The headwinds of cartel risk for the oil and gas industry are blowing into Texas from around the country. Signs of the shifting winds are apparent in novel cartel and cartel-style allegations brought against mostly Texas-based oil and gas companies in Nevada and closer to home in Houston. In Nevada, putative classes of retail gasoline consumers sued eight of the largest US shale oil producers for allegedly conspiring with each other and OPEC to fix global crude oil (and thereby gasoline) prices. Meanwhile in Texas, plaintiffs are concocting cartel-like theories that a band of large gas companies manipulated the energy market during Winter Storm Uri.

These developments dovetail with the build-up of regulatory pressure at the national level. The same OPEC-oriented allegations as in the Nevada case threatened to derail Exxon Mobil’s USD60 billion acquisition of Pioneer Natural Resources in May 2024. The FTC barred Pioneer’s outgoing CEO – a key figure in the alleged conspiracy – from serving on Exxon’s board and, in a rare move, referred the allegations against him to the Department of Justice, consistent with the Biden administration’s policy of increased scrutiny of the oil and gas industry. The administration’s green agenda notwithstanding, faced with high prices at the pump, the president has taken aim at the industry: in October 2022, for example, making the case for increased production by labelling profits as an “outrageous” “windfall.”

This article analyses the impact of these developments on cartel risk for oil and gas companies in Texas, which can be summarised as follows:

• Consumers and regulators are looking for someone to blame for gas prices, Cartel allegations are one way to point the finger at oil producers.
• Plaintiffs in the Nevada case are using novel market definitions to raise the specter of an OPEC-style cartel at home.
• Plaintiffs may try to bring cartel-style cases without even advancing antitrust theories to seize on this compelling narrative.
• Enforcers have signalled that they may scrutinise whether proposed oil and gas mergers present increased possibilities for cartel conduct.

Gasoline Consumers Hitch Their Case to OPEC’s Wagon

In January 2024, after a several-year rally in crude oil prices, gasoline consumers filed the first of eight actions in the US District Court for the District of Nevada. They allege a price-fixing conspiracy by the country’s largest shale oil producers: Permian Resources Corp. (formerly Centennial), Chesapeake Energy Corp., Continental Resources, Inc., Diamondback Energy, Inc., EOG Resources, Inc., Hess Corp., Occidental Petroleum Corp., and Pioneer Natural Resources Co.  Rosenbaum et al v. Permian Resources Corp., No. 24-103 (D. Nev.).

Plaintiffs assert claims under the antitrust laws of 28 states and the District of Columbia and claim that a domestic cartel restricts oil and gasoline output resulting in artificially inflated prices.

On a global level, pointing fingers at OPEC – perhaps the world's most open and notorious conspiracy to control output – is easy. But OPEC is not subject to American antitrust laws, so plaintiffs need another, domestic target. In Rosenbaum, the plaintiffs allege that recent events have aligned the interests of OPEC and US shale producers, creating an opportunity for the plaintiffs to bootstrap domestic producers into a global cartel conspiracy.

When the domestic shale industry first emerged in the early 2000s, it was a nimble competitor to OPEC, posing a significant threat to OPEC’s control of the international oil market with an ability to quickly and cheaply ramp up production to capture market share. This sparked a price war with OPEC in 2014-2016, which gave way to a détente, price stabilisation, and the US shale market’s consolidation around a handful of large, publicly traded producers. After the dust of the price war settled, OPEC and shale producers began to publicly signal a mutual interest in stable prices and revenues and a more measured growth outlook.

There are two distinct narratives to explain this development. One is the story of the natural rationalisation of a volatile market through parallel conduct, public signals and the dynamics of an oligopolistic market dominated by OPEC and the major shale producers. The other is the class action plaintiffs’ story of a price-fixing conspiracy, in which the shared mantras of discipline and rationality are euphemisms concealing an agreement to restrict supply.

This antitrust theory is notable for several reasons. First, it spans several product markets. Shale oil can be mixed with other forms of crude oil and refined into gasoline, but shale and gasoline are hardly substitutes. Class plaintiffs have worked up a chain of causation, arguing that crude oil prices are a primary driver of gasoline prices. If this theory survives, it would expand potential liability up the causation chain and require oil and gas companies to re-evaluate antitrust risk that could come from products downstream of their production. 

Second, the plaintiffs seek to prove cartel conduct by hitching the conspiracy to OPEC’s wagon, an undisputed and unabashed cartel. While there is economic logic in shale producers’ coexisting with OPEC and jointly profiting from high crude prices, plaintiffs need to tip the balance to intentional conduct and an agreement among shale producers to limit production to bolster prices. The backdrop to the alleged conspiracy is the annual CERAWeek energy industry meetings in Houston, along with public statements about shared production goals. Couching this as a “years-long campaign” by OPEC to “bring [US shale producers] into the cartel,” plaintiffs seek to transform public communications and industry interchange into actionable conduct.

Why not Texas?

One striking question is how Texas’s biggest cartel case landed in Nevada. Indeed, five defendants are headquartered in Texas, all defendants have produced shale oil in Texas, and the alleged conspiracy was hatched during a Houston conference. Given such deep Texas contacts and the heterogeneity of the plaintiffs (suing under the laws of 28 states and DC), Texas seems the natural venue for such a suit. Defendants apparently had the same thought and sought a transfer of the case to the US District Court for the Western District of Texas in March 2024.

Plaintiffs countered that this Texas-tinged case does not belong in Texas because plaintiffs intentionally excluded Texas consumers from their purported damages class. That omission makes sense, as the default rule, based on the Supreme Court’s decision in the Illinois Brick case, Illinois Brick Co. v. Illinois, 431 US 720 (1977). Under the Illinois Brick or direct purchaser rule, claims for damages under the Sherman and Clayton Acts can only be brought by plaintiffs who purchase a good or service directly from a defendant. The Illinois Brick rule would be a serious bar to any arguments that the purported conspiracy inflated the price of crude oil, thereby increasing the price of certain crude derivatives like gasoline and home heating oil. Yet many states like Nevada have passed statutes that expressly exempt their state antitrust laws from the indirect purchaser rule.

The distinctions between state antitrust laws explain why these plaintiffs strategically structured their damages class to only bring claims under the laws of 28 states and the District of Columbia. And for that same reason, a court may be hesitant to transfer the case to Texas – a jurisdiction that continues to follow the Illinois Brick rule barring such indirect claims. On that basis, the Illinois Brick rule may be a double-edged sword for Texas oil and gas companies: though their net antitrust liability to consumers shrinks, the focus on state antitrust law may deprive them of a home field advantage in these nationwide class actions.     

Quasi-Cartel Allegations

As part of the deluge of litigation that ensued after Winter Storm Uri rattled Texas in February 2021, a distinct batch of suits arose in Texas in 2023 alleging “market manipulation” by gas companies. Chief among them is a suit brought by data analytics firm CirclesX claiming that a group of nearly 50 gas companies wielded “monopolistic-like positions and power” to “surreptitiously restrict supply” of gas leading up to and during the storm, CirclesX Recovery LLC v. BP Energy Co. (281st Judicial Dist. Ct., Harris Cnty.) (No. 2023-21953). This intentional diversion of gas allowed the defendants to ratchet up gas prices and recover windfall profits, plaintiffs claim.

But even though such allegations smack of a cartel claim, these are not antitrust cases. Rather, theories of market manipulation have been grafted on to common law actions for tortious interference, private nuisance and unjust enrichment. Plaintiffs’ apparent goal is to plead just short of an actual antitrust conspiracy. In doing so, they reap the benefits of not having to meet antitrust standing requirements and can keep their cases in what they likely perceive as more favourable state courts. They can also tell a cartel story without pointing to any back-alley deal or secret handshake among the gas providers. This strategy has already paid dividends for plaintiffs, with much of the press coverage of the lawsuits referring to these as “conspiracy” cases, even though the word appears just once in the first amended CirclesX petition.   

From a planning perspective, the trouble with this kind of case is that competitors engaging in parallel conduct can draw scrutiny even where no agreement – tacit or explicit – or other plus factor has been alleged. To the extent these types of claims survive early legal challenges, energy companies face a new threat of being labelled a cartel-by-implication through creative yet hazy pleading.

Regulatory environment

These cases are just a sign of the times – a generally hostile climate for the oil and gas industry. The Biden administration has expressed a desire to pivot towards renewables while also pressing to increase domestic production to keep gas prices low and placate consumers. Both goals have led to increased government scrutiny of the industry, particularly towards oil and gas mergers which, the administration believes, could exacerbate high prices.

For instance, citing concern about “hard-working Americans paying more for gas because of anti-competitive or otherwise potentially illegal conduct,” President Biden penned a letter to Federal Trade Commission Chair Lina Khan urging her to “bring all of the Commission’s tools to bear if you uncover any wrongdoing.”

The FTC has heeded President Biden’s request. In May 2024, as a final condition of approval of Exxon’s recent acquisition of Pioneer (a defendant in the Nevada class action), the FTC required that Exxon agree to bar former Pioneer CEO Scott Sheffield and others at Pioneer from sitting on Exxon’s board. In its administrative complaint, the FTC cited public statements and redacted private messages allegedly evidencing a threat of “collusive activity that would potentially raise crude oil prices, leading American consumers and businesses to pay higher prices.” The FTC consent order further requires Exxon to engage in Clayton Act reporting for years after the merger. All of these allegations are likely to add fuel to the fire of private enforcement.

Though the Exxon-Pioneer merger survived, the resurgence of cartel risk gave the government leverage to extract concessions and advance its regulatory agenda. Market participants must thus be wary of a feedback loop between increased regulation and litigation in that action from the plaintiffs’ bar can give fodder to public enforcers and vice versa. The specter of increased scrutiny further raises the cost of similar acquisitions throughout the industry, affecting other of the class action defendants and beyond. For instance, the FTC is also investigating Chevron’s proposed USD53 billion acquisition of Hess, Diamondback’s USD26 billion purchase of Endeavor Energy Partners, and Occidental’s USD12 billion deal for CrownRock.

Conclusion

Whichever way the winds blow next, industry participants would be well advised to note a likely escalation in antitrust enforcement as private plaintiffs and regulators latch onto the oil and gas industry as a target for renewed interest in cartel and cartel-style theories. In terms of litigation, the novelty of these theories poses difficult questions about effective risk management, aside from the fact that domestic industry participants should avoid getting too cozy with OPEC and each other. At the same time, these novel aspects – eg, unusual market definitions, reliance on implied agreements – may cause these cases to fizzle out. And though it is not yet the case that proposed oil and gas mergers will be dead in the water, companies contemplating such moves should expect increased scrutiny for signs of collusive behaviour.