Attorney General Lockyer Announces Antitrust Deal To Boost Crude Storage By Nearly 1 Million Barrels

(SAN FRANCISCO) – Attorney General Bill Lockyer today announced California's fragile gasoline market will be strengthened by the addition of almost one million barrels of crude oil storage capacity under an enforcement settlement that resolves antitrust objections to Valero's $2.8 billion acquisition of Kaneb.

"Lack of storage has been a significant contributing factor to the dysfunction that afflicts California's gasoline market and the exorbitant prices suffered by this state's drivers,' said Lockyer. 'By increasing storage capacity, this settlement will help stabilize the market in Northern California and benefit motorists by providing a buffer against supply shortages and price hikes.'

Under the agreement, Valero must construct at its Benicia refinery crude oil storage tanks with a total capacity of 900,000 barrels. To further address concerns the merger would have anti-competitive effects and harm consumers, the settlement also requires Valero to sell gasoline and petroleum terminal facilities in Martinez and Richmond currently owned by Kaneb.

Additionally, the settlement requires Valero to agree to terminate its lease of crude oil storage tanks at the Martinez terminal, and remove the oil held in those tanks. The tanks have a combined capacity of 1 million barrels. Valero will transfer the oil now stored at Martinez to the new Benicia tanks. Valero must complete construction of the Benicia tanks no later than three years following its sale of the Martinez terminal and the new owner's decision to terminate the current tank lease, or May 31, 2011, whichever comes first.

The effect of the settlement's storage provisions will be to add 900,000 barrels of capacity to the system and free up for use by third parties 1 million barrels of capacity now controlled by Valero.

The settlement's terms are contained in a consent decree Lockyer will file today in U.S. District Court for the Northern District of California. The settlement resolves a lawsuit, also to be filed today by Lockyer, that alleges the merger would lessen competition and restrain trade in violation of federal antitrust laws known as the Clayton Act and Sherman Act. The Federal Trade Commission (FTC), to remove its objection to the acquisition, today announced its approval of a settlement similar to California's, but which requires only the sale of the Martinez and Richmond terminals. The court must approve the California agreement.

Lockyer said the increased storage capacity provided by the settlement should facilitate more gasoline production, increase supply and, as a result, help control prices. As the consent decree states, 'The purpose of the provisions ... is to maximize motor fuel production and to create incentives for further investment in Northern California's infrastructure for crude oil and petroleum products ...'

The sale – formally called divestiture – of the Martinez and Richmond terminals must be completed within six months following the merger's effective date. If Valero fails to meet that deadline, the settlement allows Lockyer to appoint a trustee to complete the divestiture.

Terminals receive and store gasoline and other light petroleum products, and provide facilities to redistribute the products via pipelines, sea vessels or trucks. They also receive, store and redeliver bulk quantities of crude oil. Additionally, they provide facilities for handling and injecting gasoline additives – including ethanol. Valero and Kaneb directly compete in the Northern California terminal services market. Kaneb owns the Martinez and Richmond terminals, as well as two more in Selby and Stockton. Valero, meanwhile, operates its own terminal at its Benicia refinery.

Importantly, Kaneb's terminals are the only non-refiner-owned terminals accessible to both marine imports and the Kinder Morgan (KM) pipeline system. The KM pipeline is the only common carrier system that serves the interior of Northern California, making it the sole means of economically shipping gasoline to Northern California terminals outside the Bay Area.

The acquisition would allow the merged entity to 'control a significant share of bulk supply and terminaling services for light petroleum products in Northern California,' Lockyer's complaint alleges. 'The proposed transaction would significantly increase market concentration, and post-merger the market would be highly concentrated. After the transaction, the combined firm could more effectively coordinate with others to raise prices in the market for bulk supply of and terminaling services for refining components, blending components and light petroleum products in Northern California.'

The divestiture of the Martinez and Richmond terminals would address these antitrust concerns, the consent decree states, because the sale would 'remedy the lessening of competition in the terminaling of refining components, blending components and light petroleum products resulting from the proposed merger ...'

The acquisition also could harm consumers by providing Valero a dominant position in the market for distributing ethanol, according to the complaint. That became an even more important consideration following the U.S. Environmental Protection Agency's June 2 rejection of California's request for a waiver of the oxygenate fuel requirement. The state uses ethanol to meet that federal mandate.

Kaneb's terminals are the only ones in Northern California, independent of refineries, capable of receiving and distributing bulk volumes of ethanol, according to the complaint. Valero is a major user and supplier of ethanol. After the merger, Valero 'could increase prices for or deny access to bulk ethanol terminaling services,' and potentially increase gasoline prices, the complaint alleges. To remedy those anti-competitive effects, the settlement requires Valero to provide 'reasonable and non-discriminatory' access to ethanol terminaling services at the non-divested facilities in Selby and Stockton.