ExxonMobil this week received clearance from the Federal Trade Commission to complete its $65 billion acquisition of Pioneer Natural Resources.
The FTC didn’t take particular issue with how the deal would make Exxon far and away the biggest player in the booming Permian basin of west Texas, with combined output there of 1.3 million barrels per day — 10% of domestic supplies. But the commission did insist on one condition: Pioneer CEO Scott Sheffield would not be allowed to sit on the Exxon board of directors.
Why not? Because Sheffield, the FTC alleges, illegally “campaigned to organize anticompetitive coordinated output reductions between and among U.S. crude oil producers, and others” including members of the OPEC cartel, with the intention of padding oil industry profits “at the expense of U.S. households and businesses.”
Sounds serious. The FTC will reportedly refer the issue to the Department of Justice for criminal prosecution. The allegations will be red meat for class action attorneys.
An ExxonMobil spokesperson in a statement today says that the allegations against Sheffield “are entirely inconsistent with how we do business” and that the FTC, after pouring over more than a million documents “raised no concerns with our business practices.” Exxon has entered a consent decree with the FTC that it will not add Sheffield to its board when it closes the deal on Friday, May 3.
So what’s the evidence? The FTC cites a laundry list of public and private statements Sheffield has made over the years and even references redacted WhatsApp messages Sheffield, 72, allegedly exchanged with OPEC ministers.
Some highlights from the complaint:
In 2017 Sheffield attended a private dinner for top execs of U.S. shale fracking companies hosted by OPEC’s then-general secretary Mohammed Barkindo. According to the FTC, Sheffield at the time said, “I’m seeing a series of meetings where OPEC is reaching out and spending more time with U.S. independents than I have seen over my entire career.”
In 2020 Sheffield jawboned U.S. oil companies to reduce their drilling and restrict output, even lobbying the Texas Railroad Commission to impose restrictions on how much oil Texas companies could pump. The FTC quotes Sheffield: “If Texas leads the way, maybe we can get OPEC to cut production. Maybe Saudi and Russia will follow. That was our plan.” He added: “I was using the tactics of OPEC+ to get a bigger OPEC+ done.”
In 2021 Sheffield publicly berated oil companies that if they did not constrain their drilling, investors would punish them. “Everybody’s going to be disciplined,” he said. “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.”
In 2022, according to the complaint, Sheffield said in an interview that the strategy was working and that “the public independents are staying in line.” And less than a month ago he said, “Even if oil gets to $200 a barrel, the independent producers are going to be disciplined.”
The optics aren’t good. The FTC says that regardless of whether Sheffield’s “efforts at coordination were successful, the attempts alone suggest that Mr. Sheffield’s appointment to the Exxon board may make successful coordination more likely in the future.”
To be sure, there are plenty of extenuating circumstances that the FTC doesn’t get into in its complaint. It is worth recalling that from 2014 to late 2015 the price of oil fell from $100 a barrel to $25. The reason was simple: American oil frackers had been too successful at perfecting the magical combo of directional drilling and hydraulic fracturing to unlock the petroleum bonanza trapped in previously undrillable layers of shale rock two miles down. Between 2010 and 2015 domestic oil output surged 70% to 9.4 million bpd. A miracle.
Unfortunately, OPEC chose not to make room in the market for the American frackers, and the price crash bankrupted dozens of companies. Which is what OPEC was going after. As Saudi oil minister Ali Al-Naimi said at the time, “It is not in the interest of OPEC producers to cut their production, whatever the price is.” Adding, “Is it reasonable for a highly efficient producer to reduce output, while the producer of poor efficiency continues to produce? That is crooked logic. If I reduce, what happens to my market share? The price will go up and the Russians, the Brazilians, U.S. shale oil producers will take my share.”
Oil prices recovered somewhat, to $70/bbl in 2018, but then collapsed to zero in early 2020 as pandemic lockdowns emptied the highways, obliterating demand for gasoline. For a brief time, as oil storage tanks got maxxed out, the price even went negative.
Sheffield was far from the only oil boss who wanted to see America’s oilmen cut drilling. In 2015, billionaire Harold Hamm of Continental Resources told me that the biggest surprise to him was in seeing how unified the industry had become with massive across-the-board cuts to capital spending. “All these publicly held companies are responding in the same way. It’s not a matter of collusion, it’s a matter of cohesion,” Hamm said. In 2017, speaking at the annual CERAweek conference, Hamm warned the industry not to get too exuberant about starting up drilling again. “It’s going to have to be done in a measured way, or else we kill the market.”
Can common sense statements be considered collusion? It doesn’t matter, says Ed Hirs, an energy economist and lecturer at the University of Houston: “Sheffield may have been begging OPEC for life as they cut the legs out from under him and many others, but he knows better. You don’t do this. You don’t get together to give even the appearance of collusion. The structure of the whole oil patch is predicated on anti-trust enforcement — thanks to John D. Rockefeller.”
Indeed, for 30 years Rockefeller fought off dozens of lawsuits challenging the legality of his monopoly on oil transport and refining in America until in 1911 the Supreme Court finally sided with federal prosecutors and ordered the dissolution of the Standard Oil trust. No longer would one man be allowed to control 90% of the country’s petroleum supply. The successors and acquirers of Rockefeller’s companies include ConocoPhillips, BP, and the Union Tank Car Company (now owned by Berkshire Hathaway). Chevron and Saudi Aramco, both got their start as ventures of Standard Oil of California. And of course, Standard Oil of New York became what’s now ExxonMobil.
Whatever the FTC and DOJ decide to do with these allegations, Sheffield, who formed Pioneer in 1997 by merging Parker & Parsley Petroleum with T. Boone Pickens’ Mesa Petroleum, will be remembered in the industry as one of the founding fathers of the shale revolution.
However, for the rest of this election season look for him to resurface on the campaign trail, as Team Biden will be only too happy to blame high gasoline prices on “Big Oil Collusion.”