Phillips and Conoco Plan New Merger to Create Third Largest U.S. Oil Company
BP Amoco To Fight FTC Over Arco Buyout
Enforcement Begins on Free Air, Water Law
Chevron and Hawaii Dealer Dispute Heats Up
Utah Tobacco Stings May Be Entrapment

PHILLIPS AND CONOCO PLAN NEW MERGER TO CREATE THIRD LARGEST U.S. OIL COMPANY

HOUSTON, TX. — In a surprise moving coming just a few short weeks after the Phillips Tosco merger was finalized, Phillips and Conoco announced on Nov. 18 that they would merge their oil companies.

The new company, ConocoPhillips, would be the third largest oil and gas company in the United States and would market five major brands: Phillips 66, Conoco, Circle K, 76, and Kendall. The company would control approximately 17,400 service stations and retail outlets internationally — with the vast majority in the United States.

Archie Dunham, currently serving as Conoco chairman and CEO, will serve as chairman of ConocoPhillips and will delay his scheduled retirement to 2004. James Mulva, Phillips chairman and CEO, will be president and chief executive officer of ConocoPhillips, and also become chairman after Dunham’s retirement.

The headquarters of ConocoPhillips will be in Houston, TX., where Conoco is based, although Phillips 66 says it will keep a presence in Bartlesville, OK., where it operates as refinery and is current headquarters.

The merger of the two companies have put a hold on many elements that would complete the Phillips Tosco purchase. As the Phillips Tosco deal closed in October, personnel were being relocated to the Phillips headquarters in Oklahoma and the Phillips marketing headquarters in Arizona. Both companies were being restructured to increase efficiencies. Now the moves and relocations have been put on hold until the ConocoPhillips deal is completed.

"It makes sense that they’re putting everything on hold," said one Phillips employee who was scheduled to move to Arizona. "And I’m glad they’re doing it. I wouldn’t want to move myself and my family to Arizona and then three months later have to move to Houston. I’m glad they’re taking time to work out the details first."

"This merger of equals represents an excellent strategic fit for both Conoco and Phillips," said Dunham, announcing the deal. "It will position ConocoPhillips as a stronger U.S.-based, global energy producer by significantly enhancing its capability and growth prospects on five continents in both current and prospective ventures, while generating major synergies. ConocoPhillips will be a tough new competitor to the larger global majors."

"This merger ensures that the United States will be home to a third major international petroleum company" said Mulva. "For Conoco and Phillips, joining forces is the ideal way to be competitive in the reshaped energy industry," said Mulva. "ConocoPhillips will move forward to deliver on our legacy growth projects, develop new opportunities in existing and emerging business lines, and enhance returns in our downstream business with our companies’ leading technologies." He added, "Just as important, our compatible cultures, similar values and determined focus will facilitate a smooth integration and enable ConocoPhillips to get off to a fast and successful start."

It is expected that the Federal Trade Commission will take a close look at the merger and its effects on supply, particularly in the Rocky Mountain territory of the West and the Gulf Coast. The two companies combined would have a market share of approximately 27%, a level of market control that has traditionally made the FTC uncomfortable. In Kansas, ConocoPhillips would control 42% of the service stations and in Colorado it would have 34%. It is expected the company definitely will be required to sell some of its stations in those two areas.

"In my view, the merger will have only modest impacts on competition in the refining and marketing areas because there are few areas where the companies compete directly," predicted Economist Philip Verleger. "I expect the FTC will take aggressive action to force divestitures in any areas where the two companies will have a large combined market share."

One of the areas where the two companies compete directly, however, is in the Rocky Mountain territory and it is expected that the merger will have a major impact on the retail market in that area. For the merger to go through, Conoco and Phillips may have to divest many stations in the area.

Under the structure of the merger, Phillips shareholders will receive one share of ConocoPhillips common stock for each share of Phillips they own. Conoco shareholders will receive 0.4677 shares of new ConocoPhillips common stock for each share of Conoco they own. With this formula, Phillips shareholders will own approximately 56.6% of the new company and Conoco shareholders will own approximately 43.4%.

After the merger, it is expected that the companies will engage layoffs to increase their efficiencies. Conoco and Phillips officials predict that the combined enterprise will achieve annual cost savings of at least $750 million within the first full year after closing.

Pending approval from stockholders, the FTC, and other regulatory agencies, the merger is expected to close in the second quarter of 2002.

BP AMOCO TO FIGHT FTC OVER ARCO BUYOUT

LOS ANGELES, CA. — After being denied approval from the Federal Trade Commission to merge with Arco, the two companies have decided to go ahead and start the merger process — without government approval.

BP Amoco and Arco announced in mid-January that they were going to go ahead and proceed with the merger, giving the FTC its required 20-day notice.

In response, the FTC has voted to challenge the purchase of Arco, filing suit in U.S. Federal Court to block the merger. BP Amoco says they will fight the FTC — and they expect to win the case.

The FTC says that there are three key issues of concern, issues that they believe will allow them to block the merger. They believe a merger between BP Amoco and Arco would have too much control over Alaska crude oil production and it would greatly reduce competition for bids on new drilling in Alaska. The FTC also believes that a combined BP Amoco/Arco would have "excessive" control over the pipeline and storage system in parts of Oklahoma, giving the major oil company the opportunity to manipulate the price of benchmark crude oils.

"We will prove in federal court that BP has market power and that it has used that power to maintain higher prices on the West Coast by exporting crude oil to the Far East," said Richard Parker, chief of the FTC’s Competition Bureau. He also charged that following the merger, BP Amoco could "affect crude oil prices throughout the country."

BP Amoco and Arco made it public last year that they were looking for approval for BP Amoco to purchase Arco and all of its assets for $26.8 billion. The FTC spent most of 1999 reviewing the merger and the potential impact it would have on crude oil supply, gasoline supply, and consumer prices.

The FTC announced their decision in December: they would not support the merger — and would file suit to keep the merger from going forward.

In an official statement, BP Amoco and Arco management said that "The FTC has to date expressed concerns about the combination — concerns which are not shared by the companies."

The major oil companies noted that proceeding with the merger may bring them into court but they "remain ready to pursue a constructive solution."

The consolidation of Alaskan crude oil production into the hands of BP Amoco was considered a major stumbling block to the merger. However, in December, BP Amoco negotiated a deal with the Alaskan government that brought approval from Alaska Governor Tony Knowles. The two companies agreed to divestments of 175,000 barrels a day of Alaskan production and 620,000 acres of state and federal exploration lands, along with the sale of a matching stake in the Trans-Alaska pipeline. They believed that this action would "facilitate the entry" of more major oil companies into Alaska.

The other major stumbling block to the deal was believed to be the tight gasoline supply market in the state of California. In anticipation of this problem, the oil companies met with California Governor Davis in December, assuring him that BP Amoco "would maintain Arco’s high-volume, low- price marketing strategy" following the merger.

Having met with the leadership of both California and Alaska, BP Amoco and Arco believe that the merger should be able to go forward and are taking action to try and make it happen — despite the FTC’s actions.

CHEVRON AND HAWAII DEALER DISPUTE HEATS UP

KAKAAKO, OAHU, HI. — A court date has been set in the ongoing dispute between Chevron dealer Frank Young and the major oil company.

Young is the dealer at K&Y Chevron on South Street In Kakaako. Although Chevron owns the service station and the property, it has been operated by the Young family since 1953 when Jimmy Young, Frank’s father, took over as dealer at the site. The station has been successful and Frank Young was touted as one of the best dealers in the Hawaiian islands for his increases in gallonage.

Chevron is trying to oust Young from the site, claiming that he has repeatedly violated his service station lease by not staying open during mandated hours. Young’s lease requires the service station to be open from 6:00 a.m. to 10:00 p.m. Monday through Friday and from 7:00 a.m. to 10:00 p.m. on weekends and holidays.

The major oil company had issued four warnings against Young, then filed suit to force him to vacate the station when his lease expired at the end of last year.

The situation is more controversial than a lease disagreement, however, because Young as been a vocal opponent of Chevron and its pricing policies in Hawaii. Young has now filed a counter-suit against Chevron, charging that the major oil company "artificially inflated" its wholesale gasoline prices to Hawaii dealers.

A court date for the suit has been set for October 3 in Hawaii. Both sides have agreed to continue operations while awaiting the trial, so Young will continue to operate K&Y Chevron and be supplied by the major oil company through the Fall.

ENFORCEMENT BEGINS ON FREE AIR, WATER LAW

SACRAMENTO, CA. — Despite official word from lawmakers that they will be phasing in the requirement for all gasoline stations in California to offer free air and water, enforcement of the law began immediately in the state.

Under the terms of AB 531 (Soto), signed into law in California in December, all gasoline stations in the state must provide free air and water, effective as of January 1, 2000.

California’s Division of Measurement Standards (DMS) reportedly convinced lawmakers that their timetable was impossible to meet. DMS officials met with Soto, the author of the bill, to explain that there was no way every station in the state could convert their equipment to allow free access by January 1. In addition, the hundreds of stations that did not offer air or water would not be able to add the equipment in less than a month.

Although industry leaders and associations had been making the same arguments for many months, Soto understood the DMS’ arguments and agreed to a phase-in of the law.

In addition to converting and installing new equipment, the new law requires that all stations post a sign advising customers of the law and listing a toll-free number to report to the DMS if that station is not offering free air and water.

The DMS officials reportedly told Soto that the signs could not be produced, shipped, and installed by January 1, 2000 since the agency had only obtained the toll-free number to print on the signs on December 13.

In response to these problems, the DMS said they will phase-in their enforcement of the new law. However, service station owners say this is not the case. Inspectors reportedly were handing out violation notices as of January 3, the first work day for government employees following enactment of the law.

In Los Angeles County, in fact, several of the inspectors were handing out tickets based on an inaccurate reading of the law. The inspectors were claiming that air and water had to be free to anyone arriving at the station — which is untrue. Air and water must be free to customers. However, the station owners who were offering free air and water to customers only were receiving tickets saying they were in violation.

Sue Claypoole of Mass Air reports that as of February, "everybody we have is set up to give air and water free to gas customers. They all gave free and water with tokens as of Jan. 1, but the signs just weren’t available to install. Probably 80% of our stations are in complete compliance — we just haven’t been able to get out to everyone to put up the signs yet."

Claypoole and Mass Air were part of a legal action to have an injunction placed against the law at the end of December which was denied by the court. The presiding judge ruled that service stations should simply raise the cost of gasoline to the public to cover the cost of the free air and gasoline.

"It’s an air/water hoax," said Claypoole, "that fools the public into thinking they’re getting something for nothing." She cited the example of the toll-free number, mandated to be posted on every station by the state if the air or water equipment is not working.

"When you call the number, you reach a recording that asks you to leave your name, address, and phone number and they will send you a complaint form and it will come in 7-10 days.

"We called and got one of those forms," she continued, "and it came. When you get the form, you have to fill it out — and you have to spend 33 cents to mail it. You have to fill out a form and spend 33 cents — 34 cents next year — to complain that you had to spend a damn quarter."

The majority of service station owners who already had air and water equipment are coming into compliance by offering free tokens to their customers. However, many stations did not have the equipment installed and are having difficulties getting the equipment and contractors to do the work because of the demand.

There are also reports of increased vandalism of the air and water equipment at service stations. As one dealer explained, "anything for free will be vandalized. That’s just the way it is."

The air/water companies are continuing to fight the law in court, seeking a Trial by Declaration. Unlike their earlier action, this process will allow them to bring facts before the judge in written form and making an argument about the legality and impact of the legislation.

UTAH TOBACCO STINGS MAY BE ENTRAPMENT

SALT LAKE CITY, UT. — In an attempt to eliminate teen purchases of cigarettes the Utah Department of Public Safety’s Criminal Investigation Bureau is conducting sting operations on convenience stores around the state.

According to reports from marketers in Utah, however, the Bureau is not following the letter of the law and may be involved in entrapment.

According to John Hill, executive director of the Utah Petroleum Marketers Association, "In a recent incident, the minor used to make the tobacco purchase was a couple weeks sky of his 19th birthday. When the agent came in the store to give the clerk the citation, the clerk reports that the agent refused to show the minor’s identification to the clerk again.

"In a previous incident," continued Hill, "the clerk reports that a tobacco sale to a minor was refused during a particularly busy time in the evening. But instead of just leaving, the minor started badgering the clerk until a sale was made — in an effort to get rid of the disturbance."

According to regulations established by the Food and Drug Administration for sting operations, the stings can only use minors under 16 years old. In addition, the FDA specifies that if a sale is refused, the minor must leave the establishment immediately, "without comment."

The marketers who have been involved with the stings in Utah, however, charge that the Bureau has not been following these regulations based on their experiences.

"In confronting the agent in charge of the tobacco sting operation, we were told that only 15 and 16-year-olds are used and that the agent involved would never refuse to show the minor’s identification to the clerk if an illegal sale took place," stated Hill.

"Additionally, we were told that badgering a clerk would never take place and that an undercover office is always present in the store watching the transaction. So, if there is a question about how an illegal purchase was made, have your clerks ask to speak with the officer that was present during the purchase."

Hill also asked that any Utah c-store operators or petroleum marketers who feel they were victims of an unethical tobacco sting contact his office immediately.

Originally published in the December 2001 issue of O&A Marketing News.
Copyright 2001 by KAL Publications Inc.