oil company borrows in the capital markets to finance its acquisition of another oil firm, this borrowing will tend to deplete the pool of capital available for exploration. This fear is unfounded. An acquisition moves capital from one group in the capital market to another--the latter being the shareholder of the acquired firm. There is no empirical or theoretical reason, however, to believe that the group that receives the proceeds is going to consume all or an overwhelming part of those proceeds rather than reinvest them in the capital market. In other words, in a merger capital moves within the capital market; very little disappears from the market. Hence, the size of the capital pool will not substantially diminish. Indeed, there is nothing about consummating a merger that changes the profitability of oil exploration opportunities. Therefore, since mergers leave exploration opportunities and the amount of loanable funds essentially unchanged, mergers create insignificant impediments to the flow of capital into potentially profitable exploration prospects. Thus, prohibiting or restricting merger activity is not a viable means of increasing exploration for oil.

Moreover, the bill's prohibition of merging companies from participating in lease sales is counterproductive.

If

companies do merge in spite of the leasing prohibition, the result would be a reduction, in each instance, of a bidder from the number of firms capable of finding and producing oil on

public land. The likely effect of the penalty would be a reduction both in competition for mineral leases and for future exploration and production. Thus, the bill's effects would be to reduce-- rather than hold stable or increase--the likely exploration activities of firms in the petroleum industry.

If the

Aside from this obvious lack of benefits, a petroleum merger prohibition is likely to have seriously adverse effects on competition, and, ultimately, consumer welfare. threat of takeover by another petroleum firm is removed, the pressure on the management of domestic petroleum companies to be vigorous, to be cost conscious, and to be innovative, will be reduced. In addition, entry and exit barriers would be increased artifically to the detriment of competition and efficiency.

Stockholders could likewise suffer because assets

could not be shifted to those who value them most.

A petroleum merger prohibition might also deny companies the most efficient means for matching complementary assets to increase their combined output. In the petroleum industry. companies at adjacent vertical stages may foresee real benefits to combining complementary expertise or, if both are at the same level, may foresee real economies of scale from consolidation. For example, a company with highly efficient production technology may take over a company that is an

inefficient producer but has substantial oil reserves.

Although no new reserves are found, such a merger may greatly

benefit the economy because the combined firm may now be capable of getting existing reserves to consumers at much less cost to society. Similarly, the larger size and broader base of expertise that results from a merger might enable the merged firm to undertake a risky but potentially lucrative exploration opportunity that neither of the predecessor firms would have undertaken alone.

In sum, the current spate of merger activity in the petroleum industry should be viewed as a response to free market forces. If some of these mergers appear to be anticompetitive, existing antitrust laws provide adequate remedies; if some of them prove to be unsound business

decisions, the discipline of the marketplace can and should be relied upon to remedy the situation. In either event, there is no need for special anti-merger legislation directed at the petroleum industry or for other forms of governmental interference in the market.

Mr. Chairman, that concludes my prepared remarks. I would be happy to respond to any questions you or other members of the Subcommittee may have.

DOJ-1984-04

STATEMENT OF HON. TIMOTHY J. MURIS, DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION

Mr. MURIS. Thank you, Mr. Chairman. I appreciate the opportunity to appear here today to discuss this important issue. As I am sure you are aware, a substantial part of our antitrust work at the FTC involves reviewing mergers to assure that they do not violate the antitrust laws.

The Bureau of Competition, of which I am Director, has for several years maintained a separate Petroleum Division, which consists of antitrust attorneys and other professionals who specialize in the petroleum industry.

I want to briefly make three points and ask that my testimony be put in the record. First, I want to discuss our oil-merger study. Second, I want to discuss our specific oil-merger cases. Third, I want to discuss briefly competition at the crude oil level.

Turning to our 1982 petroleum-merger study, that study was done after Congress asked us to perform such a study. It was finished in September 1982, is 300 pages long and it contains several conclusions relevant to the hearing this morning.

First, petroleum mergers occur for a variety of reasons, including wider use of enhanced-oil-recovery techniques; divergent expectations concerning future crude oil price movements; the phased decontrol of crude oil; the imposition of the windfall profits tax; and corporate income tax provisions such as those permitting an increased basis of acquired assets and redepreciation of assets for tax purposes. Second, the Commission concluded in the oil-merger study that it did not believe that acquisitions occurring in the period studied adversely affected petroleum prices or availability of supply. Third, the study found no substantial evidence that increased oil merger activities significantly diverted capital from exploration and development of energy sources. Indeed, the study found that crude oil exploration and production generally increased during the period studied. Fourth, the Commission concluded that most geographic markets at the various levels of the petroleum industry were not highly concentrated, that mergers generally increased concentration levels only slightly, and that such increases did not appear to have endangered the substantial competition the commission found to exist in most aspects of the petroleum industry. Finally, and perhaps most pertinent for the subcommittee's present deliberations, the Commission recommended against any legislative moratorium or ban on oil company mergers.

Turning to the second point I wish to make, concerning our enforcement activity regarding oil mergers, we have had three cases, Mobil/Marathon, Gulf/Cities Services, and Texaco/Getty. Let me summarize the common theme among them.

First of all, each involved a major, vertically integrated petroleum company that attempted to acquire a smaller, so-called secondtier firm, primarily to gain control over the latter's crude oil reserves. Second, in each case, the Commission concluded the proposed merger raised substantial anticompetitive concerns that warranted enforcement action. Third, however, none of the competition problems were caused by or even related to the overall size of the company. Fourth, each of the problems affected only a relatively

small identifiable region of the country. Fifth, each problem pertains to only one or at most a few of the numerous products that a large integrated oil company markets. Sixth, the mergers created no antitrust problems involved in the discovery and production of crude oil. The Texaco/Getty case was different from the other two in one important sense. Texaco was willing to cure the problem. When firms are willing to cooperate, our standard practice has always been to attempt to obtain a consent agreement to solve the problem. And that is what we did in the Texaco/Getty matter. We obtained and provisionally accepted a precise, focused consent agreement.

The public comment period on the consent agreement extends until May 7, at which time the Commission will assess the public comments to make its final determination. The consent agreement requires the sale of two refineries and one pipeline, the sale of considerable marketing_assets-wholesale terminals and gas stations— and the sale of crude oil on the west coast to certain independent refiners. The total value of the divestiture runs into the hundreds of millions of dollars, and the crude oil is valued at $3 billion over the next 5 years.

The final point I want to discuss concerns increased crude oil concentration. There have been some people who have expressed concern over these oil mergers because of an increase in concentration in the crude oil level. If you look, however, at the statistics at that level, you will see that in terms of crude oil reserves and crude oil production, it is one of the least concentrated of the major industries in the United States. Whether you use the Herfindahl index of the 1982 Justice Department guidelines, or four firm concentration of the earlier guidelines, you find that under either-Senator WARNER. Mr. Muris, we have a practical problem. The chairman is going to attend the services. Could we kindly interrupt your testimony so the chairman can ask questions.

The CHAIRMAN. I apologize, but I did have one question I wanted to ask Mr. Boggs and Mr. Griles. There has been some concern expressed that in some quarters that large oil companies acquire reserves beyond their immediate needs and just sit on them and don't develop them. Due diligence would require Federal leasing as an example.

Can you tell me whether an antimerger legislation would affect the acquisition of reserves or the question of would it have an effect on whether an oil company would be more or less likely to hold reserves in excess of immediate requirements?

Mr. GRILES. Mr. Chairman, the Minerals Leasing Act does have prohibitions on acreage limitation that restrict the number of acres a company can hold onshore. In that regard each of the companies involved in merger activities will be reviewed to assure that they do not exceed that limitation under the law.

If they are in excess of that limitation, we would give them notice. They would have 6 months to dispose of the excess limitation.

The CHAIRMAN. Aside from the question of how you deal with that in your rules and regulations, would the merger or antimerger activities affect the decisions made by oil companies in a way that would measurably affect the reserve holdings?