pennzoil has a 50/50 joint venture with Conoco Inc. called Excel 
Paralubes that operates a base oil refinery located in Westlake, 
Louisiana, adjacent to Conoco's petroleum products refinery at Lake 
Charles, Louisiana. Pennzoil obtains a substantial portion of its base 
oil requirements from its interest in Excel Paralubes. Pennzoil also 
has a 10-year base oil supply agreement with Exxon Mobil Corporation, 
which became effective August 1, 2000, as a result of the Commission's 
order in Exxon/Mobil, Docket C-3907 (Jan. 26, 2001). Pursuant to that 
agreement, Pennzoil is entitled to obtain up to 6,500 barrels per day 
of base oil from ExxonMobil, in grades and quantities that are 
proportionate to ExxonMobil's Gulf Coast base oil production. Part of 
this volume consists of Group II paraffinic base oil, which is the 
relevant market alleged in the Complaint.
    Pursuant to an agreement and plan of merger dated March 25, 2002, 
Shell intends to acquire all of the outstanding voting securities of 
Pennzoil. The transaction is structured such that Shell ND, a wholly-
owned subsidiary of Shell, will acquire the Pennzoil shares and then be 
merged into Pennzoil, with Pennzoil surviving as a wholly-owned 
subsidiary of Shell. Each outstanding common share of Pennzoil will be 
converted into the right to receive $22 in cash.

III. The Complaint

    The Complaint alleges that the merger of Shell and Pennzoil would 
violate section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and 
section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C 45, 
by substantially lessening competition in the refining and marketing of 
Group II paraffinic base oil in the United States and Canada. To remedy 
the alleged anticompetitive effects of the merger, the Proposed Order 
requires

[[Page 63102]]

Respondents to divest Pennzoil's 50% interest in Excel Paralubes, which 
represents Pennzoil's only base oil ownership position. Respondents 
also have agreed to freeze at approximately current levels Pennzoil's 
right to obtain Group II base oil supply under the contract with Exxon 
Mobil that was obtained as part of the relief in the Exxon/Mobil merger 
proceeding.
    Shell and Pennzoil are competitors in the refining and marketing of 
Group II paraffinic base oil in a geographic market that consists of 
the United States and Canada. The refining and marketing of Group II 
paraffinic base oil in this market would be highly concentrated as a 
result of the merger. Following the proposed merger, Shell would 
control at least 39% of Group II refining capacity in the United States 
and Canada. Overall market concentration, as measured by the 
Herfindahl-Hirschmann Index (HHI), would increase by more than 700 
points to a level in excess of 2,300.
    The refining and marketing of Group II paraffinic base oil is a 
relevant line of commerce (i.e., product market). Paraffinic base oil 
is a refined petroleum product that is the principal component, or 
``basestock,'' of finished lubricants used for a variety of 
applications, including passenger car motor oil, heavy duty engine oil, 
automatic transmission fluid, and other lubricant products. In the 
Exxon/Mobil investigation, the Commission concluded that paraffinic 
base oil constitutes a relevant market.
    Developments in the industry since the Exxon/Mobil merger indicate 
that a market consisting of Group II paraffinic base oils has evolved. 
The American Petroleum Institute divides paraffinic base oil into three 
groups (Groups I, II and III) based on differences in sulfur content, 
saturates level, and viscosity index. Group II paraffinic base oil has 
less than 0.03% sulfur by weight, more than 90% saturates by weight, 
and a viscosity index ranging from 80 to 120. Group II base oil is 
needed in order to meet current performance standards for lighter-
viscosity motor oil formulations (such as 5W-20 and 5W-30), as well as 
requirements for other lubricants. As new performance standards are 
adopted, there will be even greater demand for Group II base oil for 
the production of motor oil and other lubricants. If the price of Group 
II base oil were to increase by 5-10%, blenders of motor oil and other 
lubricants would not substitute to other bases stocks in sufficient 
quantities to prevent the increase.
    The Complaint alleges that the proposed transaction would lessen 
competition in a geographic market consisting of the United States and 
Canada. There is little Group II production outside of the Untied 
States and Canada. Further, imports of Group II base oil would be 
subject to significant freight penalties and would not be competitive 
with production in the United States and Canada. If the price of Group 
II base oil in the United States and Canada were to increase by 5-10%, 
blenders of motor oil and other lubricants would not switch to sources 
of supply outside the Untied States and Canada in sufficient quantities 
to prevent the increase.
    There are few significant producers of Group II base oil in the 
Untied States and Canada. The proposed merger would eliminate Pennzoil 
as a major competitor, and would combine Shell, the market leader, into 
a close partnership with Conoco, another leading producer. As a result 
of the proposed merger, Shell would control at least 39% of Group II 
refining capacity in the United States and Canada, and concentration in 
the relevant market as measured by the Herfindahl-Hirschmann Index 
would increase by more than 700 points to a level in excess of 2,300.
    Entry into the relevant market is difficult and would not be 
timely, likely or sufficient to prevent the anticompetitive effects 
that are likely to result from the proposed merger. Constructing a new 
refinery or converting an existing Group I refinery to make Group II 
base oil would require substantial investment, would be subject to 
significant regulatory obstacles, and would take several years to 
accomplish. As a result, new entry would not be able to prevent a 5-10% 
increase in Group II base oil prices.
    The Complaint charges that the proposed merger, absent relief, is 
likely to substantially lessen competition and lead to higher prices of 
Group II paraffinic base oil, by eliminating direct competition between 
Shell and Pennzoil, by increasing the likelihood that the combined 
Shell/Pennzoil will unilaterally exercise market power, and by 
increasing the likelihood of collusion or coordinated interaction among 
competitors in the refining and marketing of Group II paraffinic base 
oil.
    To remedy the likely competitive harm, the Proposed Order requires 
Respondents to Divest Pennzoil's interest in Excel paralubes and to 
freeze Pennzoil's ability to obtain additional Group II supply under 
the agreement with ExxonMobil. This relief will effectively remedy any 
anticompetitive effects that would be expected to arise from this 
transaction.

IV. Resolution of the Competitive Concerns

    The Commission has provisionally entered into an Agreement 
Containing Consent Orders with Shell and Pennzoil in the settlement of 
the Complaint. The Agreement Containing Consent Orders contemplates 
that the Commission would issue the Complaint and enter the Proposed 
Order and the Hold Separate Order for the divestiture of certain assets 
described below.
    In order to remedy the anticompetitive effects that have been 
identified, Respondents have agreed to divest Pennzoil's 50% 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 been accomplished 
within the required time, then Respondents are required to transfer 
Pennzoil's interest in Excel paralubes to a trustee, who will have the 
responsibility of accomplishing the required divestiture.
    Paragraph II.A. of the Proposed Order requires Respondents to 
divest Pennzoil's interest in Excel Paralubes, at no minimum price, 
within twelve months after executing the Order, to an acquirer that 
receives the prior approval of the Commission.
    Paragraph II.B. requires Respondents to negotiate with the 
acquirer, at the acquirer's option, a supply agreement for Respondents 
to purchase Group II base oil. Such agreement may not exceed one year, 
may not contain renewal or evergreen rights, and is subject to prior 
approval by the Commission. Paragraph II.C. provides that, prior to the 
effective date of divestiture, Respondents may not enter into any 
agreement to purchase Group II base oil from the acquirer other than 
one made pursuant to Paragraph II.B.
    Paragraph II.D. of the Proposed Order explicitly provides that 
Respondents may not divest the Pennzoil Excel Paralubes Interest to 
Conoco, and must enforce a letter agreement with Conoco relating to 
Excel Paralubes. Conoco already has a significant share of the Group II 
market, and the addition of Pennzoil's share of Excel Paralubes would 
result in a significant increase in concentration. In addition, under 
the Joint Venture Agreement forming the Excel Paralubes partnership, 
Conoco may, under certain circumstances, have a right of first refusal 
or a first option to purchase Pennzoil's interest in Excel Paralubes. 
Conoco has centered into an agreement with Respondents dealing with its 
waiver of such rights, and consenting to the assignment of a

[[Page 63103]]

supply agreement pursuant to which Pennzoil purchases base oil from 
Excel Paralubes.
    Paragraph III limits Respondents' use of their rights to purchase 
Group II base oil from ExxonMobil under the ExxonMobil/Pennzoil Base 
Oil Agreement. That agreement allows Pennzoil to obtain base oil from 
ExxonMobil in the proportionate types and amounts corresponding to 
production at designated ExxonMobil refineries. Pennzoil currently is 
taking approximately 1,500 barrels per day of Group II under this 
contract. Any significant increase in that amount could unduly increase 
concentration. Accordingly, Paragraph III prevents Respondents from 
increasing their share of the market for Group II Base Oil through 
additional supply under this agreement.
    If Respondents have not accomplished the divestiture within the 
required time period, Paragraph IV provides that the Commission may 
appoint a trustee to divest the Pennzoil Excel Paralubes Interest, at 
no minimum price, to a buyer approved by the Commission. The trustees 
will have the exclusive power and authority to accomplish the 
divestiture within twelve months, subject to any necessary extensions 
by the Commission. Paragraph IV.C.5 requires that the trustee will have 
access to information related to Atlas and Excel Paralubes as necessary 
to fulfill his or her obligations. (Atlas is the wholly-owned 
subsidiary of Pennzoil that holds Pennzoil's interest in the Excel 
Paralubes partnership.) The trustee shall use his or her best efforts 
to negotiate the most favorable price and terms for the divestiture, 
subject to the Respondents' absolute and unconditional obligation to 
divest expeditiously at no minimum price. If the trustee receives more 
than one bona fide offer from entities approved by the Commission, the 
trustee will divest to the party selected by the Respondents.
    Other provisions of Paragraph IV.C. generally provide that 
Respondents are responsible for management expenses incurred by the 
trustee, that the trustee has authority to employ other persons 
necessary to carry out his or her duties and responsibilities, and that 
Respondents indemnify and hold the trustee harmless against any 
liabilities or expenses arising out of, or in connection with, 
performance of the trustee's duties. Respondents may require the 
trustee to sign a customary confidentiality agreement, provided that 
such agreement may not restrict the trustee from providing any 
information to the Commission.
    Paragraphs V-VIII of the Proposed Order contain certain general 
provisions. Pursuant to Paragraph V, Respondents are required to 
provide the Commission with a report of compliance with the Proposed 
Order every thirty days until the divestiture is completed and annually 
for nine years after the first year the Order becomes final. Paragraph 
VI provides for notification to the Commission in the event of any 
corporate changes in the Respondents. Paragraph VII requires that 
Respondents provide the Commission with access to their facilities and 
employees for the purposes of determining or securing compliance with 
the Proposed Order. Finally, Paragraph VIII terminates the Order ten 
years from the date it becomes final.

V. Opportunity for Public Comment

    The Proposed Order has been placed on the public record for thirty 
(30) days for receipt of comments by interested persons. The 
Commission, pursuant to a change in its Rules of Practice, has also 
issued its Complaint in this matter, as well as the Hold Separate 
Order. Comments received during this thirty day comment period will 
become part of the public record. After thirty (30) days, the 
Commission will again review the Proposed Order and the comments 
received and will decide whether it should withdraw from the Proposed 
Order or make final the agreement's Proposed Order.
    By accepting the Proposed Order subject to final approval, the 
Commission anticipates that the competitive problems alleged in the 
Complaint will be resolved. The purpose of this analysis is to invite 
public comment on the Proposed Order, including the proposed 
divestiture, and to aid the Commission in its determination of whether 
it should make final the Proposed Order contained in the agreement. 
This analysis is not intended to constitute an official interpretation 
of the Proposed Order, nor is it intended to modify the terms of the 
Proposed Order in any way.

    By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 02-25756 Filed 10-9-02; 8:45 am]
BILLING CODE 6750-01-M