Anticipated merger between Transocean Inc. and GlobalSantaFe Corporation

Affected market: Offshore oil and gas drilling services

No. ME/3310/07

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment, undertakings in lieu and decision.

The OFT's decision on reference under section 33 given on 26 November 2007. Full text of decision published 6 December 2007.

Please note that square brackets indicate figures or text which have been deleted or replaced with a range for reasons of commercial confidentiality.

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 £223 million).

GlobalSantaFe Corporation (GSF) is the second largest provider of offshore contract drilling services to the oil and gas industry. GSF is active worldwide and has its headquarters in the United States. GSF's UK turnover was US$463 million in 2006 (at the current exchange rate around £224 million).

TRANSACTION

Transocean proposes to merge with GSF through a share exchange. The parties filed a satisfactory submission on 19 September 2007. The administrative deadline, as extended, is 26 November 2007.

The parties also notified the merger to the United States Department of Justice, which closed its investigation on 19 September 2007, and with the competition authorities in Brazil.

JURISDICTION

The EC Merger Regulation (Regulation 139/04; ECMR) does not apply because each party achieves more than two-thirds of its EC-wide turnover in the UK, thus meeting the two-thirds rule in Article 1(3) ECMR.

As a result of this transaction Transocean and GSF will cease to be distinct. The UK turnover of both Transocean and GSF exceeds £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 arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY VIEWS

Virtually all of the parties' customers that responded to the OFT expressed concerns about the merger. One of these customers also noted that the merger will not result in any customer benefits. None of the parties' competitors that responded to the OFT expressed concerns.

One of the parties' customers also raised a concern about the merger's impact on companies that build, maintain and repair rigs. However, none of these companies expressed concerns to the OFT and none of the parties' other customers expressed concerns in this respect. Hence, there is no evidence available to the OFT to indicate that the merger will adversely affect competition in building, maintaining or repairing rigs.

ASSESSMENT

Transocean and GSF are active worldwide in the provision of offshore contract drilling services to oil and gas companies with mobile offshore drilling rigs known as jack-ups and floaters. In NW Europe they overlap only in floaters. They also overlap in UDW rigs, which are only used outside of NW Europe.

Within NW Europe, the principal areas for oil and gas exploration are UK and Norwegian waters. The available evidence creates serious doubts as to whether the geographic market in this case is wider than the UK continental shelf. Norwegian regulations are stricter, resulting in higher operating costs, and the duration of contracts in Norwegian waters is longer than in the UKCS. Critically, since 2003 relative dayrates in the UKCS have increased substantially compared to dayrates in Norwegian waters, but this has not resulted in a substantial move of floaters from Norwegian waters into the UKCS. This evidence is the best proxy for whether sufficient floaters in Norwegian waters would be redeployed to the UKCS to render a hypothetical UKCS monopolist's five to 10 per cent price increase unprofitable. Accordingly, at this stage of inquiry there is insufficient evidence to conclude that the floater fleet located in Norway sufficiently constrains the UKCS fleet to warrant inclusion as part of the same geographic market.

In the UKCS Transocean has nine floaters and GSF will have two floaters if one of its floaters currently in the UKCS will [ ], as expected by the parties, [ ] work outside of NW Europe. This amounts to 58 per cent of floaters in the UKCS with an increment of 11 per cent. The parties' fleet is substantially larger than the fleet of the parties' largest competitor in the UKCS. The parties will also have the largest share of available capacity for future contracts.

Competition between suppliers of floaters generally operates through bidding for contracts. However, the OFT does not consider that in this case this means that the presence of other suppliers is necessarily sufficient to preserve the same degree of competition going forward as would prevail absent the merger. The parties appear to be sufficiently close competitors to raise unilateral effects concerns because capacity utilisation is close to or at 100 per cent and there is little, if any, scope for expanding supply rapidly. Indeed, some customers argued that the parties were close competitors, which was not contradicted by bidding data that the OFT received (although relatively limited), and floaters are generally bid in several competitions. As Transocean already has the largest fleet and the size of its fleet will be even larger after the merger, this may reduce the parties' incentive to bid aggressively in 'early' competitions given that the market is operating at full capacity. The merged firm may also have an increased incentive to withhold floaters from the market to increase prices.

The scope for entry and expansion is limited. It is very costly and it generally takes two to three years to build a new floater. Entry may occur with existing floaters currently operating outside of the UKCS. However, in view of the costs of relocating and possibly modifying floaters, and potentially inefficiency costs, the maturity of the UKCS and the fact that the market is tight in other parts of the world, it is not clear that the threat of entry is sufficient to constrain the parties' behaviour after the merger.

Although the parties' customers are generally large oil companies, it is not clear that there is sufficient countervailing buyer power to constrain supplier behaviour because, among other things, sponsored entry and self-supply are insufficiently viable counterstrategies to the exercise of market power in the supply of rigs. This conclusion is supported by the fact that almost all customers that responded to the OFT expressed concerns about the merger, and that customers have not been able to prevent very large price increases in the past few years.

Consequently, the OFT believes that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

The parties also currently have a combined share of around 58 per cent of UDW rigs, although their share will be reduced significantly to a combined share of around 31 per cent as UDW rigs currently under construction are being delivered in the next few years. As UDW rigs do not operate in the UKCS and there is insufficient evidence of a clear link between prices of UDW rigs and prices of floaters in the UKCS, the OFT does not consider that there is a realistic prospect that any effects of the merger on competition between providers of UDW rigs will substantially lessen competition in the UK.

UNDERTAKINGS IN LIEU

Where the duty to make a reference under section 33(1) of the Act applies, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, and for the purpose of remedying, mitigating or preventing 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, accept from such of the parties concerned undertakings as it considers appropriate. In addition, pursuant to section 73(3) of the Act, in considering whether to exercise its discretion to accept such undertakings, the OFT is required, in particular, to have regard to the need to achieve as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition and any adverse effects resulting from it.

The OFT has therefore considered whether there might be undertakings in lieu of reference which would address the competition concerns outlined above. The OFT's Mergers Substantive Assessment Guidance (paragraph 8.3) states that, 'In order to accept undertakings in lieu of reference, the OFT must be confident that the competition concerns identified can be resolved by means of undertakings without the need for further investigation. Undertakings in lieu of reference are therefore appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut, and those remedies are capable of ready implementation.' The OFT considers that a proposal that restores competition – in the sense of reversing the increment in the supply of floaters which can be presumed to have operated in the UKCS absent the merger – would be a suitably clear-cut remedy in this case.

The parties have indicated that in order to remedy any substantial lessening of competition identified by the OFT and to avoid a reference to the Competition Commission, they would be prepared to offer undertakings in lieu. The parties therefore offered to divest either only the GSF floater that comes available in July 2008 (the GSF Arctic II), or both GSF floaters that will operate in the UKCS if the GSF Arctic III moves away (the GSF Arctic II and GSF Arctic IV).

The parties argued that divestment of the GSF Arctic II should be sufficient to address any competition concerns, because by the time the GSF Arctic IV comes available, in September 2010, a number of new floaters will have been delivered that are specifically targeted at NW Europe. However, the OFT notes that these floaters may be more likely to work in Norwegian waters and that any resulting displacement of older floaters to the UKCS is too uncertain to alleviate the competition concerns in a clear-cut manner.

The parties' offer to divest both the GSF Arctic II and the GSF Arctic IV removes the entire anticipated increase in fleet size resulting from the merger in the UKCS, provided that the GSF Arctic III, as currently expected, relocates away from the UKCS. The OFT will seek verification that this will occur [ ]. [If] the GSF Arctic III is not relocated, the OFT is minded to consider it should form part of the divestiture package for the remedy to qualify as a clear-cut undertaking in lieu.
 
The parties consider that buyers of these floaters will not have difficulties in recruiting crew in the UKCS, but the parties noted that they were also prepared to give buyers access to the floaters' existing crew to give them an opportunity to persuade the crew to change employment. The OFT has suspended the duty to refer on the premise that it will consider representations from candidate purchasers on this issue [ ].

For these reasons, the OFT considers that the undertaking to divest both the GSF Arctic II and the GSF Arctic IV and give buyers access to the floaters' crew is sufficiently clear cut to restore competition and thereby remedy the concerns in as comprehensive a manner as is reasonable and practicable.

DECISION

The OFT has therefore decided to refer the anticipated merger between Transocean and GSF to the Competition Commission pursuant to section 33 of the Act. However, the OFT's duty to refer is suspended because the OFT is considering whether to accept undertakings in lieu of reference from Transocean and GSF pursuant to section 73 of the Act.

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