Critics Line Up Against Chevron-Texaco Merger

By NANCY RIVERA BROOKS and JAMES F. PELTZ

Oct. 17, 2000 12 AM PT

TIMES STAFF WRITERS

As Chevron and Texaco formally announced their $35-billion merger Monday and promised it would benefit consumers, the deal ran into a storm of criticism that it would drive up oil and gasoline prices and further concentrate power in the global oil industry.

Indeed, the deal, which would create the world’s fourth-largest publicly traded oil company but cost at least 4,000 jobs, drew a rebuke Monday from consumer groups and suspicion from politicians. Antitrust experts predicted that the companies would be required to sell some refineries and gasoline stations, particularly on the West Coast, to win approval from the Federal Trade Commission.

In addition, Chevron and Texaco may be hobbled by their relatively late entry into the oil industry’s race to consolidate, which in the last three years has seen Texaco and Shell bring their refining and marketing operations together, Exxon and Mobil merge to create the world’s biggest oil company and British Petroleum buy first Amoco Corp. and then Atlantic Richfield Co., making it No. 3 in the “super major” trio of Exxon Mobil Corp., Royal Dutch/Shell and BP.

Those mergers have yet to produce the anticipated increased spending in exploration and production for oil and natural gas, and each combination has further concentrated the industry and pushed the FTC to take a harder look at each successive matchup.

Past oil industry mergers were approved with the idea that exploration and production would increase because the bigger firms would have better access to capital. But such worldwide spending actually decreased 5% in 1999 despite rising oil prices and energy company profits, said Jim Petrie, a partner with the Arthur Andersen consulting firm in Houston. Part of that reflects a typical time lag, he said.

“You don’t turn the capital expenditure faucet as quickly as oil prices go up,” Petrie said.

A Closer Look

Nonetheless, given the now well- established track record of Big Oil mergers, Chevron and Texaco can expect to face even more scrutiny than did their predecessors in the bigger-is-better derby.

“Any time you see an industry that’s rapidly consolidating, the antitrust regulators tend to get a little more cautious,” said William J. Baer, who was director of the FTC’s Bureau of Competition until last fall and now is with the Washington law firm Arnold & Porter. “On the other hand, the last guy in has the argument that ‘I need to get in, too, or I won’t be able to get to the size of my competitors.’ ”

Chevron Corp. Chief Executive David J. O’Reilly, who would run the merged company, and Texaco Inc. Chief Executive Peter I. Bijur, who would become a vice chairman, hailed their long-rumored merger as good for consumers because the two companies together would be able to more efficiently search for low-cost energy around the globe. The companies pledged to work with regulators and have begun talks to sell some of the controversial refining and market assets in the West.

“We are the company for the 21st century,” Bijur said of the proposed combination, which would be called ChevronTexaco Corp. and be based in San Francisco, home of Chevron. The stock deal--which trades 0.77 of a Chevron share for each outstanding Texaco share--would leave Chevron shareholders with 61% ownership of the new company and Chevron would get nine seats on the 15-member board of directors.

In trading Monday, Chevron shares lost $2.25 to close at $82 on the New York Stock Exchange, and Texaco rose $3.88 to $59, also on the NYSE.

The two companies expect to achieve at least $1.2 billion in annual savings within six to nine months of closing the deal, partly by eliminating overlapping operations around the world and by cutting 4,000 of 57,000 jobs. The executives said they have not yet identified where the cuts would be.

Consumer groups were quick to criticize the proposed merger, saying it raises the likelihood of higher gasoline and natural-gas prices.

“We’re not pleased to see it,” said Wenonah Hauter, director of energy and environment for the watchdog group Public Citizen. “We think this doesn’t bode well for consumers, because we’ll have fewer competitors. And in the long run, there’s the additional problem of the increased political power of these larger, wealthier companies.”

Reggie James, Southwest regional director of Consumers Union, said: “We want the FTC to really, really scrutinize this merger. We’re getting increasingly concentrated [in the oil industry], and the concern, with gas prices already going up, is that we’re going to have a much greater chance that a fewer number of people could curtail production, with immediate consequences for consumers.”

Political Hot Potato

High crude oil and gasoline prices have been a hot political issue, and the proposed deal will be eyed with caution by politicians.

California Atty. Gen. Bill Lockyer, whose office is investigating gasoline pricing in the state, will closely examine the combination, spokeswoman Sandra Michioku said.

“The California market suffers from low competition and high concentration, and this sort of merger deserves to be looked at,” she said.

Sen. Barbara Boxer (D-Calif.), who has blasted past oil industry mergers as being bad for consumers, “continues to be concerned about further concentration and reduced competition in the oil industry,” her communications director, David Sandretti, said. “We think with the past oil industry mergers that there is a direct correlation between less competition and higher prices for the consumer.”

Texaco is the largest seller of gasoline in the nation through two joint ventures: one in the West with Shell, called Equilon, and another in the East with Shell and Saudi Aramco, called Motiva. Chevron is the fifth in the nation. In California, Chevron is No. 2 and Equilon is No. 4.

O’Reilly and Bijur said they are eager to cooperate with the FTC and already are considering divestitures. Texaco has begun talks with Shell Oil Co., the U.S. arm of Royal Dutch/Shell, and with Saudi Refining, about selling its interests in the joint ventures.

Chevron and Texaco together would be less than half the size of Exxon Mobil, which got FTC approval to merge in November 1999. But a transaction doesn’t have to be an industry’s biggest merger to be blocked on antitrust grounds.

Some antitrust experts said that even though U.S. regulators insist that they look at each merger on its own merits, Chevron and Texaco could be forced to divest substantial assets because Big Oil’s merger spree already has put the major producers in fewer hands.

Antitrust regulators look at each merger “with whatever scrutiny is justified by the circumstances,” and those “circumstances change if there are mergers in front of you because your industry gets more concentrated,” said Michael Cooper, an antitrust lawyer with the law firm Bryan Cave in Washington.

That’s also true regardless of the merger’s dollar value, said Steve Newborn, a lawyer at Rogers & Wells in Washington and former head of merger enforcement at the FTC.

“The size of the deal is irrelevant to the antitrust enforcer, and rightly so,” Newborn said. For instance, he noted that a merger of telescope makers Meade and Celestron in the early 1990s, a deal valued at a relatively paltry $4 million, was challenged by the FTC.

“The real factors are the concentration in that market, and how hard it is to enter that market--that is, whether it’s relatively easy for new rivals to keep up competition,” he said.

In the case of Chevron and Texaco, all aspects of their operations--from exploration and production to their gasoline stations--will be examined against the backdrop of there now being fewer major oil companies, Newborn said.

“The bottom line is: Does this merger allow the merging parties to increase prices, decrease service or reduce innovation, all of which would be to the detriment of the ultimate consumer?” he said.

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Gasoline Alley

The proposed merger of Chevron Corp. and Texaco Inc. has elicited concern among some consumer groups. Chevron marketed almost 19% of the gasoline sold in California in 1999 and had nearly 26% of the state’s gasoline refining capacity.

Gasoline sold (Percentage of total California sales in 1999)Chevron: 18.5%

Tosco (76): 17.7

Equilon (Shell/Texaco): 15.9

Arco: 20.9

Mobil: 9.9

Exxon: 8.3

Note: Data reflect companies before mergers of Exxon/Mobil and BP Amoco/Arco.

Refining capacity (Percentage of California total on Jan. 1, 2000)

Chevron: 25.5%

Tosco (76): 21.3

Equilon (Shell/Texaco): 16.3

Arco: 13.8