With Apologies to Mr. Sheffield: The FTC, The Exxon-Pioneer Consent, and the Rule of Law
The FTC flouted the law to target the oil and gas industry, and an executive, at Senator Warren and others' request. The next administration has work to do to bring the rule of law back to the FTC.
Welcome back to Competition on the Merits. Now that we have finished our 3 part series on the Robinson-Patman Act — which you can start reading here — we’re on to new topics. Today’s column is going to be about a merger settlement the FTC entered into with Exxon Mobil. It is a pretty big deal and not enough people are talking about. And I think it provides a great vehicle for discussion of some larger issues about the future direction of competition law and policy on the right.
A few months ago, the FTC filed a Complaint alleging Exxon Mobil’s $64 billion acquisition of Pioneer Natural Resources Company violated the Clayton Act. Alongside that Complaint, the FTC entered into a consent order with Exxon allowing the transaction to proceed upon the condition that Pioneer’s CEO, Scott Sheffield, may not serve on Exxon’s board of directors.
While the Exxon consent decree attracted dissenting votes from both Republican FTC Commissioners in yet another FTC party-line enforcement action, the antitrust commentariat has been relatively quiet about it beyond a few Big Law antitrust practice notes. The whole affair was in and out of the press cycle within a few weeks. Tom Hebert’s excellent column is a notable exception. That’s a shame. So we are going to talk about it here because I think it illustrates remarkably well some of the key problems with the Biden / Lina Khan FTC and highlights some issues for conservatives and free-marketers to think long and hard about when it comes to the political economy of antitrust.
Let’s start with a broad sketch of the general problem and why it matters and then get into the particulars of the Exxon consent.
The Biden/ Khan FTC is willing to flout the law – and here, play fast and loose with the facts and one person’s professional reputation – to get what they want and impose costs on political enemies and other targets.
Willingness to flout the law and put American companies and consumers at risk for political gain is a theme for this FTC: pursuing competition rulemaking without any colorable argument that Congress delegated that authority to them (as at least one court has now found as predicted by more or less everyone who read the FTC Act); revival of the Robinson-Patman Act which will inevitably result in higher prices for consumers; abandoning bipartisan Policy Statements that tethered FTC authority to the consumer welfare standard rather than vague notions of fairness; abuse of the merger process to kill commerce and dealmaking, and more.
The Exxon consent is a perfect example of this type of FTC overreach – precisely the sort of overreach from the administrative state that conservatives have warned of for decades. What impact have those moves had on the political economy of antitrust on the right? Plenty.
These examples help to illustrate just how far the competition law and policy goalposts have moved during the Biden/ Khan years. Rewind just a few short years. In June 2021, Chair Khan attracted several Republican votes in the Senate at her confirmation (as Commissioner, not Chair, but that’s a story for another time). It was, in fact, a big deal that she attracted as many Republican votes as she did. The reason was the promise to “get Big Tech,” at a time when that promise was especially important. The combination of COVID related censorship of conservative voices and political bias by some tech firms created a large and attractive political target. That target remains. To be sure. Those cases have been filed against Google, Meta, and Amazon – some by the Trump administration, some by the FTC or DOJ, and many by coalitions of States. They will win some and lose some. Fine. There were Khanservatives in Congress! Maybe there are still a few left. But the numbers are dwindling.
That is because the FTC and DOJ do more than digital platform cases. A lot more. The intense appeal of giving the Biden / Khan FTC a blank check in the name of targeting tech firms has fallen off a cliff because, well, Chair Khan (and Mr. Kanter) have done exactly what some of us predicted. They have used the antitrust laws – sometimes illegitimately – to attack all of commerce, from oil and gas to private equity to health care to pharma to manufacturing and beyond. They have politicized antitrust law and process to go after political targets. And the Khan FTC did so immediately. And conservatives saw it. Compare the more controversial Chair Khan’s confirmation vote in the Senate (68-32) to the more milquetoast Commissioner Bedoya’s vote (51-50) just one year later that attracted zero Republican support. That difference is largely explained by the FTC’s competition and consumer protection agenda during that short time.
The punchline here is that the political economy has changed in important ways as a result. Just a few years ago at least some conservatives were willing to bite down and accept the price of the Biden/ Khan antitrust regime in favor of a pound of Big Tech flesh. Fair enough. But years later – like most prices during President Biden’s tenure – the price of conservatives holding hands with the Neo-Brandeisians has gone up because it means accepting overreach that is costly across the entire American economy. It’s not just Big Tech as targets, it is Walmart and Costco, it is any deal with a faint scent of private equity involvement, it is threats to Little Tech, it is the manufacturing sector, agriculture, retail, healthcare, and of course, oil and gas. Thanks to Chair Khan and Mr. Kanter, the rule of law, constraining independent agencies from regulatory overreach, and making antitrust rational again are back in vogue.
There is no better example of FTC’s willingness to flout the law to attack a politically convenient target – in this case the oil and gas industry – than its enforcement action and consent in Exxon/ Pioneer. Senator Warren highlighted her opposition to the deal in October 2023. Democrats in Congress piled on to target oil and gas. But the deal raised zero substantive antitrust issues. So what is a law enforcement agency to do?
What Did the FTC Do and Why Did They Do It?
As we discuss below, the FTC would have lost this argument had it gone to court and been forced to prove its case. But the case did not go to court. No doubt because the parties were willing to make a deal with the FTC to get the merger done and avoid the cost and distraction of litigation. And they were willing to give the FTC what it really wanted – a scapegoat in the form of Mr. Sheffield’s scalp.
The Biden FTC has made a push for punishing individuals and executives whenever it can. In fact, that push began with Chair Khan’s predecessor, Commissioner (now CFPB Director) Chopra. The FTC does not have DOJ’s criminal authority – and so it relies on debarment and other remedies to punish individuals when it can. Companies often fight vigorously to defend against individual sanctions. But the FTC had a willing dance partner in Exxon – willing in the sense only that its $64 billion transaction was being held hostage to the FTC’s political demands. From an economic perspective, for Exxon the price of keeping Mr. Sheffield off the board to keep the transaction intact was well worth it. But make no mistake, the sanctions imposed in the Exxon consent with the FTC involving Mr. Sheffield have not a thing to do with antitrust law.
The Holyoak-Ferguson dissent gets at this point:
But Exxon’s consent to the entry of this order and its decision to exclude Mr. Sheffield from its board does not answer the ultimate question the Commission must answer before issuing a complaint: Whether the Commission has reason to believe this transaction itself violates Section 7. The Commission’s Complaint does not provide us reason to believe that it does. The Complaint fails to articulate how the “effect of [the] transaction may be substantially to lessen competition.” We fear instead that the Commission is leveraging its merger enforcement authority to extract a consent from Exxon rather than addressing the conduct of one misbehaving executive. We therefore respectfully dissent.
Sadly, the idea of an agency “leveraging” merger review authority to extract behavioral or internal corporate changes that have nothing to do with competition law is pretty standard stuff. Again, sadly. Doug Ginsburg and I wrote about this phenomenon we describe as the “Culture of Consent,” within regulatory agencies. Given an agency with a political or social agenda an inch of leverage and they will take a mile in extractions and concessions. But the Exxon consent is unique in at least three ways: (1) the underlying legal claim that provides “cover” for the Complaint is remarkably weak; (2) the laying bare of the FTC’s hypocrisy given it (and DOJ’s) previous statements about prior administrations treating the merger review process as too transactional; and (3) the singling out of Mr. Sheffield personally in the Complaint.
Empowering any regulatory agency with this sort of leverage ought to make any conservative queasy. And I can assure you, it does. And examples like the Exxon Consent give conservatives reason to re-think how they might want to shape the administrative state when and if in power again.
Is What the FTC Alleged In Its Complaint Even True?
Bad legal theories and incredible public statements from the Biden FTC and DOJ are sort of standard fare at this point. But I find the third point – the singling out of Mr. Sheffield as worthy of further discussion. Relatedly, Neo-Brandeisian FTC support groups like the American Economic Liberties Project (AELP) have used the Exxon settlement to advance facially absurd economic claims about the FTC uncovering a massive oil cartel – so massive it explains a quarter of all inflation in 2021.
Dear Readers, so you know in advance where we are heading, those absurd claims – both in the FTC Complaint and by those arguing Mr. Sheffield’s alleged conduct are macro phenomena capable of explaining a quarter of all inflation since 2021 – do not hold up to any reasonable reading of the evidence.
We will make relatively short work of those claims by digging into what the FTC actually found regarding Mr. Sheffield’s alleged “collusion.” We can begin with the obvious. The FTC has the authority to refer to the DOJ any evidence it finds of criminal price-fixing. The cartel described by AELP and Congressman Nadler, among others, would constitute a criminal violation of Section 1 of the Sherman Act (not against OPEC which is immune, but against Mr. Sheffield and potentially others). You can rest assured that the FTC did not refer this case to the DOJ as a potential criminal matter. You can rest even more assured that the DOJ will not pursue charges criminally against Pioneer or Mr. Sheffield arising from the FTC’s “findings.” Why? Certainly not because the DOJ is timid. The Assistant Attorney General insists upon telling any reporter who will listen that he, unlike prior DOJs, is not “chickenshit.” As the FTC and DOJ records make clear – neither is afraid to lose. The reason the aggressive FTC will not refer and the brave DOJ will not prosecute is that there is no cartel. Not a big one. Not a little one. None
Let’s look at some of the claims about the alleged cartel. Then the evidence. And then discuss a bit where we go from here.
Here’s AELP describing the FTC findings:
According to new evidence released by the Federal Trade Commission in connection with the proposed Exxon/Pioneer merger, the high price of oil from 2021-2023 was due to collusion among oil corporations. This evidence included emails and text messages between Pioneer Resources CEO Scott Sheffield and an OPEC official.
And:
The American Economic Liberties Project estimates this price-fixing scheme cost Americans between $500-1000 per person and between $2,000 to $4,000 a year for a family of four in 2021, a quarter of the total inflationary increase that year.
Let’s walk through the evidence supporting these claims. And, dear Reader, I must warn you in advance: you are going to be very disappointed.
What Conspiracy?
Reading the FTC Complaint paints a clear picture: a naked cartel, and a brazen attempt from Mr. Sheffield to bring oil assets in Texas in line with OPEC. Let’s take a look. The very first paragraph of the Complaint alleges:
Through public statements and private communications, Pioneer founder and former CEO Scott D. Sheffield has campaigned to organize anticompetitive coordinated output reductions between and among U.S. crude oil producers, and others, including the Organization of Petroleum Exporting Countries (“OPEC”), and a related cartel of other oil-producing countries known as OPEC+. Mr. Sheffield’s communications were designed to pad Pioneer’s bottom line—as well as those of oil companies in OPEC and OPEC+ member states—at the expense of U.S. households and businesses.
The FTC purports to have the goods on Mr. Sheffield. Here’s a list of allegations from the Complaint – quoted in full – to get a sense:
Mr. Sheffield has not been shy about those goals, and has instead publicly told competitors that they should be “disciplined” about capacity growth and “stay[] in line.” He further threatened: “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.” (Paragraph 4)
But Mr. Sheffield did not limit himself to public signaling to U.S. counterparts—he has also held repeated, private conversations with high-ranking OPEC representatives assuring them that Pioneer and its Permian Basin rivals were working hard to keep oil output artificially low. For example, Mr. Sheffield messaged on WhatsApp to [REDACTED]. (Paragraph 5)
One move in Mr. Sheffield’s playbook has involved publicly threatening U.S. shale producers who might deviate from a coordinated output reduction scheme. For example, in 2021, Mr. Sheffield said “Everybody’s going to be disciplined, regardless of whether it’s $75 Brent, $80 Brent, or $100 Brent.” He added that “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.” (Paragraph 27)
In fact, as recently as April 16, 2024, Mr. Sheffield said at a conference: “Even if oil gets to $200/bl, the independent producers are going to be disciplined.” (Paragraph 29)
But Mr. Sheffield does not simply follow OPEC from afar. Instead, he is in close contact with top OPEC member state oil ministers and other high-ranking officials representing the cartel, and uses these relationships to encourage OPEC production controls and to discuss U.S. producers’ efforts to maintain capital discipline in order to increase Pioneer’s profits. (Paragraph 34)
In March 2017, then-OPEC General Secretary Mohammed Barkindo organized a private dinner for U.S. shale producers, including Mr. Sheffield. Mr. Sheffield commented at the time, “I’m seeing a series of meetings where OPEC is reaching out and spending more time with US independents than I have seen over my entire career.” (Paragraph 35)
There are also a number of alleged communications redacted in the public Complaint. But you get the picture. The Complaint paints Mr. Sheffield as a character facilitating and operating Texas oil assets to bring them within OPEC, disciplining those who defied the cartel plan to reduce output, and constantly communicating with rivals and OPEC leaders.
What is the actual evidence? Mr. Sheffield’s comment to the FTC in regard to the proposed settlement provides context that renders the allegations in the Complaint misleading at best. Recall, the FTC was able to write this Complaint knowing it was headed to consent and the underlying facts would not be litigated. And the FTC took liberties with that. And then they took liberties from Mr. Sheffield.
Let’s explore. To demonstrate the FTC’s approach in this matter we should begin with an important, and troublesome fact that should color any reasonable observer’s read of the FTC process and allegations. During the FTC’s 6 month investigation, including a 4 hour investigational hearing of Mr. Sheffield on April 9. 2024, the FTC “did not inquire about these prior statements. Indeed, none of the quotes and text messages cited in the Complaint were even marked as exhibits, despite the fact that counsel for Pioneer had invited the FTC to ask Mr. Sheffield questions about these documents.”
That’s remarkable. And extraordinary. And sloppy.
The FTC Complaint relies almost exclusively upon the specific prior statements of Mr. Sheffield to allege the transaction violates Section 7 of the Clayton Act. But not once, even upon invitation, did the FTC ask Mr. Sheffield questions about those communications. That the FTC never intended to litigate these allegations and knew it would never have to does not do much to excuse the FTC here. Nor does avoiding answers for fear that ethical obligations would then prevent the FTC from making the allegations they desired in the Complaint. It is difficult to believe that the FTC simply did not ask questions about its core allegations before imposing serious penalties upon Mr. Sheffield. But it does help to explain the mistakes that follow.
The Complaint’s allegation that Sheffield “served as a conduit for OPEC officials to express their disappointment with individual Permian producers who dare make independent competitive decisions” is supported by a single text message in June 2020. The text read: “Just got off phone with UAE oil minister. Opec plus is upset with Parsley and EOG public statements about bringing on production.”
Mr. Sheffield’s explanation? The alleged phone call was a Zoom seminar in the middle of the pandemic that Sheffield watched (as did many others). Oh, and the short text was to hs son, who was the CEO of Parsley Energy (now acquired by Pioneer).
The constant contact with the UAE oil minister? Sigh. From Mr. Sheffield’s response:
Mr. Sheffield in fact has only met the UAE oil minister once, at a widely attended industry conference in 2018. Mr. Sheffield does not have the minister’s contact information and does not recall communicating with him by text or otherwise since that conference six years ago. He certainly was not acting as some kind of “conduit” as alleged in the Complaint. We also know that the FTC never bothered to ask Mr. Sheffield’s son about it.
Yikes.
What about the Complaint’s references to “discipline” for companies that pursued growth? These are industry references to companies that chose significant capital expenditures to pursue growth rather than returning free cash flow to shareholders in the form of buybacks and dividends. The FTC Complaint puts an antitrust spin on these terms to imply that Mr. Sheffield was a cartel ringmaster punishing firms that pursued output against the wishes of OPEC. In Sheffield’s own words:
Nearly all of the shareholders with whom Mr. Sheffield spoke expressed support for moderating growth to improve Pioneer’s free cash flow, strengthen its balance sheet, and lower costs and execution risk. Pioneer and Mr. Sheffield frequently received questions from shareholders on these topics during road shows and conferences. The decision to return more free cash flow to shareholders was undertaken to provide shareholders the level of returns that they expected regardless of oil prices, not to impact oil prices or output. These issues became even more critical when COVID hit.
There are numerous industry reports documenting the shift in how analysts and shareholders were thinking about the oil industry around the time of Mr. Sheffield’s return as CEO. One report published by Wolfe Research in 2017 explains that “[s]hareholders are demanding cash return.” The analyst firm says, “We implore companies to exert capital discipline and temper growth targets in the pursuit of cash returns. We will resolutely oppose aggressive growth targets and strategies, in general.” The report explains that “oil stocks dramatically underperformed the market” because of concerns about the “End of the Oil Age.” These demands were not hidden from the public or government authorities. Major news organizations covered them. Mr. Sheffield regularly discussed his views on Pioneer’s capital framework given shareholder interest in it.
Again, the FTC simply did not bother to ask Mr. Sheffield about any of this. Instead, the FTC assumed into evidence a basis to allege that the statements somehow related to disciplining market output rather than the widely held observation across the industry that asset markets would discipline producers who chose not to return capital to shareholders.
The entire Complaint references two communications with US oil producers. Ever. The first, discussed above, was to his son. The second is to Mr. Foutch, Laredo’s CEO. The FTC alleges this text message encourages Laredo Oil to limit domestic production. But the text exchange confuses the capital markets discussion with discipline in the product market once again:
The exchange at issue occurred immediately after Mr. Sheffield returned as CEO of Pioneer in 2019. The Chairman of Laredo, Randy Foutch, asked Mr. Sheffield if he was “going to have fun going back to work.” Mr. Sheffield did not know Mr. Foutch particularly well and initially did not even recognize who the message was from. During the exchange, Mr. Foutch asked Mr. Sheffield for his views on whether shareholders would be “consistent over time on what they want,” which was a reference to the public debate going on about the need to return capital to shareholders. Mr. Sheffield told Mr. Foutch his views based on what Mr. Sheffield had heard and seen but he did not urge Mr. Foutch to limit production or take any other course of action.
The long and short of it is that the allegations simply do not support the Complaint. It is very unfortunate when that occurs. But it does happen. Agency complaints that are produced for settlement often are not exposed to the same rigorous diligence as those going to court because there is no risk of losing. Indeed, this FTC has had some issues in proving up factual contentions to support aggressive legal theories even in the litigation setting. But the Exxon Complaint wasn’t merely a representation of the facts without the worry of litigation; it was an orchestrated misreading and misrepresentation of the facts purely for political gain.
And By the Way, The Antitrust Complaint Was … Not Good
If one searches for antitrust substance in the Complaint rather than simply accepting it as an instrument of naked political weaponization of the antitrust laws, there are a few odd substantive issues worthy of discussion for the antitrust lawyers and economists among you.
Perhaps the most obvious is that the FTC’s theory of harm is dubious. The theory is, as the dissenting Commissioners Holyoak and Ferguson accurately describe it, that “the merger may substantially lessen competition because of the prospect that Exxon’s shareholders may elect Scott Sheffield—Pioneer’s founder, former CEO, and current board member—to Exxon’s board of directors.”
The Merger Guidelines and Section 7 of the Clayton Act contemplate merger challenges based upon a theory that the target of the acquisition was a maverick who often disrupted efforts to collude. Thus, the proposed merger in such a transaction might eliminate a constraint on collusion and render it more likely as a result of the merger. This is what antitrust lawyers would describe as a standard “coordinated effects” theory. But the FTC’s theory turns coordinated effects on its head. Exxon acquires a target whose CEO – according to the FTC’s Complaint – was not any sort of maverick but rather made various attempts at industry wide collusion over time. The merger agreement would give that person, Mr. Sheffield, a chance to serve on Exxon’s board after the merger and therefore make it more likely that Exxon would collude post-merger because of his influence. Readers, pay close attention here so you do not miss the card being pulled from inside the sleeve.
Post-merger, Mr. Sheffield would become part of a board of directors that would make decisions for Exxon moving forward. A board consisting of twelve members, and not Mr. Sheffield operating alone. The FTC theory that post-merger, Mr. Sheffield’s participation in a board of twelve members would make it more likely that Exxon colludes is total nonsense. Ultimately, and because of his single seat on the board, Mr. Sheffield would have had less control over Exxon’s choices than he did over Pioneer’s. A serious interpretation of the FTC’s Complaint would seem to make post-merger collusion less likely, if anything, by taking an alleged force for coordination off the market and absorbing into another entity. And that is even taking the FTC’s complaint at its word. Which you should not do for reasons we have already discussed.
The FTC, the Rule of Law, and What’s Next?
The FTC’s most offensive tactic in this ordeal are that it exposed its willingness to infringe upon the liberty of Mr. Sheffield to target a conservative-coded industry (oil and gas) to make a splash about its ability to hold individual executives to account and respond to the call from Senator Warren and others to “do something” about a deal that presented zero antitrust issues.
The result is not pretty. The FTC leadership culture is so blatantly politically motivated that it does not bother to do the diligence (even when asked) to establish the facts alleged in a complaint, a willingness to trade political and press wins for Mr. Sheffield’s individual liberty – up to and including public threats to refer the case for criminal prosecution. And to be absolutely clear: the FTC has falsely accused Mr. Sheffield of a crime. And it did so recklessly – spending more time on press releases than it did on diligence to support the allegations in its Complaint. And, of course, no recourse for Mr. Sheffield because FTC consent decrees are not subject to judicial review.
So what now?
Back to our discussion of political economy. One would hope the Exxon-Pioneer consent serves as a bit of a wake up call for the conservatives who still need it. The previous Trump and now the Biden administration have live and ongoing cases against Big Tech. Perhaps there will be more. And that is OK. But the competition policy landscape is far broader than that. The episode shows that there is much to do, and significant gains from trade to be had, for conservatives on the deregulatory side of competition law and policy.
Conservatives have not spent enough time, in my view, thinking about what is next for competition law and policy, for agency design, for Congress? That project needs more attention. One part of that discussion is about what happens when the costs of government FTC and DOJ overreach hit close to home? What about when they hit Walmart and Costco in the upcoming Robinson-Patman cases? What about when they hit Publix and Procter & Gamble? What about when they show a willingness, as they did here, to flout the rule of law to target oil and gas companies, private equity, small businesses, Little Tech, and beyond? What about when the tools used to empower the FTC and DOJ to go after Big Tech are used to put the American economy at a global disadvantage?
One does not have to feel sympathy for the disgruntled oil executive to see the problem here. But one does have to care about the rule of law. If antitrust overreach can come for Mr. Sheffield without any violation of the law – it can certainly come for any other industry. And any other executive. Any time. I suspect the salience of this particular occasion among conservatives – and especially those willing to turn a blind eye during the Tech Wars – will prove significant. An agency that for political gain has the power to micromanage company boards, take individual liberty, and redesign your favorite industry – all without risk of litigation or even breaking a sweat – is an agency that needs less power, not more. Well-staffed agencies with responsible leadership can bring the cases they need to bring, with facts and real legal theories. And they can go and win those cases in federal court with flouting the rule of law. Forward-thinking conservatives must be thinking right now about the design of competition policy and its institutions with a long enough time horizon that our choices communicate to the world economy that companies that want to innovate, invest, and compete here understand that the rules of the antitrust road will be vigorously enforced, but also will remain stable and rational.