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Antitrust Probe of Pressure Pumping Leaders Expands

Baker Hughes Inc. and Halliburton Co. said they have received civil investigation demands (CID) from the Department of Justice (DOJ) to provide documents and information on their pressure pumping businesses.

Baker, the third-largest oilfield services provider, said in a Securities and Exchange Commission Form 10-Q on Wednesday that DOJ was seeking documents for an antitrust investigation related to the pressure pumping market. DOJ sent Baker a CID on May 30 under the Antitrust Civil Process Act for information beginning May 29, 2011 on its pressure pumping business, which oversees hydraulic fracturing (fracking) work.

"We are working with the DOJ to provide the requested documents and information," Baker said. "We are not able to predict what action, if any, might be taken in the future" by DOJ or other government authorities concerning the investigation.

On Thursday Halliburton, the biggest fracking provider in North America, said it also had been contacted by DOJ regarding potential antitrust issues related to the pressure pumping market. "We understand there have been other participants in the industry who have received similar correspondence from the DOJ, and we do not believe that we are being singled out for any particular scrutiny," Halliburton said. "We intend to continue to cooperate with the DOJ's inquiries and requests in these investigations."

An antitrust expert told NGI's Shale Daily that Bloomberg had cited in a report that a representative from Houston's PacWest Consulting Partners said there are currently 54 pressure pumping companies in the United States. On the surface, that might appear to be a competitive market.

However, he told Pat Rau, NGI director of strategy and research, the U.S. government tends to assess the competitiveness of industries not by the number of its competitors, but by how much market power the leading companies in a particular industry might wield. It assesses this by looking at top firm concentration ratios, as well as by calculating the Herfindahl-Hirshman Index (HHI), which adds together the squared market share of each company in an industry.

U.S. regulators believe an industry may show characteristics of a supra-competitive market when the eight-firm concentration ratio exceeds 50%, and/or if the HHI is more than 1,500, the expert said.

According to Barclays Capital, Baker Halliburton, and Schlumberger had a combined 63% of North American pressure pumping market in 2012. That figure includes activity in Canada, "but it is likely similar to the service companies' combined market shares in the United States, considering unconventional drilling and completion activity is more prevalent domestically than it is in Canada. That would indicate the eight-firm pressure pumping concentration ratio in the United States is "well above 50%," the expert told Rau.

"We would need market shares for all 54 companies in the U.S. pressure pumping market to calculate its HHI index, but if we conservatively assume that Baker Hughes, Halliburton and Schlumberger each have an equal 21% share of the market, and the other 51 firms each had equal 0.725% shares, that would yield an HHI score of 1,350.

"However, since the actual U.S. market shares are neither equal among the top three, nor among the remaining 51 companies as we assume in this example, the true HHI score in this case would be higher than 1,350, and may in fact exceed the critical 1,500 threshold."

Regulators also may be assessing regional market power in the pressure pumping industry, such as if shale or tight sands plays are dominated by only a few oilfield service providers, he said. It's not uncommon for DOJ to require merging firms to sell assets in regional markets where the combined entity is thought to have too much market power, he added.

"None of these things means U.S. regulators will take action against the U.S. pressure pumping industry, of course. But we believe these calculations do underscore why the DOJ is taking a deeper look at its competitive nature."

FTS International, which owns the fourth-largest pressure pumping fleet in North America, withdrew an initial public offering in 2012. Standard & Poor's Ratings Services cut its corporate credit rating a year ago because it said capacity additions and rising costs, combined with moderating demand and low natural gas prices, were pressuring margins in the pressure pumping industry (see Shale Daily, June 4, 2012).

DOJ said it could not elaborate on the investigation. Paris-based Schlumberger Ltd., the largest global oilfield services provider, had no comment.

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