SIGMA SPRING MEETING
LOEWS CORONADO RESORT, CORONADO, CA. MAY 1, 1999

The hot topic is obviously BP and Amoco — the largest merger in history — until ExxonMobil was announced.

In assessing mergers, we look at the industry and overlaps from the top to the bottom. We start at the E &P and go to tank farming and determine if there is a competitive issue anywhere in the U.S.

We recognize that open dealers and jobbers are an important constraint on the power of major oil companies.

Since some of these problems are regional or local, we are very much dependant on people to bring to us stories about transactions.

The Sherman Act is American stuff. It’s based on the concept that economics in the U.S. is not based on regulations or government fiat but by competition. It recognizes consumers will get the best deal of companies are in the marketplace slugging it out.

We are particularly mindful of this industry because of its centrality to the American economy and the American way of life.

We are very aware of the important role that independent retailers have played at two levels. Keeping the industry price competitive, independents first came up with the idea. They provide a base of customers with the ability to shift business between suppliers fairly easily and thus induce competition at the wholesale level.

Shell-Texaco grew out of the companies’ $17 billion combination. We did a level-by-level analysis and identified specific markets that could be harmed.

Most mergers are not challenged. Most mergers — even those that create huge companies — are not challenged because they create efficiencies and are good for the economy of the United States.

It appeared that the wholesale gasoline business in San Diego was fairly concentrated. 90% of the gas was sold by 6 brands. With the merger, 6 would go to 5. Virtually all of that moved through company-owned stations. Our analysis showed entering San Diego was difficult. Land is scarce, permitting is difficult and existing stations already held most — if not all — choice locations. The market was already behaving as if there were not enough competitors. Prices were consistently higher than Los Angeles. We made Shell and Texaco divest 30 stations. That induced more wholesale activity and brought prices more in line with L.A.

BP Amoco. Firms operating did not overlap in most areas. However, the sale of gas in 30 specific markets were an area of concern. We required divestiture in those markets of all stations in one or the other of the firms. 135 gas stations were divested.

What we’re doing is not trying to determine the terms of contracts. We’re not trying to determine prices. We’re not being regulatory. We’re trying to create market conditions where competition can take place.

The whole idea is to determine if there’s any bottleneck at any area that would allow the firms to behave non-competitively. This includes E&P, transportation, pipelines, and refining.

The Avon fire shows how sensitive this industry can be and with a slight change in supply.