Completed merger between Transocean Inc. and GlobalSantaFe Corporation

Affected market: Offshore oil and gas drilling services

No. ME/3310/07

The OFT's decision on reference under section 33 given on 11 April 2008. Full text of decision published 22 April 2008.

PARTIES

Transocean Inc. (Transocean) is the leading provider of offshore contract drilling services to the oil and gas industry. Transocean is active worldwide and has its headquarters in the United States. Transocean's UK turnover was US$462 million in 2006 (at the current exchange rate around £233 million).

GlobalSantaFe Corporation (GSF) was the second largest provider of offshore contract drilling services to the oil and gas industry. GSF was active worldwide and had its headquarters in the United States. GSF's UK turnover was US$463 million in 2006 (at the current exchange rate around £234 million).

TRANSACTION

On 27 November 2007 GSF merged into Transocean through a share exchange.

JURISDICTION

As a result of this transaction Transocean and GSF ceased to be distinct. The UK turnover of both Transocean and GSF exceeded £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.

BACKGROUND

On 26 November 2007 the OFT decided that, on the evidence available to it, it believed that it was or may be the case that the then anticipated merger may be expected to result in a substantial lessening of competition in relation to the provision of floating drilling rig services in the UK Continental Shelf (UKCS). A copy of the decision is attached at Annex 1.

However, the OFT suspended its duty to refer the merger to the Competition Commission under section 33 of the Act, because the OFT was considering whether to accept appropriate undertakings from Transocean and GSF in lieu of reference pursuant to section 73 of the Act.

To address the OFT's competition concerns, Transocean offered to give undertakings to divest two out of the three floating drilling rigs that were operated by GSF in the UKCS prior to the merger, the GSF Arctic II and the GSF Arctic IV (the divestment rigs), to one or more purchasers approved in advance by the OFT. These two rigs could be expected to have remained deployed in the UKCS absent the merger. In contrast, the OFT had determined at the time of its decision that GSF's third relevant floating drilling rig, the GSF Arctic III, was the subject of advanced negotiations for relocation outside the UKCS (to Libyan waters) , and could not therefore be expected to have been used in competition with Transocean for UKCS customers absent the merger. Transocean has since confirmed that the GSF Arctic III will indeed relocate away from the UKCS to Libya in September 2008. Accordingly, it remains the case that the undertakings in lieu restore competition in the UKCS by effecting a divestment of those GSF rigs that would have competed with Transocean in the UKCS absent the merger, and consequently remove the increment in market share brought about by the transaction.

CONSULTATION

The OFT considered that the undertakings offered by Transocean were, in the circumstances of this case, clear cut and appropriate to remedy, mitigate or prevent the competition concerns identified in its decision on reference. On 8 February 2008, the OFT therefore published these proposed undertakings and gave notice that it was minded to accept them, inviting interested third parties to give their views.

In the course of the consultation, the OFT received views from one third party. This third party stated that it broadly supported the proposed undertakings, but suggested three relatively minor changes to the proposed undertakings.

The first change arose from the third party's concern that Transocean could potentially move key staff off the divestment rigs prior to divestment. In the course of the OFT's investigation of the merger some third parties noted that there was a shortage of skilled staff. It was also noted that a rig's operational efficiency was to a significant extent determined by the expertise and experience of the rig's staff. Therefore, as already set out in the OFT's decision on reference, the OFT considers that it is important that the buyer of each divestment rig must have a genuine opportunity to secure access to the rig's complete crew in order to facilitate a transfer of crew to the rig's new owner, should the purchaser wish the crew to transfer. This was already provided for in the proposed undertakings, but following the consultation, Transocean modified the proposed undertakings to clarify that the provisions relating to key staff apply to the complete crew of the divestment rigs as at the date of the undertakings.

The second change suggested by the third party is that Transocean should include those spare parts that are rig-specific in the sale of the divestment rigs in view of the age of the divestment rigs and the difficulty of obtaining spare parts. Transocean changed the proposed undertakings to this effect. It noted that it is customary to include such spare parts in the sale of rigs and that it had intended to include these spare parts in the divestment even though these had not been expressly mentioned.

The third change suggested by the third party relates to one of the purchaser approval requirements. The proposed undertakings stipulate, for the purposes of the OFT approving a proposed purchaser, that this proposed purchaser must have assured the OFT that it has the firm intention of operating the relevant divestment rig in the UKCS for a period of at least three years from completion of the divestment (paragraph 3.1(f) of the proposed undertakings). The third party suggested that proposed purchasers should give a firmer commitment to the OFT.

However, the OFT believes that the requirement as consulted upon is as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition in this case. In particular, on the facts of this case, the OFT considers that the requirement for it to be assured of a 'firm intention' is sufficient to replicate the competitive constraint posed by the divestment rigs in the UKCS prior to the merger. The OFT's decision on this aspect of purchaser approval will be informed by objective evidence establishing the proposed purchaser's intentions in this respect, such as business plans in relation to the relevant rig. The OFT considers that it would not be proportionate to go further than this and require that a purchaser formally guarantees that the relevant rig will stay in the UKCS for at least three years from completion. The OFT has taken into account the fact that, absent the merger, in the event of a significant change in circumstances, it is possible that GSF may have decided to move the divestment rigs outside the UKCS, given that the divestment rigs are capable of being moved to other areas of the world and as demonstrated by the redeployment of the GSF Arctic III. A binding requirement on the purchaser to deploy the divestment rigs in the UKCS irrespective of changes in market conditions would appear to go beyond restoring competition, in other words, akin to an independent GSF active in the UKCS absent the merger. The OFT therefore considers that the undertakings in lieu are suitably restorative of competition absent the merger and that it is not necessary or proportionate to modify the proposed undertakings in this respect.

Pursuant to paragraph 5(1) of Schedule 10 of the Act, the OFT does not consider that the modifications made to the proposed undertakings further to the consultation, as set out above, are material in any respect. Therefore, a further consultation on the undertakings with the modifications is not necessary.

In light of the consultation exercise, Transocean has now offered undertakings that include the modifications set out above. These undertakings are attached to this decision as Annex 2 (pdf 111 kb).

DECISION

On 26 November 2007 the OFT decided to refer the merger to the Competition Commission if Transocean failed to give suitable undertakings pursuant to section 73 of the Act. The OFT considers that the undertakings offered by Transocean, including the modifications following the OFT's consultation, will remedy, mitigate or prevent the substantial lessening of competition concerned or any adverse effect which has or may have resulted from it or may be expected to result from it. The OFT has therefore decided to accept the undertakings offered by Transocean attached at Annex 2 (pdf 111 kb) in lieu of reference to the Competition Commission.

The merger will therefore not be referred to the Competition Commission and the undertakings that have been signed by Transocean, the text of which is attached as Annex 2 (pdf 111 kb) to this decision, will come in effect from the date of this decision.

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