Texaco, Gulf, Cities and Conoco. However, a September 12, 1975, feasibility study indicated that the BPL line was sized only

for Cities, Conoco, Gulf and Mobil (Texaco had dropped out of SEADOCK and BPL in May 1975) with 15 percent of extra space available for nonowners in the segment from Freeport to BeaumontPort Arthur. No space was provided for nonowners in the segment from Beaumont to Lake Charles. As now proposed, the BPL system will consist of a 34-inch line running 117.5 miles from Freeport to a Beaumont-Port Arthur tank farm. The segment from Beaumont

to Lake Charles will be a 57.9 mile, 16-inch diameter line. The average volume forecast for 1985 is 511 MBPD. The BeaumontPort Arthur segment will cost approximately $82,040,000, and the Lake Charles segment approximately $29,805,000.

In addition to delivering to the present owners, BPL owners are planning to make deliveries to another large diameter joint interest crude line known as Texoma, discussed below.

d. CASE

At a

As noted above, four SEADOCK participants decided to work together to build a system from the Freeport terminal to the Houston-Baytown area. They were Crown Central, Arco, Shell and Exxon. Texaco was undecided about its routing and asked that its volumes be included in the CASE volume studies. July 1973, meeting, all the CASE companies except Crown favored an undivided interest form of ownership. Exxon indicated that it would not participate in the line unless it was an undivided interest pipeline. The original CASE plan provided for a tank farm in La Porte, near the Houston ship channel, with lines from the channel to the La Porte terminal and lines from the terminal to each of the participant's refineries.

The CASE group considered several options in a 1973 feasibility study. This early study did not provide for any nonowner volumes. The tariffs appeared low in the 2 1/2 to

4 cent range for the movement from Freeport to Houston. By September, 1975, plans had changed significantly. Arco had dropped out of both SEADOCK and CASE, leaving only Crown Central, Shell and Exxon. Estimated volumes now range from 581 MBPD in 1980 to 743 MBPD in 1985 and future years.

e. Seaway

Seaway is a large diameter crude line presently under construction from Freeport to Cushing, Oklahoma. Present plans indicate that crude oil will be loaded into Seaway through the Freeport harbor and, when SEADOCK is operational, through a

pipeline connection with SEADOCK, as well. Space has been allocated at the SEADOCK tank farm for tankage for Seaway.

Seaway is a 30-inch, 510-mile system capable of initially handling 240 BPD of crude, with capacity in 1985 planned for. 500 MBPD. Initial investment is estimated at $160 million. Present owners are Apco Oil Corp., Continental Pipeline Co., CRA, Inc. (owned by Farmland Industries), Diamond Shamrock Corp., Midland Cooperatives, Inc., National Cooperative Refinery Association and Phillips Investment Co. Only two of these companies Continental and Phillips -- are SEADOCK owners.

The SEAWAY system will feed refineries in Oklahoma, the Texas Panhandle and Kansas. Its proximity to other pipelines in the Cushing area makes it possible for shipments to reach refineries in the St. Louis and Chicago areas through existing pipelines or through new joint ventures.

f. Texoma

Texoma is a 30-inch, 640 MBPD joint interest line running from the Beaumont-Port Arthur area to Cushing, Oklahoma. It is owned by Mobil, Sun Oil, Kerr-McGee, Skelly, United Refining, Western Crude, Lion Oil Co. and Rock Island Refining. Only Mobil is a SEADOCK and a Texoma owner. Texoma plans to use Sun Oil's docks at Nederland, Texas, as the unloading point for deliveries into the line. It began limited operations in late 1975 and will be fully operational in 1976. The BPL system plans to connect to Texoma. When Sun Oil was a member of SEADOCK and BPL, it provided estimated volumes for shipments through BPL into Texoma. With the withdrawal of Sun Oil, this information was no longer forthcoming and the BPL owners merely provided 15% of their volumes for nonowner shipments.

The basic legal theory underlying the antitrust analysis contained in this report is an follows: The joint venture form of organization of LOOP and SEADOCK is prima facie justified because of the economies of scale inherent therein and because of the large economic disincentives to build similar systems in close proximity thereto. Any such joint venture is powerful enough to create competitive advantages for those receiving its services, and disadvantages for those not receiving its services, but the joint venture is not powerful enough to be considered indispensable to the competitive survival of its users. The agreements creating the joint venture give its menbers the power to exclude competitors from membership and to restrict the amount of crude oil flowing through the port, thereby affording the members the power to place competitors at a competitive disadvantage. Thus, competitors who, for legitimate purposes (in this case to use the capital formation their combined strength will permit) are lawfully allowed to combine into an association which possesses significant market power, have a concomitant duty to provide for the admission of outsiders as owners or users on reasonable and nondiscrininatory terms and to acknowledge and implement other competition rules consistent with the practical limitations of the joint enterprise. See United States v. Terminal Railroad Association of St. Louis, 224 U.S. 383 (1912); Associated Press v. United States, 326 U.S. 1 (1945); Silver v. New York Stock Exchange, 373 U.S. 341 (1963); United States v. Tarpon Springs Sponge Exchange, 142 F.2d 125 (5th Cir. 1944); American Federation of Tobacco Growers v. Neal, 183 F.2d 869 (4th Cir. 1950); Gamco, Inc. v. Providence Fruit & Produce Bldg., 194 F.2d 484 (1st Cir. 1952); and United States v. New England Fish Exchange, 258 F. 732 (D. Mass. 1919).

B. Economics of Port Construction

The economics of the proposed LOOP and SEADOCK deepwater port construction involve many considerations. Four of the major ones are discussed in detail below: (1) the demand for the facilities which derives from the demand for imported oil in the section of the country served by the ports; (2) the costs of building and operating the ports, which must be less than alternative means of importing oil in order for the ports to be feasible; (3) port operations, in that prospective builders will be concerned with how much latitude they have in determining such things as operating policy, tariff levels, and capacity; and (4) the risk involved in building and operating the proposed ports.

1. Demand for Imported Crude

The demand for deepwater ports is directly related to the increased dependence of the United States on imported oil as domestic production has declined. Projections show that crude imports will continue to increase in coming years. Importing crude into the Gulf Coast region is particularly attractive because of the existing refineries in this area, the existing network of product pipelines from this area to the Midwest and Northeast, and the existing crude pipelines from this area to Hidwest refineries. These existing facilities were built when the Gulf Coast region supplied the bulk of the country's crude oil requirements. Although crude production is declining in the Gulf Coast region, the existing refineries and pipelines have a number of useful years left, so oil companies have an interest in importing crude to the Gulf Coast.

The Gulf Coast area to be served by LOOP and SEADOCK runs from Corpus Christi to Louisiana. This area includes the refining areas of Corpus Christi, Houston, Beaumont-Port Arthur, and the Louisiana Gulf Coast with respective MBPD refining capacities of 284, 1454, 1300 and 1746, for a total of 4784 MBPD. In addition to this capacity, the ports can serve, through connecting pipelines, much of the Midwest refining capacity of 2,214 MBPD. Thus, the ports potentially will have an impact on the most significant refining areas of the country with a total refining capacity of 6,998 MBPD.

It is clear from all available evidence that the United States must rely on crude imports for the next two decades to meet its needs for petroleum products. The only question is the level of such imports. The deepwater ports are premised on the assumption that they are the cheapest method to unload VLCC's carrying imported crude from Africa and the Persian Gulf. None of the participants in either project question that underlying assumption. Each project has tried to determine its viability based on projected levels of imported crude, and each commissioned a study to determine what this level will be. LOOP commissioned H. J. Kaiser Company, while SEADOCK employed Sherman H. Clark Associates.

The Kaiser study estimates anticipated crude imports through the Gulf Coast for distribution to PAD's II and III */

*/ "PAD II" refers to a Petroleum Administration for Defense designation of a 15 state area in the Midwest. PAD III includes (footnote continued on the next page)

44-579 0 - 79 - 7

The medium projections were used as a basis for LOOP planning. The Kaiser study concludes that there will be sufficient crude imports for one or two deepwater ports.

The Clark study projects significant MBPD levels of inports for both PAD's II and III that will come through PAD III:

The study then examines two situations, the first premised on the ports handling all crude imports arriving on the Gulf Coast, the second premised on their handling a significant portion of the imports, with transshipment and direct small tanker deliveries comprising the rest. Under the second premise, the total projected shipments into the ports were about 60% of the 1990 total for projected PAD II and III imports listed in the above table. The conclusion of the Clark study was that there will be sufficient Gulf Coast imports to support both LOOP and SEADOCK.

(footnote continued)

Texas, Louisiana, Arkansas, Mississippi, Alabama, and New Mexico. Although there are some PAD III refineries in Louisiana which plan to use crude brought through LOOP, much of the planned use of LOOP is to supply PAD II refineries in the Illinois to Ohio region via Capline.