Energy market advised to heed competition rules on collusion and consolidation 

05.05.20


The COVID-19 pandemic has created a severe demand shock for the energy market, coinciding with an oil price war that has caused prices to plummet further.

Mature basins such as the North Sea are especially sensitive to price fluctuations, and the resulting economic pressures will be felt throughout the supply chain.

Firms will therefore be looking to save costs and increase revenues wherever they can, and may be looking at mergers as a way to drive efficiencies. However, they should also bear in mind the boundaries set by competition law. 

 

UK and EU competition law prohibit anti-competitive agreements and practices. When times are toughest, the incentives for competitors to collude in relation to prices, customer allocations or tender responses are at their highest.

However, all these types of conduct attract significant risks, including significant fines (up to 10% of global group turnover), criminal prosecution and director disqualification. 

 

There are also less obvious types of competition infringement that become much more tempting in a difficult market, such as agreeing to shore up falling prices by reducing output or exchanging commercially sensitive information with competitors. Such conduct is also subject to fines and director disqualification.

The UK Competition and Markets Authority has announced a temporary relaxation of competition rules for firms responding to the COVID-19 outbreak, so as to facilitate coordination between competitors that aids the production of essential items and their distribution to consumers.

However, these measures are designed to ensure consumers can continue to get hold of key goods rather than to help companies in financial difficulty, and are therefore heavily caveated.

Equivalent EU measures are very much focused on the production of medicines and other healthcare-related goods.

The usual recommendation to take advice on any co-ordination between competing businesses therefore still applies. 

 

Businesses considering whether they could protect their profitability by acquiring or merging with rivals should keep in mind the limitations imposed by merger control.

In February, Prosafe abandoned its planned merger with Floatel after the CMA decided that it would be detrimental to competition.

Both parties provide additional floating accommodation facilities for offshore platforms. The CMA found that no other vessel type was a ready substitute, and that the cost of moving these vehicles larger distances and the value of North Sea experience meant the market was limited to North West Europe.

Based on that narrow market definition, Floatel and Prosafe between them held a significant majority of contracts and vessels.

Since the market generally operated through competitive bidding, the CMA decided that a merger between the two main players would create a risk of higher prices. 

 

The parties had argued that in future they faced diminishing, and possibly insufficient, demand for their separate services.

However, the CMA concluded that, even if that were correct, the merger would result in that diminished market experiencing a substantial lessening of competition, with possible higher prices and a reduced quality of service.

 

An economic slowdown creates incentives to merge but does not change the test for obtaining clearance.

The rejection of the Floatel / Prosafe merger demonstrates how difficult it can be to get clearance for further consolidation in markets that are already concentrated on only a few main players; a description that would cover a significant number of offshore service sectors.

Mergers can potentially be cleared if one of the parties would otherwise fail and exit the market in the short-term (as the recent clearance of Amazon's investment into Deliveroo shows), but that is a difficult hurdle to clear – the CMA may prefer to let a firm fail if its business would be more evenly distributed around the remaining players, rather than see it all captured by a single buyer. 

 

Companies seeking to respond to the current economic conditions by consolidating, particularly if they operate in a niche market, should therefore seek merger clearance advice at the early stages of any deal.
 

This article first appeared in Energy Voice.

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