Did FTC Overreach in Prohibiting Scott Sheffield From ExxonMobil’s Board?

Originally published on Forbes.com on May 31, 2024

Is there enough reasonable doubt to reverse the decision by the FTC and remove the personal vilification laid on a CEO who has accomplished much in the Permian oilfield?

The Federal Trade Commission (FTC) has taken an unprecedented step as part of the biggest shale oil and gas merger ever: ExxonMobil buying Pioneer Natural Resources for the hefty sum of $60 billion. But, as part of the deal, FTC announced on May 3, 2024, the chairman of Pioneer, Scott Sheffield, was prohibited from joining the board at ExxonMobil or retaining any advisory capacity. It was alleged by FTC that to cut oil production, he had tried to influence stakeholders: OPEC+ members, first, and U.S. oil and gas companies, second.  

The message was delivered together with the FTC proposed merger consent in early May. ExxonMobil accepted the deal. Sheffield didn’t resist the deal at the time, which might have delayed the benefits of the merger as well as Pioneer’s investors, employees, and the larger oil and gas community. Instead, he published a 23-page complaint against the FTC on May 28. It’s worth taking a deeper look at this story, remarkable in so many ways.    

Scott Sheffield’s History

Sheffield has worked in oil and gas for 40 years and is recognized as a thought leader. He was deeply engaged in the shale revolution and was involved in lifting the U.S. crude oil export ban in 2015. He headed Parker & Parsley when it merged with Mesa to form Pioneer Natural Resources in 1997. Sheffield was CEO of Pioneer until he stepped down in 2016, only to return in 2019.

Pioneer eventually became the largest oil producer in the Permian. In 2022, Pioneer was mentioned by EDF as one of the leaders in addressing greenhouse gas (GHG) emissions in the U.S. Sheffield was honored as a Hall of Fame Inductee in January 2013 by the Permian Basin Petroleum Museum.  He also won a Distinguished Service Award in 2014 by the Texas Oil and Gas Association.

Sheffield was acknowledged by U.S. and international business as a “straight-shooter unafraid of the limelight” by Hart Energy.

What are FTC’s responsibilities?

This comes straight from the FTC website:

“The FTC enforces federal consumer protection laws that prevent fraud, deception and unfair business practices. The Commission also enforces federal antitrust laws that prohibit anticompetitive mergers and other business practices that could lead to higher prices, fewer choices, or less innovation.”

In short, in the free market FTC’s job is to promote competition and protect consumers from unfair business practices.

A common role for FTC is the antitrust law, which seeks to limit one company’s market power or monopoly—to encourage competition. Mergers and Acquisitions (M&As) are often examined in this respect, particularly large mergers.

The FTC Order Against Scott Sheffield

The FTC issued a consent order as part of the merger approval for ExxonMobil and Pioneer. Taken from the FTC website, here are the main points of the order:

• The action resolved antitrust concerns surrounding the merger.
• It prevented Scott Sheffield from a seat on the new company’s board of directors or serving in any advisory capacity.
• The purpose is to stop Sheffield’s attempts to collude with OPEC or OPEC+ to reduce oil and gas production, which would mean higher prices at gas pumps, and boost his company profits.
• “While at Pioneer, Sheffield sought to align oil production across the Permian Basin in West Texas and New Mexico with OPEC+ via public statements, text messages, in-person meetings, and WhatsApp conversations.”
• Through hundreds of text messages exchanged with representatives and officials of OPEC, Sheffield discussed “crude oil market dynamics, pricing and output.”

It’s noteworthy that the FTC voted 3-2 to accept the order and to put it on the record for public comment. With the vote this close, if any misinterpretation of Sheffield’s actions were revealed, it might have reversed the result of the vote (see discussion below).

Scott Sheffield hits back

Sheffield remained silent when the consent order from FTC came down on May 3, 2024. But on May 28, the straight-shooter defended himself against his accusers in a 23-page filing to FTC. Here are the main points of the letter, as described in a detailed article by Politico: 

• The FTC case “is built on a false narrative,” Sheffield said, and the FTC had unjustly smeared him.
• The allegations of collusion were false. The FTC misrepresented Sheffield’s communications with competitors and gave him no chance to defend himself.
• The FTC went beyond its mandate and smeared Sheffield unjustly.
• The FTC argument is based on a false narrative, and “a farfetched interpretation of the applicable statutes.”
• Sheffield did make comments in media reports and at public conferences about the need to reduce production, but these reflected investor demands for higher returns, by not continuing to spend capital on drilling growth for growth’s sake.
• The communications the FTC listed with OPEC people and Saudi Arabia were instead sent to “a U.S. analyst who studied the industry.”
• In regard to personal contact with an OPEC official, the only time was when Sheffield offered contact info to the Texas Railroad Commission, the regulator for the Texas oil and gas industry, about a public proceeding.
• Communications that Sheffield received from OPEC were email blasts such as public news stories.
• The letter closed with an appeal for the FTC to vacate the consent order barring Sheffield’s relationship with ExxonMobil because it was “based on falsehoods and a woefully incomplete investigative record.”

Finally, the FTC doesn’t have to do anything in response to Sheffield’s protest letter, because their relationship is with ExxonMobil, and the latter had waived its rights to contest the merger settlement.

FTC Reply To Sheffield’s Letter

The FTC did respond to Sheffield’s letter. FTC spokesman Douglas Farrar told Hart Energy. “There is no question that Mr Sheffield publicly urged Texas oil producers to limit production while having regular, private back-and-forth communications with senior OPEC representatives over a period of years.”

This is revealing, because it connects the issue of production limits in Texas with Sheffield’s communications with OPEC, both over a number of years. The first phrase in the FTC reply is elementary economics for oil and gas production. If you drill oil wells to develop a new play, at some point you must check the returns on investment. If these are too low, stocks will fall and the company needs to increase its capital efficiency—by slowing the drilling of new wells with a new focus on cost-cutting.

In U.S. shale drilling, this rationale took hold about 2018, in no small part due to warnings by Scott Sheffield, to slow new drilling and focus on cost-cutting. This is a strong guideline in 2024 with companies like EnCana, ExxonMobil, and Pioneer pursuing drilling cubes and four-mile laterals to boost their capital efficiency in the Permian.

The second phrase in the FTC reply about communications with OPEC representatives over the same timeframe may have been fortuitous in timing. It’s not surprising that CEOs of big oil companies would communicate with OPEC, who from time to time publish predictions for oil futures and prices. And, as Sheffield argued, his communications were innocuous.

But it is possible that a linkage was made by FTC between the two aspects (two phrases above) and that this could lead to a suspicion of collusion between Sheffield and OPEC or OPEC+. If this was the case, then FTC should have made a more thorough investigation, as pleaded by Sheffield, rather than a flimsy four-hour interview FTC had with him. With this in mind, and a 3-2 vote by the Commission to approve the consent order, it seems there is enough reasonable doubt to reverse the decision by the FTC and remove the personal vilification and embarrassment laid on a CEO who has accomplished so much in the Permian oilfield.