The commission indicated that concentration of base oil capacity was a potential issue in May, when it asked the companies for additional information about the subject. According to an industry source familiar with negotiations between the companies and the commission, Shell officials said recently that the commission had asked them to divest Pennzoil-Quaker States 50-percent interest in Excel Paralubes and that the companies had agreed. The source spoke on condition of anonymity.

In addition, a union employee at Excel Paralubes told Lube Report yesterday that workers were recently told that Pennzoil-Quaker State was shopping its stake in the venture. The union member, reached at Local 4-555 of the Paper, Allied-Industrial Chemical and Energy Workers International Union in Sulphur, La., did not identify himself. Bloomberg first reported the information given to union members Aug. 29.

Shell and Pennzoil-Quaker State have remained mum about the commissions review. Shell spokesman Rick Wirth said only that the company is working closely with the [commission] to obtain a consent order..

According to sources, Conoco(now ConocoPhillips), which owns the other half of Excel Paralubes, has right of first refusal if Pennzoil-Quaker State does sell its share. A ConocoPhillips official refused to say yesterday whether it has engaged in buyout negotiations. A Pennzoil-Quaker State representative could not be reached for comment.

Some independent lubricant blenders have complained that the acquisition would reduce competition in the U.S. base oil market – especially the market for Group II oils – by allowing Shell to control too much capacity. Shell has a 50 percent stake in Motiva, which owns the continents largest base oil refinery, a 22,000 b/d plant at Port Arthur, Texas. Saudi Refining owns the other half of Motiva, but Shell is widely viewed as the more active manager.

Excel Paralubes, which is located next to a Conoco oil refinery at West Lake, La., ranks just behind the Port Arthur refinery, with capacity of 21,300 b/d, all Group II. Pennzoil-Quaker States share of that capacity would give Shell control of 32,650 b/d of Group II, or 45 percent of the 71,800 b/d total U.S. Group II capacity.

If Shell and Pennzoil-Quaker State have agreed to divest the stake in Excel Paralubes, a sale is not necessarily imminent, according to stock analysts tracking the deal. Several said the companies would probably make an immediate attempt to market the interest but would seek permission to delay the sale if a suitable buyer – one that would pay a reasonable price and pass FTC muster – did not appear. Under such conditions, analysts said, the commission might allow the companies to complete the merger on condition that they put the Excel Paralubes stake into a trust, which would have a period of time to find a buyer.

The commission allowed similar use of a trust last year when approving the merger of Chevron and Texaco. Texaco gave its shares of the Equilon and Motiva downstream partnerships to a trust that had one year to sell them.

Analysts also said that consolidation in the lubricants industry has reduced the number of potential buyers for a stake in Excel Paralubes. As a result, they said, Shell and Pennzoil-Quaker State might try to pitch it to investors outside the industry.