OPEC collusion allegation shakes US shale oil sector

U.S. regulators have introduced a new point of tension in the tense relationship between the federal government and the country's oil industry, accusing one of the sector's most vocal executives of attempting to collude to raise energy prices.

The Federal Trade Commission alleged Thursday that Scott Sheffield, the former head of Pioneer Natural Resources, attempted to coordinate production levels with the OPEC cartel to improve Pioneer's financial results… to the detriment of households and American companies.

The agency's surprise move, which came alongside approval of ExxonMobils' $60 billion takeover of Pioneer, sent tremors through the industry, leaving insiders wondering how past comments might be scrutinized and stoking fears of a wider crackdown ahead of November's presidential election.

The implications go well beyond Sheffield, James Lucier, an analyst at Capital Alpha Partners, wrote in a note to clients. The FTC has yet to take an adversarial approach to oil industry mergers… This relative hands-off policy is no more.

Any CEO considering a merger will have to fear being singled out as Sheffield was, he added.

Under the leadership of Lina Khan, appointed by US President Joe Biden, the FTC has taken an aggressive approach in its mission to protect competition and consumers. In the past two weeks alone, the group has banned non-compete agreements with its employees and filed a lawsuit to block an $8.5 billion takeover of the luxury industry, arguing that the deal threatens to deprive consumers of competition for affordable handbags.

As a condition of approving Exxons' purchase of Pioneer, the FTC took the extraordinary step of barring Sheffield from joining the supermajors' board of directors as provided for in the merger agreement. In doing so, the agency targeted a senior figure in America's shale energy revolution, which over the past two decades made Pioneer Texas' largest oil producer with operations in the vast basin Permian.

The FTC focused on Sheffield's efforts to curb production amid a dramatic fall in prices at the start of the Covid-19 pandemic in 2020, which left many U.S. producers on the brink of bankruptcy.

Sheffield led an effort urging Texas regulators to introduce supply curbs and called on members of the OPEC+ group, including Saudi Arabia and Russia, to cut production.

Pioneer said Sheffield, 71, who has lived through six industrial downturns, had simply expressed his concerns aimed at raising awareness of the problem and encouraging state, federal and international governments to act. Sheffield declined to be interviewed.

But the FTC, which combed through hundreds of text messages, WhatsApp messages and public statements as it scrutinized the Exxon takeover, said it had embarked on the Exxon takeover.[ed] on a series of efforts to coordinate production levels to keep production artificially low, and served to direct communications between its Permian Basin competitors and OPEC.

Serving on Exxons' board risked amplifying his public message and the effectiveness of his private contacts with OPEC, the agency said.

Scott Sheffield, former CEO of Pioneer Bloomberg

Evidence cited by the agency included a dinner that Sheffield attended with other U.S. producers, hosted by the late OPEC Secretary General Mohammed Barkindo, in 2017. Such dinners have become a regular event of the industry in recent years, often organized on the sidelines of the agreement. Annual CERAWeek Energy Conference in Houston.

Participants say the gatherings have become increasingly cordial in recent years, as memories of cartel efforts to sink the U.S. shale industry by flooding the market with oil fade.

CEOs in attendance include Vicki Hollub of Occidental Petroleums, Rick Muncrief of Devon Energys, Nick DellOsso of Chesapeake Energy and John Hess of Hess. Chesapeake declined to comment, while the other companies did not respond to requests for comment.

Industry executives and analysts said Sheffield was paying the price for its outspokenness and becoming a victim of the FTC's efforts to take a tough stance on the industry. One senior executive described the agency's approach as a bit over-the-top.

Sheffield has clearly been one of the voices of the U.S. upstream industry, and in retrospect he's obviously taking a bit of a beating, said Dan Pickering of Pickering Energy Partners, an investment and consulting group.

Given the high-profile nature of this deal, they needed something. I think you would hear a lot of screaming from a lot of people who didn't want this deal to go through if it went through without any changes.

Under Chairman Lina Khan, the FTC has taken an aggressive approach in its work to protect competition and consumers. Getty Images

The move comes six months before Americans go to the polls, as Biden administration officials worry about the electoral impact of rising prices at the pump.

Kevin Book, an analyst at ClearView Energy Partners, said that could indicate a new tactic by the administration to moderate such hikes: implicitly encouraging national operators seeking commission approval for transactions to increase their production.

Industry fears FTC may open broader, industry-wide investigation into collusion allegations ahead of election as it gathers massive trove of documents and private communications from companies energy companies in the midst of a merger and acquisition boom.

In addition to the $60 billion Exxon-Pioneer deal, the FTC issued a second request for information to companies in at least four other pending buyouts worth a total of more than $100 billion: Chevron and Hess; Diamondback Energy and Endeavor Energy; Occidental and CrownRock; and Chesapeake Energy and Southwestern Energy.

The FTC declined to say whether or not it would launch an industry investigation into the collusion allegations.

But some experts said that despite the action on Sheffield, the agency's approval of the Exxon-Pioneer deal, the supermajor's largest since its 1999 merger with Mobil, demonstrated that it was unlikely it blocks similar mega-mergers in the oil sector.

I think the outcome is really encouraging for these upstream transactions that the agency is currently considering, said Jeffrey Oliver, a partner at the law firm Baker Botts and a former FTC attorney. This is very helpful for many of these deals that are still pending.

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