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On 14 May 2013, the European Commission (the "Commission") begun an investigation into the possible manipulation of energy price benchmarks. Several companies in the energy sector had surprise inspections carried out by the Commission for alleged infringement of European antitrust law, namely the manipulation of the reference price for oil and bio fuel products. This investigation will most likely have very significant implications for the whole oil industry and its customers as well as the any banks, trading houses, utilities or major users who buy oil products or trade oil based commodities. The effects of the investigation will not be limited to Europe.
Decisions taken in the early stages of a cartel investigation or immediately upon discovering evidence of wrongdoing can have significant consequences. The cost of breaches and non-compliance including financial penalties, litigation, reputational damage, and unenforceable agreements can be great. Identifying and assessing competition compliance risk factors is business critical. Please consider if you have contacts in your company or clients that might be interested in our services. We have excellent competition law and energy teams in Europe and the US that can address any issues your company or clients may have in this context.
The unannounced inspections do not imply that the Commission has conclusive proof of an infringement. It only signifies that the Commission will conduct an in-depth investigation of the case as a matter of priority. The Commission also sent requests for information (RFIs) to major energy companies, price reporting agencies, oil refiners and trading houses. There is no inference that these companies are subject to the investigation. Rather the articles infer that the European Commission is using the RFIs to try to gain knowledge on how the market works, especially with regard to the Platts market-on-close (MOC) system.
When the dawn raids took place, the European Commission said in a press release that it has concerns that the companies may have colluded in reporting distorted prices to a price reporting agency to manipulate the published prices for a number of oil and biofuel products. Furthermore, the European Commission stated in its press release that it has concerns that the companies may have prevented others from participating in the price assessment process, with a view to distorting published prices. An article from Reuters alleges that the key question in the RFIs is whether there is any proof of major discrepancies between bids and offers submitted to Platts and actual deals done in the market. The above behaviour, if established, is likely to be a violation of Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU), that prohibit cartels and restrictive business practices and abuses of a dominant market position. It is possible, that the scope of the investigation may widen with the discovery of new information by the Commission.
The current focus of the investigation is on the period 2010-2013.. If the infringement was a practice that has been ongoing for many years, then the European Commission could potentially look back for the whole duration of this alleged illegal practice without limitation in time.
The alleged activity and potential impact
The commission has concerns that the companies may have colluded in reporting distorted prices to a price reporting agency to manipulate the published prices for a number of oil and biofuel products, Platts publishes benchmarks prices that are used to determine the costs refiners pay for crude oil and distributors pay for diesel fuel and gasoline. Traders report transactions to Platts. Those deals, rather than a complete record of all trades, are used to determine the price.
The effects of this investigation may well spread beyond the borders of Europe for the following reasons:
- the reference prices are used for products traded not only in Europe but around the world. Total SA (FP), Europe’s third-biggest oil company, estimates that as much as 80 percent of all crude and oil product transactions are linked to reference prices such as those published by Platts, while as much as 20 percent are linked to exchange-traded futures on Nymex and ICE. Platts prices represent as much as 95 percent of crude transactions, 90 percent of oil products and OTC derivative transactions, according to Total’s estimates.
- Price assessments could be vulnerable to manipulation because traders participate voluntarily, meaning they may selectively submit only trades that benefit their positions, according to an October report from the International Organization of Security Commissions.
- The influence of price reporting agencies stretches beyond crude and oil products. The assessments published by Platts and its competitors including Argus Media Ltd. and Reed Business Information’s ICIS are used to price the raw materials used in everything from plastic bags to car parts in the US$2.2 trillion global base chemical industry as well as coal, power, metals, emissions, liquefied natural gas and shipping rates.
- A week after the Commission's impaction, Prime International Trading Ltd, a Chicago-based commodity trading house which trades crude oil and other commodities, filed a class-action lawsuit against BP Plc (BP.L), Royal Dutch Shell Plc (RDSa.L) and Statoil (STL.OL), accusing the firms of misreporting trades in North Sea Brent, the oil benchmark which sets the price of about 70 percent of the world's crude.
Therefore, the companies affected by this investigation include not only companies who may have participated in the alleged illicit behaviour but also those companies who may have bought products, be they tangible oil-based goods or intangible financial instruments, based on the underlying benchmark rate. For example, airlines may have been affected in the latter sector given their use of hedging techniques against oil prices.
Any citizen or business who suffers harm as a result of a breach of Articles 101 and/or 102 of the TFEU is able to claim reparation from the party who caused the damage. This right of victims to compensation is guaranteed by Community law. An action is brought by a citizen/business that suffer from the breach (usually as a result of paying prices that are higher than that would have been if there wasn't a breach, is often called follow-on action. Member States are required to have effective legal framework that allow for follow-on action. Differing member states have different procedural requirements.
Previous Scrutiny
Oil companies have been the subject of the Commission before. In September 2006, it fined 14 companies €266.7 million for fixing the price of bitumen, a petroleum by-product used to make asphalt, over eight years on the Dutch market. Shell, whose fine was increased for being a repeat offender, received the biggest penalty. Price-fixing probes haven’t been confined to European markets. BP agreed to pay US$303 million in October 2007 to settle U.S. Commodity Futures Trading Commission allegations relating to claims of market manipulation. In January 2009 a BP unit, Houston-based BP America, agreed to pay US$52 million to propane buyers who accused it of trying to monopolize the supply of gas flowing through a Texas pipeline.
In April 2012, Optiver Holding BV and three employees agreed to pay US$14 million to settle market-manipulation allegations by U.S. regulators. The Dutch proprietary-trading firm used a high-frequency trading program called the “Hammer” in 2007 to affect the settlement prices of crude, heating oil and gasoline traded on the New York Mercantile Exchange. As part of the settlement, Optiver didn’t admit or deny wrongdoing.