Specialists see big problems in oil-focused antitrust reform

April 10, 2006
US Senate Judiciary Committee Chairman Arlen Specter (R-Pa.) has circulated antitrust reform proposals directed at US refiners and overseas producers.

US Senate Judiciary Committee Chairman Arlen Specter (R-Pa.) has circulated antitrust reform proposals directed at US refiners and overseas producers.

While he has not introduced an actual bill, he is seeking input on a measure that would expand reviews of proposed mergers, establish a joint federal-state task force to examine oil and gas industry information-sharing, and bring the Organization of Petroleum Exporting Countries under US price-fixing laws.

Three antitrust specialists told Oil & Gas Journal that they generally found a summary of the proposals more political than practical and warned that the provisions could create more problems than they solve if enacted.

“It’s politics as usual,” observed Sean Boland, partner and antitrust cochair at Howrey LLP in Washington, DC. “I don’t see anything in the legislation that’s going to be effective at all. If these proposals are passed, we’ll spend a lot of time looking in the wrong direction to solve a lot of problems.”

Rufus Oliver, a partner in the antitrust section of Baker Botts LLP in Houston, questioned the validity of the idea that apparently is behind Specter’s proposals-that oil industry consolidation has led to higher prices.

“The proposals seem to be designed to make it possible for the government to challenge certain transactions by making a lesser showing of anticompetitive effect than in the current statute. That reflects the current political hoopla that is floating around,” he said.

The specialists saw particular problems in the idea of attacking foreign oil suppliers’ efforts to influence prices by removing them from the sovereign immunity doctrine and making the act of state doctrine inapplicable.

“The Federal Trade Commission has testified before Congress that decisions by foreign countries about how much oil to allow producers to extract are not competition issues,” said Anthony C. Epstein, a partner in the antitrust group at Steptoe & Johnson LLP in Washington. “I’m struggling to understand how they could be decided by a jury in a US district court.”

Proposals’ specifics

Specter alluded to the proposals in a Mar. 13 committee hearing on oil and gas industry concentration and its possible impact on prices and described them more fully in a Mar. 9 speech to the full Senate.

“It is my concern that there ought to be some close analysis of the existing antitrust laws with what is happening in the marketplace. The outline of proposed legislation which I have denominated the Petroleum Industry Antitrust Act of 2006 is an outline for analysis and for further thought,” he said on the Senate floor.

The proposal, designed to make it possible for foreign oil-producing countries to be prosecuted in US courts for price-fixing, “would eliminate the judge-made doctrines that prevent OPEC members from being sued for violation of the antitrust laws by conspiring to fix the price of crude oil,” Specter said.

The idea, known as No Oil Producing and Exporting Cartels (NOPEC), has emerged as a separate bill in the past few congressional sessions from the Judiciary Committee’s antitrust, competition, and consumer rights subcommittee. It cleared the committee three times and was approved by the full Senate in 2005 but did not make it past negotiations with the House and the administration of President George W. Bush.

It could potentially create serious problems if adopted and enforced, the three antitrust specialists said. “Turning diplomatic issues into legal issues is very problematic. It puts judges and juries into a role they really shouldn’t be in,” said Epstein.

Boland said, “Acts by sovereign nations are protected not just from attack by antitrust laws but by other statutes. If we start to suggest that this would change, there will be repercussions and legislations passed we won’t like.”

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Oliver noted that the Foreign Sovereign Immunity Act, which has existed for decades, states that a foreign sovereign can’t be sued in a US court except in very narrow, enumerated circumstances such as torture or expropriation of assets.

But an interesting question is whether the government could bring a criminal charge against an OPEC member if this law was adopted, he said. If the OPEC conduct was by nongovernment officials, criminal charges might arise.

The US government has a very active criminal enforcement program directed toward nongovernmental international cartels, such as the $500 million criminal fine it assessed against vitamin producers, according to Oliver.

“It would be an interesting spectacle for a US court to try to prosecute [Venezuelan President] Hugo Chavez,” he said.

Antitrust amendment

Specter said another of his proposals would amend the Clayton Antitrust Act by adding a prohibition of oil and gas mergers that may “appreciably diminish competition.”

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“Current law allows the antitrust agencies to challenge any acquisition that may ‘substantially’ lessen competition. This change would significantly increase the level of scrutiny received by any large merger between competitors in the oil and gas industry,” the senator said.

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Boland said: “I don’t know if anyone knows the difference between ‘substantially’ and ‘appreciably.’ I think that if FTC officials could speak freely, they would say they don’t want it, they don’t need it, and they’re already very tough on the oil and gas industry in merger reviews.”

Modifying antitrust rules for a specific industry “certainly would be new and different,” Epstein said. “Obviously, the intent is to establish a lower standard. The Clayton Act standard was modified in the early 1950s in response to steel mergers, but it was an across-the-board action affecting all companies. How much more lenient should it be?”

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He said current federal antitrust laws work because they are more general than specific. “If you make them too specific, you create a potential for loopholes. There’s no question that the technology has evolved, and that it will continue to evolve. It’s actually a virtue that the antitrust laws are written so broadly that it eliminates the need for Congress to update them every few years,” he said.

Oliver said the federal government has taken a fairly consistent approach to enforcing Section 7 of the Clayton Act, dealing with mergers and competition, since it was adopted in 1917. There are even written interpretation and enforcement guidelines that antitrust lawyers can use to advise their clients, with reasonable accuracy, on how government regulators will react to a proposed merger.

“FTC enforcers have been accused of being industry lap dogs. But when they’re after me and my client, they sure don’t seem that way,” Oliver said.

Merger review

Specter also proposed requiring the US comptroller general to review any oil and gas merger in the last 10 years involving the Justice Department and Federal Trade Commission and requiring divestitures as part of a consent decree.

Once the study was completed, Specter said, the FTC and Justice Department would have to consider “whether any additional steps are necessary to restore competition, including further divestiture or the unraveling of some mergers.”

Boland said the first problem here would be finding the expertise in the comptroller general’s office to review mergers. “The FTC and Department of Justice have huge staffs of economists. Justice, in particular, has economists who are very familiar with the oil and gas industry,” he said.

“The antitrust agencies look back at mergers. The FTC has been doing this recently with the hospital industry. So looking back is not novel. Having an agency that doesn’t have experience take it on doesn’t make sense,” he said.

Epstein said, “The FTC on its own initiative has reviewed some consent decrees to see if they’ve worked. If it turns out that the remedy was ineffective in unanticipated ways, there’s plenty of precedent to modify consent decrees so they solve the problem they’re intended to solve.”

Specter said in Mar. 9 Senate floor remarks that he also is considering the establishment of a joint federal-state task force, including any state’s attorney general wishing to participate, to investigate oil and gas information-sharing practices, “particularly any company about which the [US] Energy Information Administration collects financial and operating data for as part of its financial reporting system.”

Wisconsin Atty. Gen. Peg Lautenschlager applauded this idea when she testified before the Senate Judiciary Committee 4 days later. “There is a potential for market manipulation and other abuses. Putting all your eggs in one basket when it comes to energy has not served this country well, particularly in places that are colder and rely heavily on natural gas,” she said.

Boland said involving the states would make the investigation political. “The oil industry shares a limited amount of information on inventories and, sometimes, swapping products. If you can identify what the problem is, it should be assigned to the FTC or Justice Department. The states can’t look across the nation,” he said.

Oliver said current law provides “plenty of ways” to address price-fixing. “I don’t think anyone has suggested the government isn’t enforcing price-fixing laws. People in the oil and gas industry are very mindful of the risks in sharing competitive information. They go to great lengths to avoid it.”

If sharing information became illegal, he asked, “How would you publish transaction prices to create price indexes?

“How would a publication gather information to create a Henry Hub or New York Harbor bunker fuel price? This is done on a blind basis so no one knows who’s involved in individual transactions. But it is useful not only to people in the oil and gas business, but also purchasers of those commodities. It helps them formulate contracts.”