SUBCOMMITTEE ON ANTITRUST AND MONOPOLY
February 17, 1970.
Memorandum to: Dr. John M. Blair, Chief Economist.
From: Walter S. Measday, Economist.
Subject: Oil Companies' Entry into Nuclear Energy Field.
The development of nuclear-powered steam generating plants offers the predominant market for civilian applications of nuclear energy in the present state of the art. The first experimental commercial reactor, Duquesne Power's Shippingport #1, began power operation in 1957 with a capacity of 90 Mwe (megawatts electrical). Between 1960 and 1969 another 14 plants began power operation, with a combined capacity of 4,120 Mwe. By the end of the decade, however, 89 projects with 75,000 Mwe capacity had been announced for completion in the 1970's; of these 82 were under construction or firm contract. The AEC now predicts operable capacity in the neighborhood of 150,000 Mwe by 1980, double its projection made five years earlier. 
The reactor and steam generator segment of the industry continues to be dominated by General Electric and Westinghouse, followed at a considerable distance by Babcock & Wilcox and Combustion Engineering. The petroleum industry is represented at this stage only by Gulf General Atomics (acquired by Gulf Oil from General Dynamics in 1967), which built one small unit (40 Mwe) and has another (330 Mwe) under construction.
What is often not recognized is the importance of the fuel cycle in these installations. A recent GE $70 million award for an installation at Moscow, Ohio, included a contract of $30 million for the reactor and steam generating facilities, but one of $40 million for the initial fuel supply.  Thus, it is in the fuel area that petroleum companies are especially interested. Here they have learned from their own experience: during the l950's and 1960's, oil has replaced coal to a great extent in fossil fueled utility plants, and the oil companies are well aware that a comparable shift from oil to nuclear power may be expected in future decades. 
The fuel cycle has several distinct steps, each of which may develop its own industrial structure:
The number of uranium mining companies (well over 100) is deceptive. This step is dominated by 14 integrated mining and milling companies which produce roughly 90 percent of the crude ore and process that of other companies.  The largest firm in this step is an oil company, Kerr-McGee, with nearly a quarter of the total capacity; in addition, Kerr-McGee has a 50 percent interest in Petrotomics Co., a smaller mining and muting company with about 4 percent of the total capacity, operated by Getty Oil.
This picture could change in the near future. Demand for ore in the mid-1960's was low, following the initial enthusiasm of the 1950's which led AEC to stockpile far more ore than could be used. This had its effect on exploration and development: e.g., it was not until 1967 that the previous peak drilling rate, 9.2 million feet in 1957, was equalled. Three years later, the forecast for 1970 is nearly 30 million feet, reflecting primarily the future possibilities of the commercial market. It is significant here that most of the major oil companies (including Jersey Standard, Mobil, and Gulf) are among the largest companies now engaged in exploration and development projects.
Conversion of the U3O8 oxide from the ore to uranium hexafluoride, an essential step for enrichment in gaseous diffusion plants, has been primarily an AEC operation. The only commercial plant in operation until 1969 was that of Allied Chemical. Allied had entered the market early, on the basis of an AEC contract; when the contract expired in 1964, the plant was closed. As a commercial market appeared, Allied reopened its plant in 1968 and is in the process of expanding its capacity to 10,000 tons/year. A second commercial plant, owned by Kerr-McGee, is scheduled for operation early in 1970 with an initial capacity of 5,000 tons/year which is to be doubled in about three years. From the standpoint of future significance, however, there is a difference between the two competitors—this is the only phase of the fuel cycle in which Allied participates, while Kerr-McGee is on the way to becoming a completely integrated fuel supplier.
There is no private capability in hexafluoride enrichment, all of this step being carried out by AEC which is capable of supplying the full commercial market at present. This step accounts for one-third of the cost of the total fuel core.  What is of prime future importance here is the Administration's present consideration of the sale of AEC's three gaseous diffusion plants, since whoever purchases them will have control over the key step in nuclear fuel production.
The next step involves conversion of enriched UF6 to the dioxide, UO2, and pelletizing the powder into the form in which it is used in fuel elements. There are presently six companies with capability in this step. Three of them are oil companies—Kerr-McGee, Getty (Nuclear Fuel Services), and Atlantic Richfield (Nuclear Materials and Equipment Corp.).  Of four other firms which have announced plans to enter the market, only one (Combustion Engineering) is not an oil company; the others are Jersey Standard, Gulf General Atomic, and C/A Nuclear Fuels (a joint venture of Continental Oil and General Tire & Rubber).
The final step, fabrication of the actual fuel elements, is dominated by the reactor manufacturers. Only two "outsiders", United Nuclear and Atlantic Richfield, at present offer complete elements. The reason for this lies in the prevalence of tying contracts in which the reactor manufacturer supplies the initial core and usually one or more reloads, eliminating the possibility of other suppliers for a period of some years.  This pattern may be breaking, however, as United Nuclear has received orders for several replacement cores and Atlantic Richfield recently received its first. It appears that the major utilities are moving in this direction to develop alternative core suppliers to GE and Westinghouse, the dominant reactor manufacturers. Further, it could mean that even initial cores might be obtained from other firms, since the reactor and fuel core contracts have always been separately negotiated. This possibility may explain why Jersey Standard and C/A Nuclear Fuels have announced plans to provide complete cores.
Mergers have been of considerable importance in the entry of petroleum companies into the nuclear energy field. Thus, Kerr-McGee began uranium mining with the acquisition of Navaho Mining Co. in 1952, on the basis of which it was able to get an AEC ore processing contract. Subsequently it acquired Pacific Uranium Mines (1960), Gunnison Mining, and Lakeview Mining (both 1961). It moved into nuclear fuel production with its acquisition of the Nuclear Fuels Department of Spencer Chemical in 1962, a year before the latter company was acquired by Gulf Oil.
Gulf itself made what has perhaps been the largest acquisition to date when it purchased General Atomic (division of General Dynamics) in 1967, with both fuel core and reactor production capability. Atlantic Richfield entered the nuclear fuel business in 1967 with its merger of Nuclear Materials and Equipment Co., one of the most promising independents in the industry. Getty Oil made a similar move when it acquired Nuclear Fuel Services (one-third in 1968, and the remaining two-thirds interest from W. R. Grace in 1969); in addition to nuclear fuel capability, this company operates the only commercial plant for the recovery and reprocessing of spent fuel.
The most important acquisition questions of all may arise if the Government arrives at an affirmative decision to dispose of its three UF6 enrichment plants, which supply the enriched uranium needs not only of all U.S. users but for most of the Free World. Some concern has been expressed over the fact that the major petroleum companies comprise the one group of potential private buyers most able to afford such acquisitions.
Mention should also be made of an antitrust case in this area, United Nuclear Corp. v. Combustion Engineering, which has indirectly frustrated the attempted takeover of United Nuclear by Ashland Oil & Refining Co. Combustion Engineering purchased 21 percent of United Nuclear's voting stock from Olin Mathieson (which has played a major role in the organization of the company). United filed a private antitrust suit in Federal District Court, Philadelphia, and secured a preliminary injunction in July 1968 barring Combustion from any further stock acquisitions. In December 1968 Combustion agreed to sell its holdings to Ashland Oil, which announced a tender offer for the remaining stock; the tender offer was suspended almost immediately, however, pending settlement of the antitrust suit. In July 1969 Judge Fullam found Combustion's purchase of United Nuclear's stock to be a clear violation of Section 7 which would tend "to substantially lessen competition in lines of commerce of nuclear fuel and reload fuel." The case was finally settled in November 1969 when Judge Fullam accepted a joint consent agreement requiring Combustion Engineering to dispose of its holdings in such a way that no more than one-fifth (i.e., about 4 percent of United Nuclear's stock) would be sold to any single person or affiliated persons. This presumably would also prevent Ashland from securing the large initial block of stock on which it had been counting for its takeover.