Chevron Corporation and Unocal Corporation; Analysis of Agreement Containing Consent Order To Aid Public Comment, 35429-35433 [05-12044]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 70, Number 117 (Monday, June 20, 2005)]
[Notices]
[Pages 35429-35433]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-12044]


=======================================================================
-----------------------------------------------------------------------

FEDERAL TRADE COMMISSION

[File No. 051 0125]


Chevron Corporation and Unocal Corporation; Analysis of Agreement 
Containing Consent Order To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

-----------------------------------------------------------------------

SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the complaint and 
the terms of the consent order--embodied in the consent agreement--that 
would settle these allegations.

DATES: Comments must be received on or before July 9, 2005.

ADDRESSES: Interested parties are invited to submit written comments. 
Comments should refer to ``Chevron Corporation, et al., File No. 051 
0125,'' to facilitate the organization of

[[Page 35430]]

comments. A comment filed in paper form should include this reference 
both in the text and on the envelope, and should be mailed or delivered 
to the following address: Federal Trade Commission/Office of the 
Secretary, Room 159-H, 600 Pennsylvania Avenue, NW., Washington, DC 
20580. Comments containing confidential material must be filed in paper 
form, must be clearly labeled ``Confidential,'' and must comply with 
Commission Rule 4.9(c). 16 CFR 4.9(c) (2005).\1\ The FTC is requesting 
that any comment filed in paper form be sent by courier or overnight 
service, if possible, because U.S. postal mail in the Washington area 
and at the Commission is subject to delay due to heightened security 
precautions. Comments that do not contain any nonpublic information may 
instead be filed in electronic form as part of or as an attachment to 
email messages directed to the following email box: 
consentagreement@ftc.gov.
---------------------------------------------------------------------------

    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).
---------------------------------------------------------------------------

    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the FTC Web site, to the extent 
practicable, at http:www.ftc.gov. As a matter of discretion, the FTC 
makes every effort to remove home contact information for individuals 
from the public comments it receives before placing those comments on 
the FTC Web site. More information, including routine uses permitted by 
the Privacy Act, may be found in the FTC's privacy policy, at https://
www.ftc.gov/ftc/privacy.htm.

FOR FURTHER INFORMATION CONTACT: Dennis Johnson, Bureau of Competition, 
600 Pennsylvania Avenue, NW., Washington, DC 20580, (202) 326-2712.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec.  2.34 of 
the Commission Rules of Practice, 16 CFR 2.34, notice is hereby given 
that the above-captioned consent agreement containing a consent order 
to cease and desist, having been filed with and accepted, subject to 
final approval, by the Commission, has been placed on the public record 
for a period of thirty (30) days. The following Analysis to Aid Public 
Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for June 10, 2005), on the World Wide Web, at https://www.ftc.gov/os/
2005/06/index.htm. A paper copy can be obtained from the FTC Public 
Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., Washington, 
DC 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. All comments should be filed as 
prescribed in the ADDRESSES section above, and must be received on or 
before the date specified in the DATES section.

Analysis of Agreement Containing Consent Order To Aid Public Comment

I. Introduction

    The Federal Trade Commission (``Commission'' or ``FTC'') has issued 
a complaint (``Complaint'') alleging that the proposed merger of 
Chevron Corporation (``Chevron,'' formerly ChevronTexaco Corporation) 
and Unocal Corporation (``Unocal'') (collectively ``Respondents'') 
would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, 
and Section 5 of the Federal Trade Commission Act, as amended, 15 
U.S.C. 45, and has entered into an agreement containing consent order 
(``Agreement Containing Consent Order'') pursuant to which Respondents 
agree to be bound by a proposed consent order (``Proposed Consent 
Order''). The Proposed Consent Order remedies the likely 
anticompetitive effects arising from Respondents' proposed merger, as 
alleged in the Complaint.

II. Description of the Parties and the Transaction

A. Chevron

    Chevron is a major international energy firm with operations in 
North America and about 180 foreign countries in Europe, Africa, South 
America, Central America, Indonesia, and the Asia-Pacific region. Its 
petroleum operations consist of exploring for, developing and producing 
crude oil and natural gas; refining crude oil into finished petroleum 
products; marketing crude oil, natural gas, and various finished 
products derived from petroleum; and transporting crude oil, natural 
gas, and finished petroleum products by pipeline, marine vessels, and 
other means. The company operates light petroleum refineries for 
products such as gasoline, jet fuel, kerosene and fuel oil at 
Pascagoula, Mississippi; El Segundo, California; Richmond, California; 
Salt Lake City, Utah; and Kapolei, Hawaii. Chevron is a major refiner 
and marketer of gasoline that meets the requirements of the California 
Air Resources Board (``CARB''). Chevron also has operations for the 
manufacture and marketing of commodity petrochemicals for industrial 
uses and additives for fuels and lubricants. For 2004, the company had 
total revenues of approximately $155.3 billion and total assets of 
approximately $93.2 billion.

B. Unocal

    Unocal is also a major international energy firm with operations in 
North America, Asia, and other locations around the world. Its primary 
activities are oil and gas exploration, development and production. It 
has oil and gas operations located in various countries, including 
Thailand, Myanmar, Indonesia, Azerbaijan, Bangladesh, and Vietnam. 
Unocal sold most of its downstream operations in the United States to 
another company in the mid-1990's. As a result, Unocal has no 
downstream operations in refining or gasoline retailing, and with a few 
exceptions almost all of Unocal's operations are in the upstream 
segment of the industry, i.e., exploration and production. The company 
had total revenues for 2004 of approximately $8.2 billion and total 
assets of approximately $13.1 billion.

III. The Transaction

    Pursuant to an Agreement and Plan of Merger dated April 4, 2005, 
Chevron plans to acquire 100% of the voting securities of Unocal. 
Unocal will merge into a direct wholly-owned subsidiary of Chevron, 
with the subsidiary continuing as the surviving entity and a wholly-
owned subsidiary of Chevron. Under the terms of the agreement, Unocal 
shareholders may elect to receive 1.03 shares of Chevron stock, $65 in 
cash, or the combination of $16.25 in cash and 0.7725 of a share of 
Chevron common stock. The election is subject to the limitation that 
75% of the outstanding shares of Unocal common stock will be exchanged 
for Chevron common stock and 25% will be exchanged for cash, with 
prorationing in the event the cash election is oversubscribed or 
undersubscribed. The total value of the transaction is estimated at 
approximately $18 billion, which includes approximately $1.6 billion in 
assumed debt.
    The transaction is subject to various closing conditions, including 
the approval of Unocal shareholders and the

[[Page 35431]]

expiration or early termination of the waiting period under the Hart-
Scott-Rodino Act, 15 U.S.C. 18A. The parties expect to close the 
transaction as soon as practicable after the last of the conditions to 
closing have been satisfied.

IV. The Complaint

    The Complaint alleges that the merger of Chevron and Unocal would 
violate Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and 
Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 
45, by substantially lessening competition in the refining and 
marketing of reformulated gasoline that has been approved by the 
California Air Resources Board (``CARB'') for sale in California. 
Through its wholly-owned subsidiary, Union Oil Company of California 
(``Union Oil''), Unocal owns a portfolio of five U.S. patents relating 
to reformulated gasoline (``RFG''). These patents (the ``Relevant U.S. 
Patents'') cover the production and supply of CARB RFG, particularly in 
warmer weather months. To remedy the alleged anticompetitive effects of 
the merger, the Proposed Consent Order requires Respondents to take 
certain actions, including (1) to cease and desist from any efforts to 
assert or enforce any of the Relevant U.S. Patents against any person, 
to recover any damages or costs for alleged infringements of any of the 
Relevant U.S. Patents, or to collect any fees, royalties or other 
payments for the practice of the Relevant U.S. Patents; and (2) to take 
the necessary actions to dedicate to the public the remaining terms of 
the patents.
    According to the Complaint, gasoline is a motor fuel used in 
automobiles and other vehicles. It is produced in various grades and 
formulations, including conventional unleaded gasoline, low emissions 
reformulated gasoline (``RFG''), California Air Resources Board 
(``CARB'') compliant reformulated gasoline, and others. CARB compliant 
reformulated gasoline (``CARB RFG'') is a type of gasoline that meets 
the specifications of the California Air Resources Board. CARB RFG is 
cleaner burning and causes less air pollution than conventional 
unleaded gasoline. The sale of any gasoline other than CARB RFG is 
prohibited in California, and there is no substitute for CARB RFG as a 
fuel for automobiles and other vehicles that use gasoline purchased in 
California. As a result, CARB RFG is a relevant line of commerce in 
which to analyze the potential effects of the merger.
    CARB RFG is produced primarily in California and at a few other 
locations on the West Coast. The Complaint alleges that the state of 
California, and smaller areas contained therein, are relevant sections 
of the country in which to analyze the potential effects of the merger.
    Chevron is a leading refiner and marketer of CARB RFG. Unocal does 
not refine or market CARB RFG. However, through its wholly-owned 
subsidiary, Union Oil, Unocal owns Relevant U.S. Patents relating to 
CARB RFG. Refiners must use the technology covered by the Unocal 
Relevant U.S. Patents for producing CARB RFG during warmer weather 
months--i.e., CARB ``summertime'' gasoline. Thus, Unocal controls an 
important input used by CARB refiners to produce CARB gasoline.
    Unocal licenses its RFG patents to others in exchange for payments 
ranging from 1.2 to 3.4 cents per gallon. In addition, Unocal has won a 
patent infringement suit against major refiners of CARB RFG and 
obtained a court judgment awarding Unocal royalties of 5.75 cents per 
infringing gallon produced in California.
    There are relatively few producers of CARB RFG. As a result, the 
relevant markets for the refining and marketing of CARB RFG are either 
highly concentrated or moderately concentrated. The Complaint further 
alleges that entry into the relevant lines of commerce in the relevant 
sections of the country is difficult and would not be timely, likely or 
sufficient to prevent anticompetitive effects resulting from the 
proposed merger.
    The Complaint states that, because of factors such as Unocal's 
perception of possible actions by the California Air Resources Board or 
other governmental authorities, Unocal is likely to be constrained in 
charging the full monopoly level price to licensees of the Unocal 
patents. Moreover, Unocal has no operations at downstream levels of the 
industry through which it could attempt to recoup any additional 
profits.
    Because of its significant operations at the refining and marketing 
levels, Chevron will have a greater ability than Unocal to obtain 
additional profits by coordinating with its competitors at the 
downstream refining and marketing levels. As part of Unocal's license 
agreements, Unocal regularly collects detailed reports from licensees 
about their production of CARB RFG and other refinery operations. By 
obtaining the Unocal patents, Chevron would receive additional 
information about the production of competitors and other information 
not otherwise available to members of the industry. Chevron could 
facilitate coordination among refiners and marketers of CARB RFG by 
using this information to monitor a collusive agreement and thus detect 
cheating on a collusive agreement. The anticompetitive effects from 
such coordination would be likely to outweigh any efficiencies that 
would be obtained by the integrated firm.
    As a result, the Complaint charges that the effect of the proposed 
merger, if consummated, may be substantially to lessen competition in 
the marketing and refining of CARB RFG in the relevant sections of the 
country, in violation of Section 7 of the Clayton Act, as amended, 15 
U.S.C. 18, and Section 5 of the Federal Trade Commission Act, as 
amended, 15 U.S.C. 45.

V. Resolution of the Competitive Concerns

    The Commission has provisionally entered into an Agreement 
Containing Consent Order with Chevron and Unocal in settlement of the 
Complaint. The Agreement Containing Consent Orders contemplates that 
the Commission would issue the Complaint and enter the Proposed Consent 
Order requiring the relief described below.
    In order to remedy the anticompetitive effects that have been 
identified, Chevron and Unocal have agreed to take several actions. 
First, they will cease and desist from any and all efforts, and will 
not undertake any new efforts, to assert or enforce any of Unocal's 
Relevant U.S. Patents against any person, to recover any damages or 
costs for alleged infringements of any of the Relevant U.S. Patents, or 
to collect any fees, royalties or other payments, in cash or in kind, 
for the practice of any of the Relevant U.S. Patents, including but not 
limited to fees, royalties, or other payments, in cash or in kind, to 
be collected pursuant to any License Agreement. These obligations 
become effective as of the ``Merger Effective Date,'' which is defined 
as the earlier of (1) the date that the certificate of merger for the 
Merger is filed with the Secretary of State of Delaware or such later 
time as specified in such certificate of merger, or (2) the date that 
Chevron acquires control of Unocal Corporation, as ``control'' is 
defined by 16 CFR 801.1(b).
    Second, the Proposed Consent Order requires that, within thirty 
(30) days following the Merger Effective Date, Respondents shall file, 
or cause to be filed, with the United States Patent and Trademark 
Office, the necessary documents pursuant to 35 U.S.C. 253, 37 CFR 
1.321, and the Manual of Patent Examining Procedure to disclaim or 
dedicate to the public the remaining term of the Relevant U.S. Patents. 
The Proposed Consent Order further requires

[[Page 35432]]

that Respondents shall correct as necessary, and shall not withdraw or 
seek to nullify, any disclaimers or dedications filed pursuant to the 
order.
    Third, the order requires that, within thirty (30) days following 
the Merger Effective Date, Respondents shall move to dismiss, with 
prejudice, all pending legal actions relating to the alleged 
infringement of any Relevant U.S. Patents, including but not limited to 
the following actions pending in the United States District Court for 
the Central District of California: Union Oil Company of California v. 
Atlantic Richfield Company, et al., Case No. CV-95-2379-CAS and Union 
Oil Company of California v. Valero Energy Corporation, Case No. CV-02-
00593 SVW.
    Paragraph V of the Proposed Consent Order requires Respondents to 
distribute a copy of the Order and the Complaint in this matter to 
certain interested parties, including (1) any person that either 
Respondent has contacted regarding possible infringement of any of the 
Relevant U.S. Patents, (2) any person against which either Respondent 
is, or was, involved in any legal action regarding possible 
infringement of any of the Relevant U.S. Patents, (3) any licensee or 
other person from which either Respondent has collected any fees, 
royalties or other payments, in cash or in kind, for the practice of 
the Relevant U.S. Patents, and (4) any person that either Respondent 
has contacted with regard to the possible collection of any fees, 
royalties or other payments, in cash or in kind, for the practice of 
the Relevant U.S. Patents.
    Paragraph V also requires Respondents to distribute a copy of the 
Order and the Complaint to present and future officers and directors of 
Respondents having responsibility for any of Respondents' obligations 
under the Order, and to employees and agents having managerial 
responsibility for any of Respondents' obligations under the Order.
    Paragraphs VI, VII and VIII of the Proposed Consent Order contain 
standard reporting, access, and notification provisions designed to 
allow the Commission to monitor compliance with the order. Paragraph IX 
provides that the Order shall terminate twenty (20) years after the 
date it becomes final.

VI. Opportunity for Public Comment

    The Proposed Consent Order has been placed on the public record for 
thirty (30) days for receipt of comments by interested persons. 
Comments received during this thirty day comment period will become 
part of the public record. After thirty (30) days, the Commission will 
again review the Proposed Order and the comments received and will 
decide whether it should withdraw from the Proposed Order or make final 
the agreement's Proposed Order.
    By accepting the Proposed Order subject to final approval, the 
Commission anticipates that the competitive problems alleged in the 
Complaint will be resolved. The purpose of this analysis is to invite 
public comment on the Proposed Order, and to aid the Commission in its 
determination of whether it should make final the Proposed Order 
contained in the agreement. This analysis is not intended to constitute 
an official interpretation of the Proposed Order, nor is it intended to 
modify the terms of the Proposed Order in any way.

Statement of the Federal Trade Commission

    The Federal Trade Commission has voted unanimously (4-0-1, with 
Chairman Majoras recused) to accept two linked consent agreements that 
resolve both the Commission's monopolization case against Unocal 
Corporation's subsidiary Union Oil Company of California and any 
antitrust concerns arising from Chevron Corporation's pending 
acquisition of Unocal. The key element in the settlements, which will 
become effective when the acquisition is completed, is Chevron's 
agreement not to enforce certain Union Oil patents that potentially 
could have increased gasoline prices in California by over $500 million 
a year (or almost six cents per gallon). This agreement provides the 
full relief that the Commission sought in its administrative litigation 
with Union Oil and also addresses the only possible objection to the 
Chevron/Unocal acquisition.
    On April 4, 2005, Chevron agreed to acquire Unocal in a transaction 
valued at approximately $18 billion. Chevron and Unocal both have 
extensive oil and gas operations. However, nearly all of Unocal's 
operations are in the so-called ``upstream'' segment of the business--
namely, the exploration and production of crude oil and natural gas. 
Unocal has no refineries or gasoline stations in the United States or 
anywhere else in the world, and has few other ``downstream'' 
operations. As a result, virtually all of the competitive overlaps 
between the two firms are in unconcentrated upstream markets, and the 
merger thus creates no competitive risk. For example, Chevron and 
Unocal combined have only 2.7 percent of world crude oil production, 
0.77 percent of world crude oil reserves, 11.3 percent of U.S. crude 
oil production, and 11.4 percent of U.S. crude oil reserves.\2\ We want 
to emphasize that the merger will have no impact whatsoever on 
concentration at the retail or refinery levels. It is clear from all we 
have seen that Chevron's primary motivation is to gain access to 
Unocal's upstream oil reserves.
---------------------------------------------------------------------------

    \2\ Sources for the underlying data include the Energy 
Information Administration, U.S. Department of Energy, U.S. Crude 
Oil, Natural Gas, and Liquids Table 2003 Annual Report, Table B5, 
available at https://www.eia.doe.gov, the FTC Bureau of Economics 
Staff Study, ``The Petroleum Industry: Mergers, Structural Change, 
and Antitrust Enforcement,'' August 2004, Table 5-3, available at 
https://www.ftc.gov/os/2004/08/040813/mergersinpetrolberpt.pdf, and 
the Oil and Gas Journal.
---------------------------------------------------------------------------

    The only potential competitive concern with Chevron's proposed 
acquisition of Unocal involved patents held by Union Oil--the same 
group of patents involved in the Commission's monopolization case 
against Union Oil. In order to explain why this is so, it is necessary 
first to discuss the issues in this monopolization case.
    The Commission's administrative complaint against Union Oil charged 
that the firm had illegally acquired monopoly power in the technology 
market for producing certain low-emission gasoline mandated by the 
California Air Resources Board (CARB) for sale and use in California 
for up to eight months of the year. According to the complaint, Union 
Oil misrepresented to CARB that certain gasoline research was non-
proprietary and in the public domain, while at the same time it pursued 
a patent that would enable it to charge substantial royalties if the 
research results were used by CARB in the development of regulations. 
The complaint further asserted that Union Oil similarly misled its 
fellow members of private industry groups, which were also 
participating in the CARB rulemaking process. As a result, if Union Oil 
were permitted to enforce its patent rights, companies producing this 
low-emission CARB gasoline would be required to pay royalties to Union 
Oil, the bulk of which would be passed on to California consumers in 
the form of higher gasoline prices. The Commission estimated that Union 
Oil's enforcement of these patents could potentially result in over 
$500 million of additional consumer costs each year. The complaint 
sought an order requiring Union Oil to cease and desist from all 
efforts to assert these patents against those manufacturing, selling, 
distributing, or otherwise using motor gasoline to be sold in 
California. In the

[[Page 35433]]

settlement announced today, Unocal and Chevron have agreed to all of 
this requested relief.
    The consent orders also resolve any possible antitrust objections 
to the merger. Although Unocal does not engage in any refining or 
retailing itself, it had claimed the right to collect patent royalties 
from companies that did so (including Chevron). If Chevron had 
unconditionally inherited these patents by acquisition, it would have 
been in a position to obtain sensitive information and to claim 
royalties from its own horizontal downstream competitors. We have 
reason to believe that this scenario would likely have an adverse 
effect on competition and, in any event, would inevitably have required 
an extensive inquiry and possible litigation.
    For example, Union Oil regularly collects detailed reports from 
licensees about their production of CARB gasoline and other refinery 
operations. If Chevron had continued these license agreements after 
inheriting Union Oil's patents, it would have received information not 
otherwise available to members of the industry. Chevron could have used 
this information to facilitate coordinated interaction and detect any 
deviations. Chevron might also have been able to use the patents to 
discourage maverick behavior. Our present knowledge suggests that the 
likely competitive harm from this potential coordination and discipline 
would outweigh any likely efficiency gains from the vertical 
integration of a merged Chevron-Unocal. Now, a further inquiry into 
that belief is not necessary.
    The settlement of these two matters is thus a double victory for 
California consumers. The Commission's monopolization case against 
Unocal was complex and, with possible appeals, could have taken years 
to resolve. The stakes were high, and substantial royalties could have 
been paid in the meantime--with an immediate impact on consumers. If 
the Commission lost the case, the dollar costs to consumers ultimately 
would have been immense. At the same time, a challenge against the 
acquisition of Unocal by Chevron would itself be a complex case, with 
high stakes and an uncertain outcome. The settlement provides the full 
relief sought in the monopolization case and resolves the only 
competitive issue with the proposed merger. With the settlement, 
consumers will benefit immediately from the elimination of royalty 
payments on the Union Oil patents, and potential merger efficiencies 
could result in additional savings at the pump.

    By direction of the Commission, Chairman Majoras recused.
Donald S. Clark,
Secretary.
[FR Doc. 05-12044 Filed 6-17-05; 8:45 am]
BILLING CODE 6750-01-P