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BP Amoco-Arco Faces State, Federal Trouble

February 7, 2000
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BP Amoco-Arco Faces State, Federal Trouble

The merger of BP Amoco and Atlantic Richfield Co. (Arco) became significantly more complicated last week. Now the companies face federal and state opposition, but they've added one former challenger to their camp.

BP Amoco and Arco say they will fight the Federal Trade Commission in court for their right to merge. Wednesday the FTC said it would seek a preliminary injunction in federal District Court to block the merger. Press reports had one analyst speculating legal wrangling could last six months and cost BP Amoco as much as $100 million.

Adding to BP Amoco's worries, the states of Washington and Oregon have said they will sue to block the merger. But the merger partners have one state in their corner, Alaska, which was previously cool to the deal (see NGI Nov. 8). Last week Gov. Tony Knowles said he was disappointed by the FTC challenge to the merger and directed the state's attorney general to intervene on the companies' behalf. "Competition within Alaska and major investments for future development are put on hold by the FTC's action," Knowles said in a press release. "Alaska must be at the table - whether in court or negotiation - as future decisions critical to Alaska are made."

The FTC said the deal would violate antitrust laws by lessening competition in the exploration and production of Alaska North Slope crude oil and its sale to West Coast refineries. The FTC also said competition would be harmed in the market for pipeline and storage facilities in Cushing, OK, raising prices for oil used to produce gasoline and other petroleum products throughout North America.

"We are surprised and disappointed that the FTC has rejected all efforts for a positive resolution," the companies said last week in a statement. "We have consistently been open to improvement of our original proposal. We have addressed the concerns of the State of Alaska. We have been, and remain, willing to discuss any reasonable options that might lead to a negotiated settlement

"We regret that the only course now open to us is to resolve the issue through litigation, but we believe we have a compelling case in support of our combination which we will argue vigorously in court."

The FTC voted 3 to 2 to seek the injunction against the merger. The fate of the deal has been uncertain for months due to FTC concerns over the Alaskan crude market. "Any suggestion that there is a special West Coast market for Alaskan crude oil that functions independently of world crude prices is without foundation," the companies said. "In fact, the proposed combination of our companies will drive down Alaskan production costs, making Alaskan crude oil more competitive in the world market."

The FTC worries the merger would give the combined company too much control over California gasoline prices. The companies currently produce 70% of the oil on Alaska's North Slope. Production there accounts for about 45% of oil refined in California, Oregon and Washington state.

"We will prove in federal court that BP has market power and that it has used that market power to maintain higher prices on the West Coast by exporting crude oil to the Far East," said the director of the FTC's Bureau of Competition, Richard G. Parker. "This deal will cement that market power and harm competition by creating a significant risk that crude oil prices would be higher on the West Coast than they would be without the deal. In addition, the merger would enable BP to manipulate trading in crude oil futures and affect crude oil prices throughout the country."

The FTC said the merger would create the third largest private petroleum company in the world and the largest U.S. oil producer and refiner.

The preliminary injunction would prevent the merger from moving forward until the conclusion of an administrative trial or any appeals on the legality of the merger. If the court grants the FTC's motion, the commission will have 20 days to determine whether to issue an administrative complaint. The complaint would mark the beginning of the administrative trial process.

The companies announced their intent to merge in April (see NGI April 5). BP Amoco closed down $0.56 at $53.94 Wednesday, the day of the FTC announcement. Arco shares closed down $2.19 at $72.06.

Joe Fisher, Houston

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