Antitrust Scrutiny Heating Up in Oil and Gas Industries
President Biden recently wrote a letter to FTC Chair Lina Khan urging the Commission to immediately investigate potential anticompetitive behavior in the oil and gas sector. The President noted that gas prices have been rising, while the costs faced by oil and gas companies themselves have decreased. Concerned that the two largest oil and gas companies in the country are set to double their net income over 2019 while the gap between the price of unfinished gasoline and the price at the pump is increasing, he called on the FTC to “bring all of the Commission’s tools to bear if you uncover any wrongdoing.”
Steps Already Taken
The Biden administration has made a previous attempt to direct the FTC’s focus towards the oil and gas industries. At President Biden’s behest, the Director of the National Economic Council, Brian Deese, wrote to Chair Khan on August 11, citing “divergences between oil prices and the cost of gasoline at the pump” and urging the FTC to investigate. Chair Khan responded with a letter of her own, outlining a three point plan to address the administration’s concerns about the cost of gas. First, the FTC would identify additional legal theories to challenge fuel station mergers that involve dominant players in the market acquiring family-run businesses. Second, the FTC “would tak[e] steps to deter unlawful mergers in the oil and gas industry.” The Chair specifically referred to the imposition of prior approval requirements to deter illegal mergers in sectors including retail gas markets. Third, Chair Khan indicated that she would direct staff to investigate abuses in the franchise market, noting that the sale of gasoline at high prices may benefit chains at the expense of franchisee store operations.
President Biden expressed in his November 17th letter that he appreciated the plans to “strengthen oversight of mergers in the oil and gas sector” but that further inquiry is required.
Potential Avenues for Enforcement and Investigation
Given the President’s explicit requests to investigate, participants in the oil and gas industry can expect the FTC to increase scrutiny and enforcement. The FTC may pursue several avenues to execute the President’s agenda.
Investigative Powers: Subpoenas and 6(b) Studies
In the wake of Hurricane Katrina, the FTC expended significant resources under its statutory authority to investigate accusations of price gouging in the gasoline market. The Commission issued subpoenas, also known as “Civil Investigative Demands” (CIDs) to petroleum industry firms and issued requests to retailers under Section 6(b) of the FTC Act. The FTC ultimately concluded in May of 2006 that the pricing was explained by normal market trends.
The FTC may employ similar methods to investigate oil and gas industries now by issuing CIDs and 6(b) orders. Orders issued under 6(b) of the FTC Act function similarly to CIDs and require the recipient to provide information to the FTC in writing, subject to court-ordered compliance. Both can require an organization to turn over company information. 6(b) authority also enables the Commission to conduct wide-ranging studies that do not have specific law enforcement purposes. For example, utilizing its 6(b) power and without an underlying specific law enforcement purpose, the FTC recently launched an inquiry into supply chain disruptions and its impacts on consumers.
Wholesalers, refiners, single-location retailers, pipeline owners and operators, terminal owners, and petroleum marketers could all be issued CIDs or 6(b) requests for information if the FTC seeks to gain a deeper understanding of the gasoline cost problem. This possibility seems more likely given the FTC’s recent willingness to utilize Section 6(b) in other industries, including the investigation into the supply chain shortage. However, 6(b) studies are incredibly exhaustive and time consuming to deploy. The costliness of a 6(b) study could be a barrier.
Increased Merger Scrutiny
The FTC may also increase scrutiny on oil and gas companies by ramping up its focus on mergers within the industry, as Chair Khan indicated it would in her letter to Director Brian Deese. This methodology of increasing merger scrutiny also fits within the FTC’s larger trend of increased merger enforcement across a variety of industries under Chair Khan’s leadership.
There is evidence that increased attention on mergers in the gas and oil sector is already taking place—regulators extended the approval process for at least five oil and gas mergers and acquisitions in the third quarter of 2021 alone. This sort of scrutiny has been rare in the oil and gas sector, in which mergers have, up until recently, largely sailed through the regulatory process. The FTC has not blocked a major oil merger in two decades. It brought only four energy related actions in all of 2020, while the DOJ did not file any merger enforcement actions in the energy sector last year. If the FTC’s enforcements behaviors as of late 2021 continues, we may very well see not only more extended approval processes and issuances of second requests, but perhaps more merger challenges, as well.
Participants in the oil and gas market have enjoyed several decades of flying relatively beneath the notice the antitrust regulatory bodies. Increased antitrust scrutiny of the industry from both the DOJ and FTC has been occurring and likely will increase, with President Biden’s request being just a recent example. As clients consider potential transactions, they would be well-served by seeking advice from experienced antitrust counsel.