The Intersection of Energy and Competition Law in the USA Thomas D Fina*

Home , Aubrey McClendon, John Sherman

Journal of World Energy Law and Business, 2016, 9, 411–423 doi: 10.1093/jwelb/jww031 Article The Intersection of Energy and Competition Law in the USA Thomas D Fina*

ABSTRACT The Sherman Act, with its origin in the Populist and Progresive eras, was enacted to break up ‘trusts’ like the Standard Oil Company, a vertically and horizontally integrated exploration and production Downloaded from company. Over 100 years later, the DOJ challenged the proposed merger of Halliburton and Baker Hughes, two oil-ﬁeld services companies. The government feared that the merger would potentially raise prices of servces provided by these companies to E&P companies, which are some of the largest corporations in the world and include many direct descendants of Standard Oil. Energy is of

great importance to the US economy. As a result, it is closely scrutinized by the US antitrust agen- http://jwelb.oxfordjournals.org/ cies-the Department of Justice and Federal Trade Commission. This article summarizes US antitrust laws and their origins, describes recent changes in the oil and gas industry, explains how those changes have inﬂuenced the enforcement articles of the DOJ and FTC, reviews the current industry and antitrust trends, identiﬁes likely enforcement activity in the near future and discusses the potential effect of the US’s 2016 Presidential election on antitrust enforcement.

1. INTRODUCTION The USA enacted the first modern competition laws in the world. The Sherman Act, the first and still the pri- by guest on January 3, 2017 mary US antitrust statute, was enacted to break up ‘trusts’ (essentially, large, dominate conglomerates) like the Standard Oil Company created by industry magnate John D Rockefeller. Standard Oil was a vertically and horizontally integrated exploration and production (E&P) company, and the dominant energy company in both the USA and the world in the late 1800s and early 1900s. The company controlled over 37 oil and gas companies in the USA and, at one point, over 90 per cent of the world’s refining capacity.1 Widespread public concern over the concentration of vast wealth and power in the hands of huge trusts that were controlled by a few families2 prompted both political parties to incorporate antitrust ‘planks’

* Thomas D Fina is a partner in Baker Botts LLP’s antitrust practice and the head of the firm’s antitrust practice in Texas. Much of his practice is energy and merger and acquisition focused. Mr Fina, and Baker Botts’ antitrust practice, represented Halliburton in its proposed acquisition of Baker Hughes Incorporated. He has guided hundreds of transactions through the merger review process in the USA and abroad and appeared before numerous competition authorities outside of the USA. Nathan Chubb, an antitrust associate at Baker Botts, has spent the majority of his career focused on oil and gas industry mergers and advised on Halliburton’s proposed acquisition of Baker Hughes Incorporated. Before joining Baker Botts, Mr Chubb was an attorney at the FTC, where he conducted numerous reviews of midstream and downstream energy transactions. Email: [email protected] 1 Grant Segall, John D. Rockefeller: Anointed with Oil (2001) 67. At one point, Standard Oil was estimated to hold over 50 per cent of the world’s supply of oil. In the late 1870s Standard Oil employed over 100,000 people, owned over 20,000 wells and owned or operated 4000 miles of pipeline and 5000 rail cars. Ron Chernow, Titan: The Life of John D. Rockefeller, Sr. (Vintage 1998) 249. 2 Standard Oil was largely held by four families until its breakup in 1911. Chernow (n 1) 291. Many of these families invested in other, similar trusts. Eliot Jones, The Trust Problem in the United States (Macmillan 1921) passim.

411 412 Intersection of energy and competition law

(or positions) into their respective 1888 Presidential platforms and led to Congress enacting the Sherman Act in 1890. In 1906, the Department of Justice (DOJ) brought a key antitrust lawsuit against the Standard Oil Company, alleging monopolization. In 1911, the US Supreme Court held that Standard Oil had, in fact, violated the Sherman Act and the behemoth was split into 34 separate companies. This marked the beginning of the end of the era of the trusts. Over 100 years later, the DOJ challenged the proposed merger of Halliburton and Baker Hughes, two oil- field services (OFS) companies. The government feared that the merger would potentially raise prices of services provided by these companies to E&P companies, which are some of the largest corporations in the world and include many direct descendants of Standard Oil.3 DOJ’s challenge would likely have been incon- ceivable at the time the Sherman Act was passed, but today even the largest corporations are protected by the antitrust laws in the USA.4 Energy is of great importance to the US economy, representing between 5 and 10 per cent of the US gross domestic product. As a result, it is closely scrutinized by the US antitrust agencies—the DOJ and Federal 5 Trade Commission (FTC). This article presents an overview of the intersection of antitrust and energy in Downloaded from the USA. Section II summarizes US antitrust laws and their origins. Section III describes recent changes in the oil and gas industry, while Section IV explains how those changes have influenced the enforcement activities of the DOJ and FTC. Section V reviews current industry and antitrust trends. Finally, Section VI identi- fies likely enforcement activity in the near future and discusses the potential effect of the USs’ 2016 Presidential election on antitrust enforcement. http://jwelb.oxfordjournals.org/

2. ORIGINS AND OVERVIEW OF US ANTITRUST LAW Antitrust and populism Antitrust laws in the USA have always been informed by an element of populism.6 John Sherman, for whom the primary US antitrust statute is named, said:

If we will not endure a king as a political power, we should not endure a king over the production, by guest on January 3, 2017 transportation, and sale of any of the necessaries of life. [If w]e would not submit to an emperor, we should not submit to an autocrat of trade.7

America’s first antitrust law was passed in 1890, the height of the populist movement in America and a time of considerable farmer and working class antipathy towards big industry and societal elites. Populism, with its agrarian roots, gave way to Progressivism, a reform movement with a more metropolitan base that believed the problems facing society (poverty, child labour and poor working conditions, among others) could be ad- dressed with education, a safe environment, and rational government regulation in the economic sphere. During the Progressive Era in the USA, from around 1900–17, the federal government actively intervened in

3 Examples include ExxonMobil, BP (through the acquisition of several Standard Oil companies) and Chevron. 4 Deborah Feinstein, Remarks of Deborah Feinstein Antitrust in Healthcare Conference, American Bar Association, May 12-13, 2016: Arlington, Virginia, USA. 5 Both agencies have units devoted to investigating activity and mergers in the energy sector. The FTC’s Mergers III division focuses on downstream oil and gas mergers and practices, including market and price manipulation in the petroleum futures market. The DOJ’s Transportation, Energy and Agriculture section focuses on mergers in E&P, OFS, electric power generation and transmission and nuclear power generation and transmission. 6 Historically, populism in the USA was an agrarian, anti-elitist reform movement, fueled by discontent with crop failures, falling prices for crops and expensive railroad transportation for agricultural products. Some populist causes were later embraced by the Progressives, a reform movement which reached its height at the turn of the 20th century in response to economic and social problems caused by rapid in- dustrialization in the USA. Today, the term ‘populism’ is used broadly and invoked by right wing groups such as the Tea Party and left wing groups such as Occupy Wall Street. 7 Eric Holder, ‘Attorney General Eric Holder Speaks at the Sherman Act Award Ceremony’ (2010) Department of Justice accessed 14 August 2016. Intersection of energy and competition law 413 the economy, breaking up trusts, and regulating railroads and other industries. The previous laissez-faire approach to economic affairs was deemed to no longer be an acceptable option, as the growth of unregulated big businesses had brought about abuses of corporate power. Once monopolies and trusts were established, progressives argued that consumers, farmers and small businessmen were often forced to accept high prices and inferior products and service. Notably, Theodore Roosevelt became president in 1901. Roosevelt was a champion of the Progressive Era, and his signal ‘Square Deal’ domestic policies promised the average citizen fairness, ‘trust-busting’ antitrust enforcement, regulation of railroads and pure food and drugs. This included DOJ’s successful challenge to, and breakup of, the Standard Oil Company. As a consequence, US competition law has elements of both populism and progressivism. The statutes are designed to protect consumers against the unchecked abuses of ‘big business’. To protect consumers,8 Congress sought to preserve competition between firms.9 The ideology that ‘when businesses make war, consumers win’ underlies even early expressions of Congressional intent in enacting antitrust legislation.

As populist sentiment has ebbed and flowed in the USA, so too has interest in antitrust enforcement. This Downloaded from has been reflected in enforcement trends and the receptiveness of the courts to the agencies’ arguments.10 In the 1880s and 1890s through the start of World War I, the question of how government would deal with the trusts dominating the US economy was at the forefront of political discourse. By the early 1980s, however, both political parties in the USA had broadly accepted general antitrust principles, and enforcement did not vary substantially depending on the party in power. http://jwelb.oxfordjournals.org/ In 2016, however, populist sentiment is surging again, reflected in the Presidential political campaigns of Republican nominee Donald Trump and Democratic contender Bernie Sanders, as well as political move- ments like the Tea Party movement on the right and the Occupy Wall Street movement and Senator Elizabeth Warren on the left. Senator Warren, a progressive Democrat representing Massachusetts, has sug- gested that antitrust enforcement has floundered in recent decades, including during the Obama Administration, and needs reinvigoration.11 Members of Congress, ‘think tank’ reports and newspaper ‘op- eds’ have raised the alarm about mergers and increasing concentration in the US economy.12 The revival of populism as a force in US politics, and the outcome of the 2016 President election, could affect antitrust en- by guest on January 3, 2017 forcement in the USA in a way that has not been seen recent decades. ‘Antitrust is making headlines again, and I don’t just mean in antitrust publications,’ stated the head of the Antitrust Division of the Department of Justice in a recent speech.13

Sherman Act section 1 While individual states within the USA enforced common law prohibitions on anti-competitive practices before the Sherman Act,14 the Sherman Act represented the first-federal attempt to proscribe anti-competitive behaviour.15 Section one of the Sherman Act states that, ‘[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign

8 While there is some current debate whether a total welfare standard is a more appropriate measuring stick, courts have historically focused on consumer welfare. Roger D Blair and D Daniel Sokol, ‘Welfare Standards in U.S. and E.U. Antitrust Enforcement’ (2013) 81 Fordham L Rev 2497, 2499 (‘[W]e believe that it is total welfare rather than consumer welfare that should drive antitrust analysis.’). 9 Robert H Bork, The Antitrust Paradox (Free Press 1978) 20, 50–71. 10 Sandeep Vaheesan, ‘The Evolving Populisms of Antitrust’ (2014) 93 Neb LR 370. 11 ‘U.S. Enforcers Respond to Critics From All Sides’ Global Competition Review, 21 September 2016. 12 Acting Assistant Attorney General Renata Hesse of the Antitrust Division Delivers Opening Remarks at 2016 Global Antitrust Enforcement Symposium, The Conference was at Georgetown University, Washington D.C., USA on Sept. 20, 2016 accessed 14 October 2016. 13 ibid. 14 15 USC ss 1–7. 15 Phillip Areeda and Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application (2016) s 101. 414 Intersection of energy and competition law nations, is declared to be illegal.’16 But, as noted in Standard Oil Company of New Jersey v United States,17 every contract restrains trade to some degree. Acknowledging that a strictly literal interpretation of the Sherman Act was unworkable, the court in Standard Oil Company of New Jersey concluded that only unrea- sonable restraints should be considered unlawful. This rule of reason generally governs US antitrust jurisprudence, with the exception of restraints deemed to lack any pro-competitive justification—labelled ‘naked restraints’,—which are generally considered per se illegal. If the elements of a per se illegal activity are demonstrated, a defendant can be found guilty of violating the Sherman Act without consideration of the intent or the effect of the activity. Examples of per se violations are bid rigging and price fixing.18

Clayton Act section 7 In 1914, Congress passed the Clayton Act19 to clarify and strengthen antitrust enforcement. While the government had won several notable cases under the Sherman Act, including breaking up Standard Oil and other trusts,20 the Sherman Act had various weaknesses, including ambiguity with respect to several practices, unin- Downloaded from tended application to labour unions and the inability to prevent anti-competitive mergers.21 Because of these shortcomings, remedial antitrust legislation was a focus of popular political discourse in the 1900s and 1910s, culminating in the passage of the Clayton Act, through which Congress added teeth to American antitrust jurisprudence.22 Of particular relevance to the energy industry, section 7 of the Clayton Act was designed to prevent anti- http://jwelb.oxfordjournals.org/ competitive mergers and other business combinations that would lessen competition. Mergers where ‘the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly’ were declared unlawful.23 The section 7 gave the DOJ and FTC the power to prospectively challenge mergers on behalf of the government, rather than requiring the agencies to wait until a transaction closed before challenging it.24

Hart–Scott–Rodino Antitrust Improvements Act of 1976, as amended (‘HSR Act’) Although section 7 of the Clayton Act granted federal enforcement agencies clear authority to challenge anti- by guest on January 3, 2017 competitive mergers, the DOJ and FTC continued to have a difficult time stopping unlawful mergers before closing. Ex post remedies were often unfulfilling,25 as competition was rarely fully restored.26 ‘Unscrambling the eggs’ post-closing is, at best, a difficult task. Consequently, in 1976 Congress passed the HSR Act27 to es- tablish a pre-merger notification system that gave the antitrust enforcement agencies an opportunity to review and, if necessary, challenge transactions before they closed.

16 15 USC s 1. 17 221 US 1 (1911). cf U.S. v Joint Traffic Ass’n (1898) 84 US 505; N. Sec. Co. v U.S. (1904) 193 US 197. 18 Department of Justice, U.S. Antitrust Resource Manual (2016) s 8. 19 15 USC ss 12–27. 20 221 US 1 (1910). 21 See Bork (n 9) 34. Later, Isabel Paterson would describe the Sherman Act by saying, ‘[a]s freak legislation, the antitrust laws stand alone. Nobody knows what it is they forbid.’ Ioannis Kokkoris and Rodrigo Olivares-Caminal, Antitrust Law Amid Financial Crisis (2010) 1. 22 The Clayton Act established that price discrimination, certain tying and exclusive dealings, mergers which tended to substantially lessen competition, and horizontal interlocking directorates are antitrust violations. 23 15 USC s 18. 24 ibid. 25 And often still are. See eg In the Matter of Evanston Northwestern Healthcare Corporation, FTC Docket No 9315 (Rosch op, 2008) (con- firming an antitrust violation but refusing to order divestiture of assets). 26 ibid. 27 15 USC s 18a. Intersection of energy and competition law 415

Overview of the HSR merger review process Parties to mergers valued above a specified threshold28 must follow prescribed notification and approval pro- cedures before closing.29 The merging parties must submit filings containing information and documents about the transaction30 and must wait a minimum of 30 days before closing to allow the DOJ and FTC the opportunity to review the transaction.31 Each party submits its own notification form, which provides a description of the transaction and breaks the party’s revenues down by government-issued industrial product and service clas- sification codes. The filings must also include certain types of documents prepared by the parties analysing the transaction with respect to competition. However, the filings do not require any substantive antitrust analysis.32 Before the expiry of the initial 30-day waiting period, the investigating agency may issue a Request for Additional Information and Documentary Materials, referred to as a ‘Second Request’, which is a subpoena for an extraordinarily broad range of data and documents. 33The breadth of the government’s concerns about a potential transaction and the number of product markets implicated in its investigation largely determines scope of a second request. Depending on the government’s concerns, parties may be able to narrow and focus a second request, reducing the burden of compliance. Complying with a Second Request generally is a Downloaded from major undertaking, and can require the production of millions of documents and vast amounts of data, de- tailed written responses to agency questions, and, sometimes, depositions of company executives. Compliance can cost millions or tens of millions of dollars and require from four to eight months or longer. Managing the Second Request process efficiently and effectively is critical to enhancing the likelihood of the merger being approved. http://jwelb.oxfordjournals.org/ Once both parties to a proposed merger have substantially complied with the Second Request, the government has 30 additional days to determine whether to attempt to block the transaction.34 In practice, however, the agencies typically require the merging parties to enter into a ‘timing agreement’ that provides the reviewing agency substantially more time to conduct its investigation. To block a transaction, the agency must seek a preliminary injunction through the federal courts. The FTC arguably faces a lighter burden in court than its DOJ counterpart in this regard.35 As a result, the ‘agency draw’ can make a difference in the ultimate outcome of a merger. As a practical matter, few transactions filed with the government36 are reviewed in depth or challenged. by guest on January 3, 2017 Table 1 below shows that in the 2015 Fiscal Year, fewer than three per cent of the HSR-filed transactions

28 These figures are updated annually based on the consumer price index. 29 FTC, Premerger Form and Instructions accessed 14 August 2016. 30 ibid. 31 Alternatively, parties to transactions unlikely to create competitive harms may request ‘early termination’ of the HSR waiting period. 32 One of the significant and fundamental differences between the US merger review process and the merger review process in the EU is that the US process is ‘back loaded’ with respect to the provision of data and documents, while the EU process is ‘front loaded’ with respect to the provision of data and documents. Thus, under the US HSR process, parties to a proposed transaction can notify their transaction to the antitrust agencies on their time schedule. Complying the data and documents required by a HSR filing typically requires a party ap- proximately two weeks, and the filing does not require any substantive data or antitrust analysis. To the extent that DOJ or the FTC (depending on which agency is reviewing the proposed transaction) wants additional documents and data about the transaction, it issues a subpoena to the parties (discussed further). In contrast, in the EU merger review process, parties typically draft lengthy Form CO filings which contain a great deal of substantive antitrust analysis and data, and may go through several draft Form CO filings and reviews with European Community staff before the filing is accepted for review. 33 FTC, Model Request for Additional Information and Documentary Materials (Second Request) (2010). 34 ibid. 35 See generally, Nathan Chubb, ‘Agency Draw: How Serious Questions in Merger Review Could Lead to Enhanced Merger Enforcement’ (2011) 18 Geo Mason L Rev 533. Recent efforts have been taken to align the two standards. See eg Judiciary Committee, House of Representatives, ‘House Judiciary Committee Approves SMARTER Act to Deliver Predictability to the Merger Review Process’ (2015) accessed 14 August 2016. 36 In the USA, less than 6 per cent of all transactions filed involved a target operating in the energy or natural resources industries. 416 Intersection of energy and competition law

Table 1. HSR ﬁling statistics Fiscal Year 2015 Fiscal Year 2014 Transactions Reported 1801 1663 Matters in which Second Requests were issued 47 51 Number of matters challenged or in which remedies were negotiated 42 33

Information Source: Hart–Scott–Rodino Annual Report for Fiscal Year 2015 received Second Requests. Once a Second Request is issued, the odds of a remedy being required or the agencies filing a challenge in court are high.

Both the DOJ and FTC have merger enforcement jurisdiction When the FTC Act was enacted in 1914,37 Congress created overlapping jurisdiction between the DOJ and Downloaded from FTC for enforcement of the Sherman and Clayton Acts.38 As a result, the US federal antitrust system has ‘competition’ between the DOJ and FTC. To prevent duplicative investigations, the agencies typically allocate mergers reviews based on their respective historical experience with certain industries. For transactions in the areas of electric power gener- http://jwelb.oxfordjournals.org/ ation and transmission, as well as nuclear power, the DOJ will generally conduct the review. The FTC generally reviews mergers in the biofuels and coal sectors. Responsibility for review of transactions in the petroleum-related industries is split between the agencies. Typically, the DOJ reviews mergers in the upstream market, such as for E&P and OFS companies. The FTC has established experience in reviewing midstream and downstream sector mergers, such as those involving companies in the gathering, refining and distribution business.

3. INDUSTRY CHANGES—THE BOOM OF UNCONVENTIONAL SHALE DEVELOPMENT by guest on January 3, 2017 The US energy industry has undergone an enormous transformation in recent years. In the 1990s, land- based oil and gas reservoirs in the USA that could be economically developed using traditional techniques were in decline,39 forcing E&P companies to seek new exploration and production opportunities. Many of the major oil companies re-focused on offshore and overseas targets, whereas some others, particularly small to mid-sized US E&P companies, worked to develop new technologies for exploiting known, but to that point uneconomic, hydrocarbon shale formations. The combination of advances in horizontal drilling technology and hydraulic fracturing (‘fracking’)—a technology which itself was first developed in the 1800s and had been available in substantially its current form since the 1950s—brought new life to US oil production. 40 These complementary technologies enabled E&P companies to drill long horizontal wells in narrow, dense shales, and access significant volumes of hydrocarbons trapped in them,41 leading to a resurgence in US oil production.42 US production steadily increased until, in 2014, the USA became the world’s largest pro-

37 15 USC ss 41–58. 38 Only FTC can enforce the FTC Act and, in particular, its section 5 powers. 39 EIA, U.S. Field Production of Crude Oil accessed 14 August 2016. 40 For a fuller discussion of the origins of fracking, see generally, Russell Gold, The Boom: How Fracking Ignited the American Energy Revolution and Changed the World (2015). 41 Eg Dennis Dimick, ‘How Long can the U.S. Oil Boom Last’ National Geographic (Dec 19, 2014). 42 At one point, it was estimated that over 90 per cent of newly drilled wells were fracked. Ian Urbina, ‘Regulation Lax as Gas Wells’ Tainted Water Hits Rivers’ New York Times (Dec 19, 2011). Intersection of energy and competition law 417 ducer of oil and natural gas liquids.43 In that period, hydrocarbon production reached ‘nearly 11 million barrels per day—an increase of 3 million barrels per day since 2011 alone’,44 and an approximate 150 per cent increase from the low point in 2008.45 Commenters noted that ‘the burgeoning U.S. oil and gas industry was experiencing growth unseen since the 1970’s, all while prices stayed remarkably stable (and high)’.46 As previously unexploited shale formations first began to be developed, attractive acreage was afford- able and readily available. As fresh acreage was exploited, new E&P and OFS companies were formed at an astonishing rate to serve the burgeoning production. By way of example, based on industry counts, at least 100 new OFS companies have been established in the USA since 2011. These new entrants have emerged in all segments of the upstream oil and gas industry. Many of these companies grew quickly in local or regional basins, and subsequently expanded or merged to form new national competitors to the well-established major E&P and OFS companies. Competition for acreage in the area of these reservoirs, and correspondingly the prices for acquiring such acreage, increased in parallel with these developments.47 Downloaded from 4. APPLICATION OF COMPETITION LAW IN THE ENERGY SECTOR DOJ’s recent energy activity Historically, the DOJ has been active in enforcing the antitrust laws in the energy sector. As noted above,

from the earliest days of antitrust regulation in the USA, the DOJ was focused on the oil trusts and Standard http://jwelb.oxfordjournals.org/ Oil. Over time, the DOJ’s enforcement activity has shifted from breaking up trusts to preventing potentially harmful mergers and prosecuting bid rigging.

DOJ merger review The proliferation of E&P companies in the USA and worldwide has created a highly competitive industry. Consolidation in this area has not garnered much DOJ interest, in large part because DOJ has generally considered the E&P market to be global in scope. To the extent that either agency has reviewed mergers be-

tween E&P companies, it has been the FTC focusing on the downstream assets of these companies— by guest on January 3, 2017 refineries, terminals and retail distribution (gas stations).48 While the DOJ has not recently challenged E&P mergers, the same cannot be said for mergers of OFS companies. These companies provide a range of products and services, such as drill bits, directional drilling, well completion tools and services, cementing, wireline services, well intervention and well plugging and abandonment services, among numerous others. The DOJ has closely reviewed OFS mergers in recent years, particularly among companies that operate in the Gulf of Mexico. The DOJ has generally taken the position that transactions involving companies which provide products and services offshore, and particularly in deep water, are the most problematic, because there are the fewest number of competitors and highest barriers to entry in this sector. In contrast, the DOJ has been less concerned about the provision of products and services on land, where there conversely tend to be more competitors and lower barriers to entry.

43 ibid. 44 ibid. 45 In September 2008, US crude oil field production averaged 3,980,000 barrels per day. This figure does not include natural gas liquids. EIA, ‘U.S. Field Production of Crude Oil’ accessed 14 August 2016. 46 Urbina (n 42). 47 Eg Allied-Horizontal started operations in 2010. In 2014, it merged with Horizontal Wireline, another recent startup. By 2015, the merged companies were estimated to be the fifth largest wireline services provider in the USA. 48 Eg the FTC investigated Exxon’s merger with Mobil, Chevron’s merger with Texaco, and Conoco’s merger with Phillips. 418 Intersection of energy and competition law

The most recent example of DOJ’s aggressive enforcement posture is reflected in the challenge of Halliburton Company’s attempt to acquire Baker Hughes Incorporated. The $34 billion dollar deal was announced in November 2014.49 The DOJ investigated the proposed transaction for almost 17 months, ultimately filing a complaint in federal district court challenging the proposed transaction. The complaint alleged 23 potential violations, most of which focused on a Gulf of Mexico geographic market.50 The DOJ re- jected Halliburton’s proposal to address the alleged problems through divestitures, and the parties ultimately abandoned the transaction.51 While the DOJ challenged the proposed Halliburton–Baker Hughes merger, the DOJ has permitted some other mergers in offshore OFS markets, subject to divestitures and other remedies. In 2013, the DOJ permitted Ecolab to purchase Permian Mud Services after Ecolab agreed to divest certain assets providing chemicals used in deep water oil production in the Gulf of Mexico.52 Without the the required divestiture, the companies would have had a 70 per cent offshore market share in anti-freezing/clumping additives for oil.53 The DOJ also permitted Baker Hughes’s acquisition of BJ Services in 2010, subject to the divestiture of certain 54 pressure pumping assets and two vessels in the US Gulf of Mexico. Downloaded from

DOJ bid rigging investigations Bid rigging is a criminal violation of section 1 of the Sherman Act, punishable by prison sentences of up to 10 years, US$1 million in individual fines, and US$100 million in corporate fines.55 The development of unconventional shales in the USA, and the concomitant increase in bidding for mineral rights on federal, state http://jwelb.oxfordjournals.org/ and private land, has increased the number of federal and state investigations into allegations of bid rigging. While the total number of investigations is unknown due to confidentiality protections, it is clear that federal and state authorities currently have a number of ongoing investigations. In 2014, the DOJ reviewed potential bid rigging between Chesapeake Energy and Encana in land lease auctions in Michigan.56 Chesapeake and Encana had engaged in discussions regarding a potential Michigan- based joint venture (JV). In the process, Chesapeake and Encana allegedly agreed not to compete on certain acreage bids. The JV never materialized, leading to a DOJ and Michigan Attorney General (AG) investigation. While the DOJ ultimately closed its investigation,57 the Michigan AG filed civil antitrust charges against by guest on January 3, 2017 both companies and criminal antitrust charges against Chesapeake. The companies ultimately settled with the AG for a combined US$30 million.58

49 Halliburton, ‘Halliburton and Baker Hughes Reach Agreement to Combine in Stock and Cash Transaction Valued at $34.6 Billion’ (2014) accessed 14 August 2016. 50 ‘DOJ Files Antitrust Lawsuit Against Halliburton’ (2016) Competition Pol Intl accessed 14 August 2016. 51 Leslie Picker, ‘Halliburton and Baker Hughes Call Off $35 Billion Merger’ New York Times (May 2, 2016). 52 Department of Justice, ‘Justice Department Requires Divestiture in Merger of Ecolab Inc. and Permian Mud Service Inc.’ (2013) accessed 14 August 2016. 53 ibid. 54 Department of Justice, ‘Justice Department Requires Divestitures in Baker Hughes’ Merger with BJ Services’ (2010) accessed 14 August 2016. 55 The fines may be increased above the maximum in rare circumstances to twice the gain or loss involved in the activities. 56 ‘Chesapeake, Encana Face Criminal Antitrust Charges in Michigan’ CNBC(2014) accessed 14 August 2016. 57 Mohid Ahmed, ‘Chesapeake Energy Corporation (CHK) To Pay $25 Million As Settlement For Michigan Lease Charges’ BidnessEtc (2015) accessed 14 August 2016. 58 ibid. Chesapeake’s settlement included settlement of non-antitrust charges as well. Intersection of energy and competition law 419

The DOJ also investigated a potential Chesapeake conspiracy with SandRidge Energy in Oklahoma in 2015.59 From December 2007 to March 2012, Chesapeake allegedly conspired with SandRidge to rig bids for oil and gas acreage in Northwest Oklahoma.60 The DOJ filed criminal charges against Aubrey McClendon, Chesapeake’s CEO.61 Mr McClendon died in a car accident shortly thereafter, but the investigation into Chesapeake is ongoing.62 In 2012, the DOJ concluded an investigation into bid rigging activities between Gunnison Energy and SG Interests in Colorado.63 The DOJ filed a civil antitrust complaint after the companies jointly bid for acreage in connection with a pipeline JV, alleging the companies’ began coordinating on bid prices before a JV had been formed.64 The companies ultimately settled with the DOJ for US$550,000.65

FTC’s recent energy activity The FTC has historically exercised the federal government’s antitrust merger jurisdiction with respect to midstream and downstream petroleum assets. The agency has been active in the last five years, requiring remedies in several matters, including energy markets not typically investigated.66 Downloaded from

FTC’s refinery and terminal enforcement—bulk supply markets There have been few major US refinery mergers in recent years. The last FTC challenge to a refinery merger was its unsuccessful 2007 attempt to block Western Refining’s acquisition of Giant Industries, a transaction between two New Mexico refiners. Since Western Giant, there have been several refinery acquisitions, includ- http://jwelb.oxfordjournals.org/ ing PBF Energy’s acquisition of assets in Pennsylvania, Ohio, Louisiana and California; Tesoro’s acquisition of refining assets in the central and western states; and HollyFrontier’s acquisition of refining positions in Tulsa, Oklahoma.67 Many of these mergers were non-reportable under the HSR Act or were filed but not investigated,68 while others did not raise competitive concerns.69 Tesoro’s acquisition of BP’s refinery alone

59 Department of Justice ‘Former CEO Indicted for Masterminding Conspiracy Not to Compete for Oil and Natural Gas Leases’ (2016) accessed 14

August 2016. by guest on January 3, 2017 60 ibid. 61 ibid. See also, Steve Sisney ‘Former Chesapeake CEO Charged With Land Lease Rigging’ Reuters (2016) accessed 14 August 2016. 62 Matt Egan and Jackie Wattles ‘Ex-Chesapeake CEO Aubrey McClendon Dead After Car Crash’ CNN (2016) accessed 14 August 2016. 63 Department of Justice ‘Justice Department Settlement Requires Gunnison Energy and SG Interests to Pay the United States a Total of $550,000 for Antitrust and False Claims Act Violations’ (2012) accessed 14 August 2016. 64 ibid. 65 ibid. 66 Gasoline prices often receive significant attention from politicians in the USA. As a result, Congress has put various mandates on the FTC regarding observing and investigating the petroleum industry. Congress has required the FTC to develop a rule and investigate market manipulation in the petroleum financial market. The agency conducted the Petroleum Industry Pricing and Practices Investigation to investigate alleged market manipulation in the gasoline market, but has not prosecuted any violations. Similarly, Congress has requested several investigations into the price of retail gasoline after disruptive events led to price spikes in petroleum products. For example, the FTC investigated retail gasoline prices in the South after Hurricane Katrina and retail gasoline prices in the Northwest after several price spikes. See, eg FTC ‘Report of the Federal Trade Commission on Activities in the Oil and Gas Industries’ (2008) accessed 14 August 2016. Crude and gasoline prices as well as the refining process are also frequent topics of economists at the FTC. See, eg Matthew Chesnes ‘The Impact of Outages on Prices and Investment in the US Oil Refining Industry’ (2014) Working Paper No 322 accessed 14 August 2016. 67 See, EIA ‘Refinery Genealogy’ accessed 14 August 2016. 68 While sustained high oil prices and were a boon to E&P and OFS companies, public reports suggest refinery profitability was squeezed due to high input costs, particularly for refineries reliant upon the light sweet crudes and foreign supply. 69 Eg, Delta Airlines acquired a refinery in Pennsylvania. More recently, PBF’s acquisition of the Torrance refinery in California did not raise competitive concerns, as none of PBF’s other refineries sold products into California. 420 Intersection of energy and competition law in Los Angeles received an in-depth investigation of the recent refinery mergers.70 The transaction was ultimately cleared without conditions, largely due to the existence of excess capacity and the fact that the acquisition did not result in a structural market change.71 Downstream transactions have resulted in several investigations and divestitures. Terminal acquisitions are particularly susceptible to competitive problems, often due to their geographical isolation and associated logistical challenges. Irving Oil’s acquisition of BP’s terminal assets in Maine,72 ArcLight Energy’s acquisition of Gulf Oil terminals from Cumberland Farms in Pennsylvania,73 and Tesoro’s acquisition of terminals from Chevron in Idaho74 have all required remedies to preserve competition in each relevant geographic market. One approach by which the FTC has expanded its enforcement activity is by defining a ‘bulk supply’ product market. Rather than defining the market based on the particular asset (eg refinery, pipeline or terminal), the bulk supply product market is based on the ability to provide refined products to the market in volumes larger than a truckload. This has allowed the FTC to pursue competitive overlaps in what may otherwise ap- pear to be vertical mergers, such as Par Petroleum’s (Par) recent acquisition of the MidPac Terminals. Par 75 acquired MidPac’s terminals which distributed refined products in Hawaii. However, because MidPac was Downloaded from capable of self-supplying through imported cargos, and redistributing those volumes throughout Hawaii, the FTC identified a horizontal overlap.76 Par ultimately divested MidPac’s interest in the import-capable terminal as a condition to closing the merger.77

FTC’s pipeline and distribution enforcement http://jwelb.oxfordjournals.org/ The FTC has been active in the review of midstream and downstream assets, particularly oil and gas pipelines. This is due, in large part, to the increase of master-limited partnership (MLP) investment structures. MLPs provide several advantages to investors; in particular, they combine the tax benefits of partnerships with the liquidity of publically traded stock.78 Oil and natural gas pipelines qualify for MLP treatment and generally have relatively consistent income flows that are attractive to MLP investors. The increase in MLPs in the pipeline industry has led to significant merger and acquisition activity, and the FTC has actively reviewed these transactions. In 2012, the FTC negotiated a remedy in Kinder Morgan’s acquisition of El Paso, a transaction between two national pipeline companies. Kinder Morgan’s acquisition by guest on January 3, 2017 of El Paso consolidated two largely complementary interstate and intrastate natural gas pipeline systems that had a considerable overlap in the Rocky Mountains.79 The FTC required Kinder Morgan to divest its

70 FTC, ‘FTC Closes Investigation into Tesoro’s Acquisition of BP Refinery’ (2013) accessed 14 August 2016. 71 ibid. The deal was termed a 7 to 7 as BP’s Northwest assets were likely considered capable of providing refined products into the West Coast geographic market. 72 FTC, ‘FTC Approves Final Order Settling Charges That Irving Oils Acquisition of ExxonMobil Assets in Maine Was Anticompetitive’ (2011) accessed 14 August 2016. 73 FTC, ‘FTC Requires Energy Investor ArcLight Energy Partners Fund to Divest Assets as a Condition of Acquiring Gulf Oil Limited Partnership from Cumberland Farms, Inc.’ (2015) accessed 14 August 2016. 74 FTC, ‘FTC Approves Final Order Settling Allegations That Tesoro’s Acquisition of Chevron Petroleum Assets Was Anticompetitive’ (2013) accessed 14 August 2016. 75 FTC, ‘FTC Approves Final Order Preserving Competition for Bulk Volumes of Hawaii-grade Gasoline Blendstock’ (2015) accessed 14 August 2016. 76 ibid. 77 Similarly, the relevant analysis in Tesoro’s acquisition of BP’s southern California refinery was the bulk supply of CARB gasoline and other light petroleum products. 78 Eg see Baker Botts’ website at < http://www.bakerbotts.com/services/practice-areas/corporate/master-limited-partnerships-mlp> accessed 14 October 2016. 79 FTC, ‘FTC Requires Kinder Morgan to Sell Rocky Mountain Pipelines as a Condition of Acquiring El Paso Corporation’ (2012) accessed 14 August 2016. Intersection of energy and competition law 421

Rockies Mountain Express pipeline, as well as additional pipelines and assets, to remedy its concerns about decreased competition that would otherwise result from the transaction.80 More recently, the FTC cleared another transaction between national pipeline operators—Energy Transfer’s acquisition of the Williams Companies—subject to Energy Transfer divesting an interest in a new natural gas pipeline serving Florida.81 At least two other pipeline mergers were investigated recently but closed with no further action. These were Magellan’s acquisition of Plains All American crude oil pipeline assets in the Rockies82 and Hilcorp’s acquisition of Marathon’s natural gas processing, storage and transmission assets in Alaska.83

FTC’s gathering and distribution enforcement Oil and gas gathering pipelines are closely related to transmission pipelines. Unlike downstream assets, which transport refined product from the processing plant or refinery to market, gathering lines collect oil and natural gas from wells and transport it to refineries or processing plants. Historically, the FTC has paid little attention to the gathering market.84 However in 2013, the FTC investigated Regency’s acquisition of Eagle Rock’s gas gathering assets. Regency had recently acquired PVR, a Downloaded from competing gas gathering and processing company, creating overlaps in Texas and Oklahoma. While the FTC ultimately closed its investigation without challenging the transaction,85 the investigation sent the signal that the agency was developing an interest in gas gathering mergers it had not expressed in over 10 years. Similarly, the FTC has generally not analysed purely retail transactions, particularly in retail gasoline.86 However, the FTC recently investigated several retail distribution transactions, including the proposed mer- http://jwelb.oxfordjournals.org/ gers of Pilot and Flying J (diesel sold to long-haul trucking fleets), and of AmeriGas and Blue Rhino (retail propane distribution). The FTC’s review of Pilot’s acquisition of Flying J, two competing retail truck stop chains, led to an eventual remedy which required the sale of 26 travel locations or ‘truck stops’ which provided diesel, among other services, to long-haul trucking fleets. In 2012, the FTC blocked Blue Rhino’s at- tempted acquisition of AmeriGas, two of the primary bulk propane distributors, for fear that the combined companies could raise prices post-transaction. Shortly thereafter, the FTC investigated an alleged agreement between the companies to reduce fill levels in propane cylinders, ultimately obtaining a conduct remedy from the companies.87 by guest on January 3, 2017

80 ibid. 81 FTC, ‘FTC Puts Conditions on Merger of Energy Transfer Equity, L.P., and The Williams Companies, Inc.’ (2016) accessed 14 August 2016. 82 Magellan Midstream Partners, L.P. / Plains All American Pipeline, L.P., Docket No 1310109 (19 September 2013) accessed 14 August 2016. 83 FTC, ‘FTC Closes Its Investigation Into Hilcorp Alaskas Proposed Acquisition of Marathon Alaskas Natural Gas Production, Transmission, and Storage Assets’ (2012) accessed 14 August 2016. 84 There are many competitive forces affecting gathering pipelines, such as each well requiring a dedicated line, the quality of the connected processing and refining assets and the destination markets available to the processing and refining assets. Gathering in the USA is pre- sumed to have little effect on the price of finished products. Furthermore, once a pipeline is extended to a well, it is normally cost prohibi- tive to switch suppliers, meaning that the timeframe to compete to supply gathering lines is generally narrow. The FTC has looked at gathering in the past, however. In 2000, the FTC required divestiture in Duke’s acquisition of Phillips gathering assets, and in 2002, Conoco was required to divest gathering assets as part of its acquisition of Phillips. ‘Duke, Phillips Resolve FTC Concerns’ (2000) MarketWatch accessed 14 August 2016; FTC Docket No 0210004, In the Matter of Conoco, Inc. and Phillips Petroleum Company accessed 14 August 2016. Both divestitures were part of larger deals. 85 Regency Energy Partners LP/Eagle Rock Energy Partners, LP, Docket No 1410070 (26 June 2014) accessed 14 August 2016. 86 Generally, retail gasoline prices are largely determined by the prices associated with gasoline and services sold higher in the distribution stream, such as dealer tankwagon prices and other spot prices at terminals. 87 Re AmeriGas and Blue Rhino, FTC Matter No 111-0195, Docket No 9360 (2015) accessed 14 August 2016. 422 Intersection of energy and competition law

5. LOOKING TO THE FUTURE Industry changes—the oil decline through 2015 Global oil prices started to decline in late 2014, then plummeted through 2015 until appearing to bottom out in February 2016. During that time, the price of West Texas Intermediate (WTI) crude oil, perhaps the most important US benchmark crude, fell from US$107 per barrel in June 2014 to just over US$26 per barrel in February 2016, a roughly 75 per cent price decrease.88 Several factors likely contributed to the oil bust, including the abundance of shale oil in the USA, logistics changes into and out of Cushing, Oklahoma where the WTI price is set,89 weakening USA and global demand, and OPEC’s unwillingness to cut production levels. However, the US antitrust agencies see energy as a cyclical business, and merging parties do not get ‘credit’ for excess capacity in downturns.

Some recovery and consolidation As a recovery appears to begin, our experience suggests a merger ‘snowball’ effect. The initial wave of consoli- Downloaded from dation may not raise significant competition concerns. Some of these transactions are occurring now. Instead, it is often the second or third transaction in a sector that is viewed as potentially more problematic and thus undergoes more extensive review. At that point, fewer competitors remain, increasing concentration in the relevant market. Fewer targets often means the second wave of consolidation is more complicated, as

there are more overlaps and fewer complementary acquisition targets. As consolidation continues, companies http://jwelb.oxfordjournals.org/ afraid of being ‘left out’ of the merger wave must consider increasingly risky acquisitions, or become targets themselves.

6. PREDICTIONS AND CONCLUSIONS Eight years ago, then-Senator Barack Obama and Senator John McCain barreled towards an election at the beginning of a deepening recession. During his campaign, Obama promised more robust antitrust enforcement, particularly with respect to mergers.90 Several times he stated that he would ‘step up’ antitrust enforcement

after, what he considered, the ‘weakest record of antitrust enforcement of any administration [referring to the by guest on January 3, 2017 Bush Administration] in the last half century’.91 However, in the economic tumult of the Great Recession, the Obama Administration quietly shelved its plans for stricter antitrust enforcement. It was well into the current economic recovery before the administration’s actions matched the ‘get tough’ rhetoric of candidate Obama.92 More recently, however, the DOJ and FTC have been particularly aggressive in merger review, challenging more than twice as many mergers in the past seven years as President Bush’s enforcers challenged in the previous eight years.93 With the exception of some recent hospital mergers,94 both the DOJ and FTC have been successful in challenging transactions in federal court, and such success begets more challenges. As the Acting Assistant Attorney General of the Antitrust Division recently noted, ‘[a]ntitrust enforcers at the Antitrust

88 EIA, ‘Cushing, OK WTI Spot Price FOB’ accessed 10 July 2016. 89 Eg ‘Seaway Crude Line Reversal Completed’ (2012) 239 Pipeline & Gas J 7; TransCanada, ‘Gulf Coast Project Begins Delivering Crude Oil to Nederland, Texas’ (2014) accessed 14 August 2016. 90 For a general discussion of popular perception of the robustness of antitrust enforcement in the USA in recent years, see D Daniel Sokol ‘Antitrust, Institutions, and Merger Control’ (2010) 17 Geo Mason L Rev 1. 91 Senator Barack Obama, ‘Statement for the American Antitrust Institute’ (2007) accessed 14 August 2016. 92 See, eg John Taladay and others, ‘President Obama Orders Federal Agencies to Further Ramp Up Antitrust Oversight’ (2016) Baker Botts < http://www.bakerbotts.com/ideas/publications/2016/04/antitrust-update-president-obama> accessed 14 August 2016. 93 Kirk Victor and Claude R. Marx, ‘Warren v. Baer: Two Tales of Antitrust Enforcement’ (2016) FTC Watch (‘In seven-plus years of the Obama administration, we successfully challenged or secured the abandonment of 39 mergers - a dramatic increase from the 16 successful challenges or abandonments during the eight years of the previous administration.’). 94 In these hospital transactions, the primary issue is typically geographic market definition. Intersection of energy and competition law 423

Division and the FTC have become justifiably more skeptical about the promise of procompetitive benefits of mergers and of the likelihood that remedies solve the competitive concerns. As a result, we are more and more litigating to challenge mergers we see as fundamentally problematic and difficult, if not impossible, to fix.’95 Where populists and pundits on the one hand and the US antitrust agencies on the other hand have split, however, is over the goals of the antitrust laws. For the populists and many pundits, concentration in and off itself is problematic, ‘big is bad’, and the antitrust agencies should challenge transactions that result in additional concentration. This is a view that both the Antitrust Division and the FTC reject out of hand.96 Size alone, and levels of concentration alone are not problematic; the antitrust agencies are concerned with transactions that create, enhance or protect ‘market power’ (essentially monopoly power) by anti-competitive means.97 While the political winds are impossible to predict, it is reasonable to expect that the populist sentiment articulated by both parties’ candidates for President will likely maintain momentum in the USA, and may manifest itself in the antitrust enforcement agenda of the new Administration. Hillary Clinton has signalled 98 her desire to continue the recent aggressive enforcement levels. For the first time in 20 years, the Downloaded from Democrats have added antitrust principles to the party’s primary statement of policies and values.99 While Donald Trump has not expressly opined on antitrust issues and is perceived as more likely to adopt business friendly policies, the Republican Party’s policy plank adopted at the Republican Convention nominating Donald Trump includes at least one expansion of antitrust enforcement.100 Regardless of the outcome of the race for the White House, the seeming resurgence of populist sentiment in the USA is likely to exert pressure http://jwelb.oxfordjournals.org/ on the DOJ and FTC to continue aggressive enforcement, including in the energy industry.101 by guest on January 3, 2017

95 Acting Assistant Attorney General Renata Hesse of the Antitrust Division Delivers Opening Remarks at 2016 Global Antitrust Enforcement Symposium . 96 See Hesse (n 12). 97 ibid. 98 Hillary Clinton, ‘Clinton Announces Technology Platform’ (2016) accessed 14 August 2016. 99 Leah Nylan ‘Democrats Add Antitrust Back Into Party Platform, Endorsing Greater Enforcement’ (2016) MLex, accessed 14 August 2016. Specifically, the party plank states, in part:

We will make competition policy and antitrust stronger and more responsive to our economy today, enhance the antitrust enforcement arms of the Department of Justice (DOJ) and the Federal Trade Commission (FTC), and encourage other agencies to police anti-competitive practices in their areas of jurisdiction. We support the historic purpose of the antitrust laws to protect competition and prevent excessively consolidated economic and political power, which can be corrosive to a healthy democracy. We support reinvigorating DOJ and FTC enforcement of antitrust laws to prevent abusive behavior by dominant companies, and protecting the public interest against abusive, discriminatory, and unfair methods of commerce. (emphasis added).

100 Specifically, the platform states: ‘We propose repealing the 1945 McCarran-Ferguson Act which protects insurance companies from antitrust litigation.’ 101 Since this article was submitted for publication, Donald Trump was elected as the next President of the United States. While Mr. Trump has made few comments regarding his stance on antitrust and competition matters, he recently appointed former FTC Commissioner Joshua Wright as the lead of his antitrust transition team. Commissioner Wright, who holds a law degree and doctorate in economics, is known to prefer the rigorous application of economic principles to competition matters. It is expected that President-elect Trump will direct the DOJ and FTC to adhere to a more restrained application of the antitrust laws than currently applied by the Obama administration.