But opinions in the industry vary as to whether the betrothed companies will, or shouldmake concessions to satisfy the regulatory agency.

Shell and Pennzoil-Quaker State announced March 25 that they had reached an agreement for the oil giant to buy the automotive consumer products marketer for $1.8 billion in cash plus $1.1 billion in assumed debt. The companies submitted the deal to the trade commission in late April for consideration under merger and anti-trust guidelines. The agency has 30 days from that date to request additional information, a step that would precede any decision to set conditions for completion of the deal.

Two base oil refiners confirmed that the FTC has interviewed them as part of its investigation. Other sources said the agency is also questioning lubricant blenders. A spokesman for the commission declined to comment.

Concerns about the deal focus on the concentration of base oil capacity that the merged company would control. Shell owns two U.S. refineries – in Deer Park, Texas, and Martinez, Calif. It is also the managing partner in Motiva Enterprises, a 50-50 joint venture with Saudi Refining Inc. that owns a base oil refinery in Port Arthur, Texas. Pennzoil-Quaker State owns half of Excel Paralubes, a joint venture with Conoco that operates a base oil refinery in Westlake, La. Including the Port Arthur facility and Pennzoil-Quaker States share of Excel Paralubes, Shell would control 46,850 barrels per day of paraffinic and naphthenic base oil capacity.

In a May 1 letter, ILMA raised three concerns, while noting that the organization had not taken a position opposing or favoring the deal. First, it noted that the Pennzoil-Quaker State acquisition would give Shell control of 37,150 b/d of paraffinic base oil capacity, meaning that Shell and ExxonMobil together would have 51 percent of the paraffinic capacity in North America.

[I]ndependent lubricant manufacturers believe that there will be less price competition in the base oils market and that further refinery rationalization could lead to reduced base oil supplies to independents, the letter said.

The association and independent motor oil blenders also expressed concerns that Shell itself could assume a dominant role in the Group II market, similar to ExxonMobils position with Group I. They noted that new engine oil standards have pushed formulators to use increased amounts of Group II oils – and even Group II-plus and Group III – and predicted that coming upgrades will cause a further shift toward premium stocks. The 33,150 b/d of Group II that Shell would control would account for 38 percent of the North American market share.

Motor oil specs are obviously becoming heavily slanted toward Group II, if not II-plus, and that trend is going to continue, said James T. Taglia, president of Nor-Lakes Services Midwest Inc. Group II supply is already tight and were concerned that concentrating supply could make it more difficult for independents to obtain. We just want to make sure that smaller independents can continue to compete.

Another issue raised by the proposed acquisition is the implication for 12,000 b/d of base oil that Exxon and Mobil were required to contract to independent blenders as a condition of their merger. Industry sources say that half of that supply went to Pennzoil-Quaker State, the other half to Castrol. Castrol was later acquired by BP. The Shell deal raises the prospect that none of the 12,000 barrels would be going to independents.

Not everyone agrees that Shells acquisition of Pennzoil-Quaker State would inhibit competition. Harji Gill, vice president of research and development and technical services at Pinnacle Oil Inc., said the motor oil market would benefit from the combination of Shells leading Rotella brand of diesel engine oils and Pennzoil and Quaker State, the top-selling passenger car motor oils.

Youll have a solid leader in branded automotive lubricants, he said. Thats good because you need a leader to help set direction for technical standards and to provide stability to the market. Today there is no clear leader. I see a lot of positives coming out of this deal.

Others speculated that Shell, by increasing the base oil capacity that it controls, could actually enhance competition by providing a rival to ExxonMobil.

Those who think the trade commission will object on grounds of base oil concentration see an obvious remedy: Require Shell to divest some of its capacity. Some say that an exit from the Excel Paralubes partnership would offer the cleanest solution, should the commission require divestment. Others contend that Shell would be loath to let go a stake in that business because its refinery is new and profitable. They believe the company would sooner part with Motivas Port Arthur refinery, which is much older.