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Congressional concerns about rising energy prices could pose the greatest risk to ConocoPhillips Co. winning federal antirust approval for its purchase of Burlington Resources Inc., one of North America’s biggest independent energy exploration and production companies. The $35.6 billion merger, which will create the largest natural gas producer in the U.S., comes just as consumers are receiving the first of what are expected to be uncommonly expensive home heating bills. Gas prices have roughly doubled since last winter in the wake of surging worldwide demand and an overall tightening of energy supplies caused by Hurricane Katrina and the war in Iraq. “Politics will drive this review,” said Sean Boland, co-chair of the antitrust practice at Washington law firm Howrey. “The Federal Trade Commission will get a lot of pressure from Capitol Hill to look at this thing.” Echoing such views, Banc of America Securities LLC analyst Dan Barcelo questioned the timing of the transaction. Executives of five major oil companies, including ConocoPhillips chief executive James Mulva, were grilled in early November by Senate Energy Committee leaders about the nearly $33 billion in profits their companies garnered when gasoline prices soared after Hurricane Katrina. “Given the heightened, albeit misguided, political pressure against oil companies in the U.S., we think a merger of this size could re-ignite political rhetoric about high natural gas prices entering a U.S. winter amid a consolidating industry,” Barcelo said in a research note. The analyst also said he sees no “apparent urgency” for the deal, noting that ConocoPhillips already has a solid position in the natural gas market and that the transaction adds little refining and marketing strength. In their congressional testimony last month, the oil executives blamed surging energy prices on supply disruptions due to the hurricanes, while also claiming to be pouring profits back into exploration and production in a move to boost supplies. In addition, they said that efforts to build new refineries are being hampered by environmental regulations and that new exploration is being hindered by bans on off-shore drilling. But consumer advocates say that a spate of oil industry mergers in recent years has led companies to shutter refineries to boost oil profits. “It wasn’t the environmental laws that closed the refineries,” Mark Cooper, research director at the Consumer Federation of America, said at a Dec. 1 hearing in Milwaukee on energy profits convened by Wisconsin Gov. Jim Doyle. “It was a business decision to not invest in refineries because a tight market is where they profit more. This is an industry that will charge whatever the market will bear.” Boland predicted that the FTC, which has drawn fire from Sen. Ron Wyden, D-Ore., and other lawmakers who contend the agency is lax in policing oil patch consolidation, will face pressure to examine the impact of consolidated energy companies’ hold on the natural gas market. In addition to ConocoPhillips, the top players in U.S. gas production include Exxon Mobil Corp., BP plc and Royal Dutch/Shell Group of Co. Despite creating the top gas producer, the combination of ConocoPhillips and Burlington — the No. 7 and No. 9 U.S. producers by market share, respectively — is unlikely on its own to alarm the FTC, Boland said. That’s because the deal will leave at least 10 other major players, so ConocoPhillips won’t have the power to raise prices unilaterally. “I don’t see the numbers game as particularly significant,” he said. “Gas production is pretty widely spread out,” added Marc Schildkraut, co-chair of the antitrust practice at Heller Ehrman. “If this was a nonenergy deal, it probably wouldn’t get a second look.” Given the size of the transaction and the political sensitivity around energy mergers, the FTC is virtually certain to issue a so-called second request for information on the transaction. ConocoPhillips and Burlington will likely have to divest assets in certain localities, including in Louisiana, where the companies’ gas operations overlap, to secure clearance. In general, however, their natural gas facilities are in different regions of the country, with ConocoPhillips focusing on Alaska and Burlington on New Mexico’s San Juan Basin. Boland predicted that regulatory approval will take six months. A wild card in the review is whether regulators believe ConocoPhillips will back away from plans to import liquefied natural gas, or LNG, now that buying Burlington will give it enormous reserves of regular natural gas. LNG, nearly all of which comes from imports, is seen as critical to helping meet U.S. gas demands. “The government is going to be looking very carefully at ConocoPhillips’ LNG projects, now that they have lots of domestic gas reserves, to make sure they don’t lose interest in LNG,” Boland said. State enforcers, especially in California and other states where power companies are accused of manipulating energy supplies, also are expected to take a close look at the deal. Copyright �2005 TDD, LLC. All rights reserved.

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