Klobuchar, Colleagues Call on FTC to Investigate Exxon-Pioneer & Chevron-Hess Proposed Mergers For Anticompetitive Harms

Letter

Dear Chair Khan:

We write regarding our concerns about two blockbuster oil-and-gas deals announced in
October: ExxonMobil's (Exxon) proposed $60 billion acquisition of Pioneer Natural Resources
(Pioneer)1 and Chevron's proposed $53 billion acquisition of Hess Corporation (Hess)2
-- two of the largest oil-and-gas deals of the 21st century. By allowing Exxon and Chevron to further
integrate their extensive operations into important oil-and-gas fields, these deals are likely to
harm competition, risking increased consumer prices and reduced output throughout the United
States. At the regional level, the deals threaten to harm small operators and suppress wages. The
Federal Trade Commission (FTC) must carefully consider all of the possible anticompetitive
harms that these acquisitions present. Should the FTC determine that these mergers would
violate antitrust law, we urge you to oppose them.

This Industry Is Already Too Concentrated, and Americans Are Already Paying the Price.

In the 1990s, over 2,600 mergers occurred throughout all segments of the U.S. petroleum
industry.3 Between 1990 and 2001, the number of major U.S. energy companies plunged by
more than half, dropping from 19 to 9, due to merger activity.4 Most notably, Exxon merged with
Mobil in 1999; Chevron merged with Texaco in 2001 (after Chevron had already acquired Gulf
Oil and Texaco had already bought Getty Oil in the 1980s).5

Such consolidation enabled anticompetitive coordination in the industry, and the
remaining firms were well aware that they were members of an oligopoly with a "small number
of companies involved, all of whom share[d] a motivation to recoup costs and not undermine the
market."6 For example, according to internal Mobil and BP documents, the majors understood
that "[f]looding the market and depressing margins on the base volume"7 they marketed was
unprofitable. Likewise, they knew that directing their individual supplies into, or away from,
particular regions of the country enabled them to achieve "price uplift scenarios" and to
"leverage up" prices.8 The Government Accountability Office found that five specific mergers
from that time period -- Marathon-Ashland, Shell-Texaco I (Equilon), BP-Amoco, MAP-UDS,
and Exxon-Mobil -- led to wholesale gasoline price increases ranging from 0.39 to 5.00 cents per
gallon.9 Of those five, the price increase due to the Exxon-Mobil merger was the greatest.

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After these huge mergers took place, the majors' upstream operations were skewed to the
detriment of consumers. Studies at the time demonstrated that spending on drilling for new oil
supplies by the merged giants fell significantly compared to the drilling budgets before their
mergers.10 Strangely enough, the majors cut back on upstream production at a time when crude
prices were sky high and exploration costs had fallen by more than half, "one of the biggest
potential disconnects between supply and demand in the 150-year history of the oil business."11
These anticompetitive tactics resulted in a fragile supply for the nation where isolated mishaps at
refineries or broken pipelines caused enormous price spikes for consumers (as took place in
2000, 2001, 2002, and 2005) -- all of which financially benefited the oligopolists, providing them
no incentive to stabilize national supply.12

Consolidation in midstream operations hurt Americans consumers, as well. In 1993, the
largest five oil refiners had a collective share of about one-third of the American market, and the
largest ten controlled 55.6 percent. By 2005, due to the wave of mergers, the top five controlled
55 percent of the market, and the largest ten had 81.4 percent.13 This increase in concentration
enabled the largest players to manipulate the industry by withholding supply in order to drive up
prices, and since most of the firms were also vertically integrated, they benefited from higher
prices at the retail level, as well.14

Similar market dynamics exist today. The oil-and-gas industry is still dominated by a
handful of corporate giants, led by the top-two players Exxon and Chevron. Any further
consolidation could harm American consumers. This is especially true given the inelastic
demand for gas products; those who drive to work rarely have substitutes for gas, so as prices
rise, people do not purchase less gas. In April 2020, as the COVID-19 pandemic began, retail
gasoline prices averaged $1.84. Prices steadily rose for two years, hitting a historic height of
$4.93 in June 2022, and remain relatively high today at $3.84.15 Meanwhile, Exxon and Chevron
posted their own historic heights in 2022: $56 billion in profits for Exxon16 and $36.5 billion for
Chevron.17 They were not alone; Big Oil corporations collectively earned an industry high of
nearly $200 billion last year.18 President Biden rightfully called for the FTC to investigate the oil
industry for price gouging19 since such surges cannot be explained away by increased production
costs from the pandemic or inflation,20 especially in light of these firms' astronomical profits.

The Deals Could Harm Competition and Lead to Even Higher Prices for Americans.

Exxon is the largest oil-and-gas corporation in the United States, operating up and down
the supply chain and across the entire industry. Its acquisition target, Pioneer, is an upstream
petroleum operator drilling in Texas's Permian Basin. Pioneer owns more drilling acreage than
any other producer in the Permian where Exxon is also a top producer. A merged Exxon-Pioneer
could produce a staggering 1.2 million barrels per day -- more than twice the amount of the next
competitor.21 Accordingly, this deal would enable the new Exxon to dominate the Permian -- the
most prolific oil-and-gas field in the world and America's most important.

Chevron is America's 2nd largest oil-and-gas firm with integrated operations rivaling
Exxon's. Hess is one of the largest producers in North Dakota's Bakken Shale, the deepwater
Gulf of Mexico, and offshore Guyana.

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Supporters of the deals have argued that the global market for oil and gas is so enormous
that dominant firms in the relevant basins would not have enough supply to restrict capacity or
raise prices in any meaningful way.22 Focusing only on the global market is improper. Even if
these energy firms represent a small fraction of the global petroleum market, the question before
the FTC is whether these proposed transactions may substantially lessen competition in any line
of commerce.23 Thus, the FTC must consider how Exxon's or Chevron's vertically integrated
operations may harm American competition in any national or regional market. For example,
Exxon owns extensive midstream operations in the Permian Basin, meaning Exxon controls
storage, refining, and transportation for a significant amount of capacity in the region where it
will acquire Pioneer's drilling operations. Exxon has an extensive pipeline system that transfers
crude supply from the Permian to the Texas Gulf Coast. Recently, Exxon expanded its refinery
operations on the Texas Gulf Coast by an additional capacity of 250,000 barrels per day24 and
announced plans to ramp up its exporting operations25 on the Texas Gulf Coast, suggesting that
Exxon-Pioneer intends to move significantly more oil and gas out of the United States than the
two companies exported separately. Exxon's CEO Darren Woods put it more bluntly in 2020:
"These projects are export machines, generating products that high-growth nations need to
support larger populations with higher standards of living. Those overseas markets are the
motivation behind our investments. The supply is here; the demand is there. We want to keep
connecting those dots."26 This export strategy -- in the nation's most important oil-and-gas field,
no less -- could reduce the amount of their capacity ultimately available to American consumers
and thereby increase prices throughout the energy supply chain, including at the gas pump.
Furthermore, as we described above, the major energy firms already have a history of artificially
reducing supply and increasing prices following rounds of consolidation.

If this "consolidation trend in the US"27 continues accelerating, competing explorationand-production companies will find it increasingly difficult to operate without Exxon's and
Chevron's networks, which creates new abilities and incentives for Exxon and Chevron to
engage in anticompetitive tactics. Exxon's and Chevron's operations downstream would enable
them to redirect Pioneer's and Hess's crude supply to themselves, away from (and possibly to the
detriment of) their midstream competitors. These new market dynamics could result in price
hikes for midstream customers, and such added costs are often passed downstream to retail
customers, including drivers at gas stations.

We also urge you to investigate how an Exxon-Pioneer merger might impact local
operators in the Permian as well as oilfield employees such as geologists and engineers. Potential
anticompetitive harms at any level of the supply chain and in any market merit consideration by
the FTC.

The FTC Must Protect Americans from Big Oil.

These deals also demonstrate how corporate consolidation can frustrate self-governing
democracy. At a time when Americans overwhelmingly support governmental efforts to clean up
the environment and protect our nation from climate disasters,28 Exxon and Chevron are
doubling down on fossil-fuel production.29 The proposed transactions would augment these
corporations' outsized political power, further enabling them to spend millions on lobbyists to
thwart climate legislation, litigation to slash environmental rules, and a coordinated campaign to

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mislead consumers and discredit climate science -- all to protect their billions in profits.30 By
taking actions to promote competition, the FTC would also prevent the fossil-fuel industry from
further subverting our democratic processes.

Under President Biden, the FTC has been willing to stand up to Big Oil. Just last year, the
FTC required an energy private-equity fund to divest its entire crude-oil business in Utah before
allowing a similar transaction to close, expressing concerns that the deal would lead to higher
prices for refiners and consumers at the pump.31

The fight against Big Oil is not new. When the Justice Department took on Standard Oil
in the early twentieth century, the Supreme Court protected competition by breaking up Standard
Oil into 43 different firms.32 Eventually, the global industry reorganized into seven dominant
global players, including five prominent American companies -- three of which (Standard Oil of
California, Gulf Oil, and Texaco) combined into today's Chevron, and two of which were
Standard Oil of New Jersey (now known as Exxon) and Standard Oil of New York (now known
as Mobil). In our view, the FTC should not have approved the ExxonMobil merger in 1999,
which created the largest corporate successor of Standard Oil's original illegal monopoly, or the
merger between Chevron and Texaco in 2001. Lax enforcement during that period resulted in
market manipulation, unstable supply, and price hikes for Americans. We must avoid similar
mistakes going forward. It is incumbent upon the FTC to closely review the Exxon-Pioneer and
Chevron-Hess acquisitions and take appropriate action should such reviews uncover any possible
anticompetitive effects enabled by the acquisitions.

If anything, the FTC should be investigating the past anticompetitive mergers of Big Oil
conglomerates like ExxonMobil and Chevron to determine whether these energy giants should
be broken up once again.

We appreciate your attention to these serious matters.

Sincerely,

Source