OilVoice - Cooperation During Crunch Time

Cooperation During Crunch Time

Friday, August 07, 2009

Collaboration is often a necessary part of doing business in the oil industry. However, the temptation to offset the pressures of recession by manipulating the market with competitors is a dangerous urge. Fines of €553 million on each of E.ON and GDF Suez in the European Commission's recent condemnation of market sharing in France and Germany, follow the high profile marine hose case which has racked up huge fines the world over, not to mention criminal convictions and jail time for the men involved. Keeping in mind that these infringements occurred in a healthier financial climate, with tougher times must come discipline.

While both the UK and EU competition authorities can levy fines of up to 10 per cent of worldwide turnover for competition infringements, they have vowed to be pragmatic in the current climate. However, this is by no means a 'get out of jail free' card. Authorities stress that robust enforcement is necessary for economic recovery, which means that hardcore infringements - such as price-fixing or market-sharing - will continue to be met with the full force of the law and a significant arsenal of penalties.

Many companies overlook the fine line between legitimate cooperation and anti-competitive behaviour, contesting that collaboration with competitors is necessary for the survival of the sector. Although acting with good intentions is certainly no excuse in the eyes of the competition authorities, knowing when relations with competitors become too close can help ensure companies take full advantage of what the law does allow.

Not all dealings with competitors are necessarily illegal. Leeway can be found in the form of ‘cooperation agreements’. Some agreements fall inside the competition law framework but may be exempt if conditions are satisfied and others do not even trigger the rules. Although tightly prescribed, competition law permits the kinds of collaboration and competitor agreements which are beneficial to efficiency and long-run consumer welfare. Formal joint ventures and mergers are governed by different legal provisions, but there are many ways to coordinate activities in the oil industry which neither extend to that level of integration nor cross the line into illegal behaviour.

Companies must understand the various factors which influence how likely an agreement is to fall within this latitude, including the relationship between the parties, their market shares and whether their combined objectives could be achieved without the collaboration. Arrangements involving collaborative research and development, joint selling and purchasing arrangements or sharing storage or transport facilities can all be moulded to take advantage of the legal latitude in the competition law rules.

Such collaborative practices are best devised in the light of day with competition law input. Close the doors and plan in the dark and it is easy to stumble across the line into the kind of practices which heighten infringement risk. One example of potentially permissible cooperation would be a so-called 'specialisation' agreement between two oil services companies to develop a new more environmentally-friendly product: One will concentrate on research and design, the other on manufacturing, sales and marketing. As competitors divvying up aspects of a project, the rules will likely come into play. Given the correct approach, however, the agreement could take advantage of possible exemptions; for example, if the combined market-share of the parties is less than 20 per cent and there is no attempt at price-fixing, output limitation or allocation of markets or customers.

It is important to bear in mind that, even when working for the best interests of the industry, companies failing to find the right balance when engaging in cooperation agreements with actual or potential competitors can still fall foul of competition law and face significant penalties. Competition law may be technical, but it is not optional, even in a recession. However, there is light at the end of the pipeline. When established carefully and with consideration to the available exemptions, cooperation agreements can prove both beneficial to industry and compliant with the rules.

Sarah Hoskins is a lawyer in the EU, Competition & Regulatory practice of Maclay Murray & Spens LLP.