Nick Snow
Washington Correspondent
WASHINGTON, DC, Mar. 15 -- As they convened a Mar. 14 hearing on oil and gas industry concentration and its potential impact on prices, Senate Judiciary Committee leaders said they plan to introduce legislation to increase federal antitrust authority and protect consumers.
Committee Chairman Arlen Specter (R-Pa.) and Ranking Minority Member Patrick J. Leahy (D-Vt.) said their bill would penalize oil and gas companies that divert or withhold supplies to create shortages and increase prices.
It also would create a joint federal-state taskforce to investigate information-sharing practices among oil and gas companies.
The bill also will contain the No Oil Producing and Exporting Cartels (NOPEC) provision that the committee has passed three times and that cleared the full Senate in 2005 but that Leahy said was killed by Republican House leaders and White House negotiators.
NOPEC aims to make price-fixing actions by overseas producers actionable, insofar as they affect US consumers, under US antitrust laws.
Sen. Mike DeWine (R-Ohio), who chairs the committee's antitrust subcommittee, said the provision is necessary because actions by the Organization of Petroleum Exporting Countries have the biggest impact on retail oil prices.
Several hours later, Specter concluded the hearing by asking executives from five integrated oil companies and the nation's largest independent refiner-marketer to provide their views on the proposed legislation at a later time.
"Let us know which sections you like and which sections give you heartburn," he said.
Representatives from two states' attorney general offices said federal antitrust reform is needed for energy.
"The dirty secret of antitrust jurisprudence is that it's increasingly difficult to prosecute companies in concentrated industries under Section 1 of the Sherman Antitrust Act," said Tom Greene, a California assistant attorney general and former National Association of Attorneys General antitrust taskforce chairman.
More than demand
Wisconsin Attorney General Peg Lautenschlager said: "We know that the upward volatility of natural gas prices can't be explained by supply and demand. We need to explore further. The financial markets are complex and lack almost completely any kind of transparency."
Congress should look at the trading markets themselves, she urged. "Some of the trading being done over the counter is not being reported. Commodities can change hands as much as 30 times before they reach market. The registering of traders and reporting trades would be a great help," she said.
Severin Borenstein, a business administration and public policy professor at the University of California at Berkeley and director of the school's California Institute of Energy, said it's important to differentiate between the crude oil market, which is global, and the natural gas market, which is continental.
"We're now at the cusp where more increases in US refining concentration could cause problems. But the real problem is crude oil prices, which essentially are controlled by Saudi Arabia," he said.
"The natural gas market is continental. It has historically been considered to be quite competitive. In the past few decades, it has become more concentrated," Borenstein added. He urged antitrust regulators to make companies seeking to merge quantify the savings they expect to pass on to customers.
Joseph M. Alioto, a San Francisco lawyer who was lead attorney for the plaintiffs in the Royal Dutch Shell PLC-Texaco Inc. antitrust case, said that when the two companies formed their western US downstream joint venture, Texaco's product prices quickly rose to Shell's levels, and then both brands' prices jumped 70% at a time when crude oil prices were depressed.
"These mergers are supposed to create efficiencies and pass savings on to the consumer. That, in fact, doesn't happen, and you can find that out if you question the chief executives. The efficiencies they're talking about are not the efficiencies of the market but the efficiencies of cartels," he said.
Alioto said US Supreme Court decisions are clear on mergers and potential market impacts. "What CEOs use are merger guidelines written by the Justice Department. The result is that the federal government comes in with the oil companies and testifies against my clients, judges listen and rule in their favor."
Responding to a suggestion by committee member Richard J. Durbin (D-Ill.) that federal antitrust regulators sound more like lap dogs, Greene said, "I have worked with people at the Justice Department and Federal Trade Commission who are very committed to enforcement. They do operate within a structure that restricts their options. Sen. Specter's proposals would be extremely helpful to them."
Alaska gas access
Another lawyer, David Boies, chairman of Boies, Schiller & Flexner LLP in Armonk, NY, charged that Alaska North Slope producers rejected proposals to build a natural gas pipeline to the Lower 48 states to control the market and maximize profits.
He said many proposals have been made to bring the gas to market, including one by a company he represents. "Every single one of them was refused. The reason is that this allows the oil companies to keep control. They know that by refusing, they prevent the development of a pipeline to bring gas to the Lower 48 states," Boies said.
Asked about this later in the hearing, ExxonMobil Corp. Chief Executive Officer Rex W. Tillerson responded, "It's regrettable that Mr. Boies decided to try his case in front of this committee. We believe his allegations are untrue and intend to defend it in court."
Regarding the pipeline project proposals that Boies mentioned, Tillerson said later, "Those proposals had a number of flaws in them that, in our view, made them nonfinanceable."
BP America Inc. Pres. Ross Pillari also denied Boies's allegations. "There is a very strong, high quality proposal sitting before the legislature in Alaska to bring that gas to market," he said.
He and the other oil company executives, who testified as a group following the first panel, argued that their companies need to be large enough to underwrite massive projects such as the planned Alaska gas pipeline.
Tillerson said, "It will be the largest construction project of any kind undertaken in North America. It will require an investment of $20 billion, but it will provide consumers with an important new source of natural gas."
ConocoPhillips Chief Executive Officer James J. Mulva said, "For companies to compete in this atmosphere where such large commitments have to be made, they have merged to create more efficient operations and leaner cost structures."
'More efficient'
Chevron Corp. Chief Executive Officer David J. O'Reilly said oil industry mergers over the past 2 decades have made US companies "more efficient in the production, refining, and marketing of energy supplies."
They also were necessary because foreign national oil companies, not publicly traded multinational firms, control most of the world's remaining oil and gas resources, he added.
"US companies had to develop economies of scale to compete in the world marketplace. Their investments have helped increase production outside OPEC," O'Reilly said.
Size also matters when it comes to refining and marketing, according to Valero Energy Corp. Chief Executive Officer William R. Klesse. Downstream independents have to be extra efficient because they don't have exploration and production units to offset refining and marketing slumps, he said.
"Improving refineries takes expertise and capital. Valero Energy has more of both because it is bigger than the companies from which we've purchased refineries," Klesse said.
Shell Oil Co. Pres. John Hofmeister said more attention needs to be paid to developing domestic oil and gas resources. "For the past 5 years alone, Shell has invested over $1 billion/year to develop offshore resources in the Gulf of Mexico," he told the committee.
But Shell is frustrated because many of its onshore drilling permit applications can't get processed because there aren't enough federal employees to handle them.
"It is ironic that some of the same voices that call for lower prices also continue to place off-limits supplies that can be produced in an environmentally safe manner using today's technology," Hofmeister said.
Contact Nick Snow at [email protected].