2004/284/EC: Commission Decision of 29 September 1999 declaring a concentration compatible with the common market and the EEA Agreement (Case No IV/M.1383 — Exxon/Mobil) (Text with EEA relevance) (notified under document number C(1999) 3093)
Date: 1999-09-29
Institutions: European Commission
Subjects: chemical industry, economic concentration, electrical energy, exchange of information, merger control, mining industry, oil industry

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(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 29 September 1999

declaring a concentration compatible with the common market and the EEA Agreement

(Case No IV/M.1383 — Exxon/Mobil)

(notified under document number C(1999) 3093)

(Only the English text is authentic)

(Text with EEA relevance)

(2004/284/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(2)

Having regard to the Treaty establishing the European
Community,

Having regard to the Agreement on the European Economic
Area, and in particular Article 57 thereof,

Having regard to Council Regulation (EEC) No 4064/89 of 21
December 1989 on the control of concentrations between
undertakings (1), as last amended by Regulation (EC) No 1310/
97 (2), and in particular Article 8(2) thereof,

Having regard to the Commission decision of 9 June 1999 to
initiate proceedings in this case,

(3)

Having given the undertakings concerned the opportunity to
make known their views on the objections raised by the
Commission,

Having regard to the opinion of the Advisory Committee on
Concentrations (3),

On 2 June 1999,
the United Kingdom notified the
Commission in accordance with Article 9(2)(b) of Regu-
lation (EEC) No 4064/89 (hereinafter referred to as the
Merger Regulation) that it considered that the concentra-
tion affected competition in the northwest of Scotland in
the retail motor fuel sector. On 26 July 1999,
the
Commission issued a statement of objections identifying,
inter alia, competition concerns in the market for motor
fuel retailing in the whole of the United Kingdom. On
10 August 1999 the Commission informed the United
Kingdom that in those circumstances and in accordance
with Article 9(4)(b) of the Merger Regulation there were
no grounds for referring the case to its authorities.

By decision dated 9 June 1999, the Commission found
that the notified operation raised serious doubts as to its
compatibility with the common market. The Commis-
sion accordingly initiated proceedings
in this case
pursuant to Article 6(1)(c) of the Merger Regulation.

Whereas:

I. THE PARTIES AND THE OPERATION

(1)

On 3 May 1999, the Commission received notification
of a proposed concentration by which the US undertak-
ings Exxon Corporation and Mobil Corporation were to
merge their activities worldwide.

(4)

(1) OJ L 395, 30.12.1989, p. 1; corrected version published in OJ L

257, 21.9.1990, p. 13.
(2) OJ L 180, 9.7.1997, p. 1.
(3) OJ C 87, 7.4.2004.

in the

is a diversified company
Exxon Corporation (Exxon)
active worldwide
exploration, development,
production and sale of crude oil and natural gas, the
refining and sale of refined petroleum products the
development, production and sale of various chemical
products, the production and sale of coal and minerals
and power generation. Mobil Corporation (Mobil) is a

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(5)

(6)

diversified company active worldwide in the exploration,
development, production, and sale of crude oil and
natural gas, the refining and sale of refined petroleum
products and the development, production and sale of
various chemical products. Mobil and British Petroleum
(BP) regrouped all their refining and retailing activities in
Europe into a jointly controlled joint venture, BP/
Mobil (4).

(8)

This notification concerns a full merger within the
meaning of Article 3(1)(a) of the Merger Regulation.
Exxon and Mobil signed an agreement and plan of
merger on 1 December 1998. Pursuant to this agree-
ment, Mobil will merge with a wholly owned subsidiary
of Exxon, with Mobil as the surviving corporation. As a
result, Exxon will hold 100 percent of Mobil's issued and
outstanding voting securities. Holders of Mobil common
stock will receive 1,32015 shares of Exxon common
stock for each share of Mobil common stock that they
own at the time of closing. Exxon shareholders will own
approximately 70 % of
the combined Exxon Mobil
entity, while Mobil shareholders will own approximately
30 %.

The concentration does not raise competition concerns
in the markets for exploration, development and produc-
tion of crude oil and natural gas and with regard to the
various petrochemical activities where the parties' busi-
nesses overlap. Both parties are active in the exploration,
development and production of crude oil and natural
gas and the Commission had expressed in the Article
6(1)(c) decision serious doubts on these markets. In the
Article 6(1)(c) decision,
the Commission had also
expressed serious doubts on the ‘gas-to-liquid’ market.
However, there are, for the reasons indicated in sections
A and B below, no competition concerns on these
markets.

(9)

the reasons

For
the concentration
indicated below,
would have given rise to the creation or strengthening
of a dominant position in the following markets:

— wholesale transmission of natural gas in the Nether-

lands (Section C),

— long-distance wholesale transmission of natural gas

in Germany (Section C),

II. COMMUNITY DIMENSION

— underground storage facilities for natural gas servi-

cing the south of Germany (Section C),

As the Parties' combined aggregate worldwide turn-
over (5) exceeds EUR 5 billion (Exxon: EUR 121 billion;
Mobil: EUR 47 billion), each of Exxon's and Mobil's
Community-wide turnovers exceeds EUR 250 million
(Exxon: EUR […] (*) billion; Mobil: EUR […]* billion)
and neither Exxon nor Mobil achieves more than two
thirds of its aggregate Community-wide turnover within
one and the same Member State, the concentration has a
Community dimension pursuant to Article 1(2) of the
Merger Regulation. The turnover of each of Exxon and
Mobil exceeds EUR 250 million in the EFTA territory
(Exxon: EUR […]* billion; Mobil: EUR […]* million).
Therefore, the case is an EFTA cooperation case.

— group I base oils in the EEA (Section D),

— motor fuel retailing in Austria, Germany, Luxem-
bourg, Netherlands and the United Kingdom (Section
E),

— motor fuel retailing on toll motorways in France

(Section E),

— aviation lubricants worldwide (Section F),

— aviation fuels at Gatwick Airport (Section G).

III. COMPETITIVE ASSESSMENT

A. EXPLORATION, DEVELOPMENT AND PRODUCTION

PROCESS

(7)

The oil industry is generally divided into the upstream
oil and gas sector (i.e. exploration, development and
production of crude oil and natural gas), the downstream
sector (refining and marketing of fuels, distribution of
natural gas, manufacture of lubricants) and the various
petrochemical activities.

(4) Case IV/M.727, BP/Mobil of 7 August 1996 (OJ C 381, 17.12.1996,
p. 8). The activities of the joint venture do not include marine and
aviation lubricants.

(5) Turnover calculated in accordance with Article 5(1) of the Merger
Regulation and the Commission notice on the calculation of turn-
over (OJ C 66, 2.3.1998, p. 25). To the extent that figures include
turnover for the period before 1 January 1999, they are calculated
on the basis of average ecu exchange rates and translated into euro
on a one-for-one basis.

(*) Parts of this text have been edited to ensure that confidential infor-
mation is not disclosed; those parts are enclosed in square brackets
and marked with an asterisk.

(10) Upstream activities comprise three types of commercial
activity: the finding of new reserves, the development
and the commercial exploitation of those reserves. The
finding of new reserves is generally described as ‘explora-
tion’. Development concerns the setting up of adequate
infrastructure for future production (oil platforms, pipe-
lines,
terminals, etc.). The exploitation of reserves is
called ‘production and sales’. Previous Commission deci-
sions (6) focused primarily on the impact of the then
notified transactions on the production and sales
segment.

(6) See Commission decision in Case IV/M.1200, Arco/Union Texas (OJ
C 16, 21.1.1999, p. 8) Commission decision in Case IV/M.88, Elf
Enterprise (OJ C 203, 2.8.1991) and Commission decision in Case
IV/M.85, Elf Occidental (OJ C 160, 20.6.1991).

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(16)

(17)

(18)

(19)

(11)

Exploration and development is a time and capital-inten-
sive activity, which includes a number of successive
steps. Firstly, countries which believe that hydrocarbon
reserves could be discovered on their territory (such a
country is called the ‘host country’) organise bids to
grant exploration licences. The bidding processes vary
from public auctions in the USA to situations where
bidders are pre-selected by the host country. This pre-
selection can be based to varying extents on technical
financial strength or other considerations
capability,
(lobbying, cultural affinities, etc.).

(12) Often, companies bid together in order to spread risks
or to bring complementary skills. In some circumstances,
host countries may require that some bidders join
together in order to get the licence for exploration. Host
countries may also require that their national oil compa-
nies be granted a share in any discovery made in the
block under licence.
In all cases when the licence is
granted jointly to a number of companies, an operator
for the block is named. The role of the operator is to
manage technically and financially the exploration and
possibly the development and production phases of the
project. Most of the important decisions require unani-
mity from all the partners in the project.

(13)

(14)

The total time between the granting of a licence and
actual production typically ranges from five years to 15
years. Costs of exploration and development projects
can reach the region of EUR 7 billion for projects in the
‘frontier areas’. The split of expenditures between the
exploration stage and the development stage is typically
respectively 15 and 85 %.

It must also be mentioned that when production is
started in a new area, infrastructure needs to be devel-
oped. This includes notably oil platforms, pipelines and
terminals. Smaller fields, which would not be economical
to develop on their own, can then be exploited through
using the infrastructure already put
in place for the
bigger field. Such smaller fields are sometimes called
‘satellite fields’. Exploration in the North Sea has typically
followed that process.

RELEVANT PRODUCT MARKETS

(15)

It is often argued that exploration, development and
production and sale are too closely inter-linked for more
than one distinct product market to be defined. It may
however be argued that exploration constitutes a sepa-
rate product market. Indeed, it could be argued that a
firm engaged in exploration has two categories of
clients: the host country, to which it has generally under-
taken to provide a future flow of resources in case oil or
gas is found, and the subsequent producers and sellers of

oil and gas that may buy it out or join in the develop-
ment and production. The transfer of rights over blocks
is a widespread practice in the industry.

the time of exploration,

Since the possible contents of the underground are not
known at
the Commission
considers that it is not justified to make a distinction
between exploration for oil and exploration for natural
gas. As regards the development, production and sales
product markets, since gas and crude oil have differing
applications and are subject to varying pricing behaviour
as well as cost constraints, the Commission considered it
the decision initiating
appropriate at
proceedings to define one relevant product market for
the development, production and sales of crude oil and
another relevant product market for the development,
production and sales of natural gas.

the stage of

The parties have contested the existence of an explora-
tion market arguing that it is too closely linked to the
subsequent steps of the production process to make it a
possible product market. As will be explained in the
section on effects of the merger on competition, it is not
necessary for the appraisal of the effects on competition
of the notified operation to define precisely the relevant
product markets according to the various stages of the
exploration, development, production and sales of crude
oil and natural gas, respectively.

RELEVANT GEOGRAPHIC MARKETS

The Commission considers that the exploration market
is worldwide in scope and agrees with the parties that
from a European-demand perspective
relevant
geographic markets are worldwide in scope for develop-
ment, production and sales of crude oil and probably
include the EEA, Algeria and Russia for gas.

the

The Commission examined whether smaller geographic
areas could constitute relevant markets. Some purchasers
of gas make, for security of supply reasons, a distinction
in their purchasing policy as to the origin of the gas on
the basis of the perceived political risks and their influ-
ence on the security of supply with regard to Russian
and Algerian gas (Russia accounted for approximately
17 % of total western European supply and Algeria for
12 %). The most explicit example of this is the Spanish
legislation ordering that not more than 60 % of the
natural gas demand can come from the same country. It
is, however, unlikely that a price increase of gas
produced in the EEA would not be defeated by a small
increase in the proportion of gas purchased from Russia
and Algeria. In any case, the precise definition of the
relevant geographic market can be left open, as this does
not alter the conclusion of the competitive assessment.

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MARKET PLAYERS

(20)

Traditionally, companies involved in the exploration,
development and production and sales business were
grouped in three categories with different profiles, stra-
tegic objectives and future exploration and development
capabilities. The categories are:
the State-owned
(mainly OPEC and some OECD-based companies such as
Statoil) producers, (ii) the ‘majors’, that is, vertically inte-
grated oil companies with international activities and (iii)
a multitude of substantially smaller oil companies, most
of which are non-integrated upstream explorers and/or
producers.

(i)

(21)

The competition concerns identified by the Commission
were raised mainly by the fact that, as a result of the
notified transaction, as well as of that notified by BP
Amoco and Arco, a distinct (fourth) tier of players might
prevail on the exploration and development activities.
This group of ‘super majors’ would be composed of
Exxon-Mobil, BP Amoco-Arco and Shell.

POSITION OF THE PARTIES IN THE MARKET

Exploration

(22)

There is no widely available or accepted indicator of
market power for the exploration market. Measurement
of market power could be carried out on the basis of the
number of blocks where licences have been granted, the
number of blocks where a given company is
the
operator, net acreage, total acreage under operatorship,
capital expenditure in exploration, etc. There is wide
agreement that proxies based on number of blocks or
acreage would not be reliable as they cover widely
varying situations.

(23) On the basis of capital expenditures, Exxon-Mobil, BP
Amoco-Arco and Shell would represent together, with
roughly equivalent shares, between 30 and 40 % of the
total capital expenditures in exploration, development
and production scheduled for 1999. The next largest
player would represent one third of the average size of
the three main players.

often include expenditure on investments such as gas
liquefaction and infrastructure rather than sums invested
purely in exploration.

(25) Another possible way to measure market power would
be to calculate the share of expected production of these
companies (since current exploration and purchase of
third party rights will translate into future production).
On the basis of the market investigation, the combined
market share of the three super majors of the non-OPEC
production, in some 10 years from now, would again be
in the 30 to 40 % range.

Production and sales

(26)

(27)

Exxon and Mobil would have together around [0 to
10]* % and [10 to 20]* % of, respectively, the worldwide
production crude oil and the European production of
natural gas in 1998. These numbers would be 3,7 % and
8,4 % for a combined BP Amoco-Arco and 3,3 % and
13,9 % for Shell. These numbers have not materially
changed over the years. Of the total natural gas produc-
tion in the EEA, the three super majors account for
almost
the natural gas
consumed in the EEA, the three super majors account
for less than [20 to 30]* %.

[30 to 40]* %. However, of

The industry often refers to proven reserves as a proxy
for market power. On this basis, the parties would hold
approximately [0 to 10]* % and [10 to 20]* % of, respec-
tively,
the worldwide proven reserves crude oil and
European wide proven reserves of natural gas. However,
it may be argued that proven reserves are not a relevant
indicator of future production. Proven reserves as stated
by the oil companies have just a stock function and, as
any other private company, private oil companies need
to limit their stocks as much as possible. By means of its
proven reserves, a company indicates that it is (or is not)
able to replace the foreseeable depletion of existing oil
fields and thereby to remain a viable player on the
market. However, national oil companies do not need to
justify further exploration and development investments
to their shareholders since they benefit from the national
reserves, which usually largely exceed their needs. There-
fore, such an indicator involves an upward bias in
favour of national companies.

(24)

The parties have contested the adequacy of this measure
of market power for the following reasons. First, capital
expenditures vary according to the sites explored. This
biases downwards the market share of national oil
companies in low-cost OPEC areas. Secondly, capital
expenditures often do not reflect the correct share of
ownership of
the output. This is
because State companies often pay a share which is
disproportionately lower than their licence interest or
take of crude oil output. Thirdly, capital expenditures

the licence or of

(28)

the OPEC
Currently and for the foreseeable future,
producers collectively enjoy substantial market power in
crude oil production. They control a substantial amount
of production and proven reserves (approximately 40 %
and 75 %, respectively, whereas Saudi reserves account
for more than one third of OPEC reserves). OPEC has
been able in a number of instances in the past to influ-
ence (7) crude oil prices up to a certain level.

(7) Prices in the crude oil trade markets may be significantly influenced

by mere announcements following an OPEC meeting.

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the national
(29) Gazprom (17 %) and Sonatrach (11 %),
Russian and Algerian suppliers, account
for approxi-
mately 30 % of EEA sales of natural gas and their
reserves account
the
combined proven reserves that can be sold in the EEA.

for 88 % (Gazprom 81,5 %) of

creation of an oligopolistic structure combining both
OPEC and the three super majors, thus creating incen-
tives for alignment on OPEC's commercial strategies.
OPEC would then be in a position to raise and sustain
prices at the highest price threshold above which new
exploration would be triggered.

(30)

(31)

(32)

(33)

EFFECTS OF THE MERGER ON COMPETITION

The Commission raised the following serious doubts as
to the effect on competition in the markets for explora-
tion, development, production and sales of crude oil and
natural gas. The notified acquisition together with the BP
Amoco–Arco merger could lead to the creation of a
fourth tier of competitor in the industry composed of
Exxon-Mobil, BP Amoco-Arco and Shell. Whatever the
parameter retained (market capitalisation, oil and gas
production, proven reserves, etc.) there is now a material
gap between these three super majors and the remaining
majors.

It was considered whether it would be possible that the
three super majors would in the future be in a privileged
position to find and develop new important reserves
compared to the other players in the market. This could
come from their increased financial strength that would
now enable them to hold a portfolio of risks of increased
size. On the contrary the other competitors would have
to pick and choose the areas where they intend to
become active. Because of their less favourable access to
capital and capacity to spread risks, smaller companies
would, if they wanted to continue developing important
fields, have to become smaller partners to the super
majors to benefit from their combination of resources.
Their only other alternative would be to become niche
players focused on exploration. This may result in the
super majors controlling the access by other explorers to
the new frontier areas first at the time of the granting of
the first licences and then for further surrounding blocks
since the super majors will have built the necessary
infrastructure.

Since the typical time lapse between the first stages of
exploration and the start of production varies between
in this scenario there would be a
five and 15 years,
possibility that within some 10 years, new non-OPEC
reserves and production would be influenced to a signifi-
cant extent by the super majors.

This could affect the production and sales markets in the
following way. The competitive constraints
limiting
OPEC's ability to function as a cartel would be lessened.
These three companies would have the same interests as
OPEC and would be likely to align themselves on the
OPEC decisions by limiting output to a certain level
without fearing that others would take advantage of this.
This would translate into the strengthening of OPEC's
dominant position in the crude oil market through the

(34) On the basis of

the

foregoing,

the Commission
concluded that the operation raised serious doubts as to
its compatibility with the common market and the func-
tioning of the EEA Agreement, which should be further
explored in an in-depth investigation.

(35)

(36)

(37)

The parties contested the Commission's serious doubts
on mainly two grounds. First, the super majors would
still be facing competitive constraints from smaller oil
companies. Secondly, host countries control oil and gas
production and in any case would have no incentives to
let oil companies restrict production.

The market investigation confirmed that small explorers
do not seem to believe that the emergence of a new
class of super majors would threaten their position.
Because of size differences they would not compete for
the same type of exploration rights and they would not
be dependent on the bigger explorers to sell their oil. In
addition, majors such as Chevron, Texaco, Elf or Total
would all seem to have unchanged capacity to explore
and develop fields anywhere in the world. The parties
have provided numerous examples of the involvement
of majors in current projects all over the world.

contracts

Second, the market investigation confirmed that typical
concession
and
explorers-producers prohibit
from limiting
their output (and leave such a decision to the discretion
of the government).

governments

the latter

between

(38) As for natural gas, it is unlikely that the parties together
with the other super majors could control EEA produc-
tion and therefore that competition would be affected.
Even if such a market did exist (in view of the perceived
political risk attached to the gas production in Russia
and Algeria), no collective dominance between the
super-majors can be argued in view of the strong posi-
tion of Norwegian gas delivered by competitors. In addi-
tion, producers of natural gas face very concentrated
demand in the hand of the national wholesale gas trans-
mission companies such as SNAM (Italy) or Transgas
(Portugal).

(39)

Therefore, the Commission concludes that the concen-
tration will not lead to the creation or strengthening of a
dominant position on the markets for the exploration,
development, production and sale of crude oil and
natural gas.

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B. GAS-TO-LIQUIDS TECHNOLOGY

(47)

(40)

The Commission expressed serious doubts in its Article
6(1)(c) decision that the notified transaction creates a
dominant position with regard to gas-to-liquids tech-
nology.

The Commission agrees with the parties that the notified
concentration, even assuming that they would hold an
essential portfolio of GTL patents, will not give rise to
any dominant position given the small impact it would
have on petroleum products markets.

(41) Gas-to-liquids technology (GTL) is a process of conver-
sion of natural gas into finished fuels. GTL technology
enables the conversion of natural gas into liquid form at
the site of exploration and production, and thus facili-
tates the commercial development of gas reserves and
transportation of natural gas from remote locations that
are not accessible by pipelines. In addition, it has the
advantage of producing high-purity products.

C. NATURAL GAS

INTRODUCTION

Description of the ‘gas column’

(42) At present GTL processes cannot produce economic
substitution products for conventional refining products.
Customers' demands for GTL products are expected to
come first from the lubricants and petrochemical indus-
tries, due to the high purity and molecular arrangement
of feedstock generated by GTL technology. Subsequent
demands may include the other petroleum products.

(43)

There are two GTL pathways at present, that is Fischer-
Tropsh (F-T) and methanol, or methanol-to-gasoline
process (MTG), which Exxon and Mobil have each devel-
oped respectively. Information collected in the market
indicated that Exxon has developed the single largest
patent portfolio directed to the F-T process, and holds
foreign and US patents directed essentially to every
significant step in the pathway. Industry sources stated
that […]*.

(44) Other oil and gas companies have limited patent posi-
tions in one or the other, or sometimes both, processes.
However, none of these companies have positions that
cover all of the essential steps of either pathway.

(45)

(46)

the strong patent position of

The patent positions of Exxon and Mobil currently
represent alternative, although not substitutable, posi-
tions. Post-merger,
the
parties would create disincentives to any potential new
entrant. Finally, the substantial financial resources neces-
sary to compete in GTL (for example: currently a F-T
plant costs [between USD 1 and 3]* billion to build)
would prevent both expansion by incumbents and entry
by potential competitors.

In response to the Commission's serious doubts, the
parties explained that GTL technology did not constitute
a market in itself and that the quantities of petroleum
products that such a technology could enable to produce
in the next decade would be minute compared to those
produced through the traditional refining process.
In
addition, other companies would hold patent portfolios
sufficient to enable them to develop the technology.

(48)

(49)

The natural gas that streams from the well contains
elements that need to be removed before the gas reaches
pipeline quality, composed almost entirely of methane
and ethane, and can be injected into the high-pressure
distribution pipelines. This gas is sold to the wholesale
transmission companies that, in turn, sell the gas to the
end consumers

There are two levels of gas wholesale transmission
companies. There are the ‘long-distance’ wholesale trans-
mission companies and the ‘short-distance’ wholesale
transmission companies. Long-distance wholesale trans-
mission companies purchase gas from gas producers and
transport this gas over long-distances through high-pres-
sure pipelines. They then either sell to other more local
wholesalers, namely the short-distance wholesale trans-
mission companies, or directly to end customers or
provide international
long-distance transit services to
other long-distance wholesale transmission companies
located in other countries.

(50)

In addition to the supply of gas, the services offered to
the end customers include:

for

the

— the provision of ‘swing’: consumption of gas is not
evenly spread around the year. This is particularly
important
local distribution companies
(LDCs) that supply via their low-pressure pipeline
grid the households who require, for their heating
purposes, a lot of gas in the winter and much less in
the summer. A key element
to provide swing is
access to storage, mostly in the form of underground
storage facilities,

— the provision of other

services

such as quality
control (ensuring that the gas provided is within the
agreed specifications), balancing (ensuring that the
input of gas in the pipelines is in line with the
required output), back-up (agreements with other
wholesalers and/or producers interconnected with
the own pipeline network in which they guarantee
the proprietary supply falls out) and
supply if
metering.

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(51)

(52)

(53)

(54)

(55)

The end customers can be grouped in three categories:
power generators, (firm or interruptible) industrial custo-
mers and LDCs. These customers differ in the following
way:

(57)

There are important price differentials between the
different customer categories, even when their gas
demand is the same. This is so because prices are tradi-
tionally based upon the value of the customer's alterna-
tive energy source (Anlegbarkeitsprinzip). This refers to
the alternative energy source to which a customer might
switch: heating oil for households, heavy fuel for indus-
trial users and, to a certain extent, nuclear energy or coal
for power generators.

There are also qualitative differences when considering
the supply to the different customer categories. In this
respect, reference is made to the‘ swing’ requirement for
supplies to LDCs and the difference between firm (their
gas supply cannot be interrupted) and interruptible
industrial consumers. These aspects equally have an
impact on the price.

(58)

(hereinafter

The last difference is the legal framework resulting from
Directive 98/30/EC of the European Parliament and of
the Council (8)
‘the Gas Directive’) and
national
implementation measures (liberalisation). The
Gas Directive requires Member States to open up their
markets before 10 August 2000 so that by then gas-
their annual
fired power generators,
consumption level, and final customers consuming more
than 25 million cubic metres (MCM) per year on a
consumption site basis, are free to contract for natural
gas
the
(‘eligible customers’). The total opening of
increasing to 28 % in
market must be at least 20 %,
2005 and 33 % in 2010. The threshold for eligible
customers will be reduced to 15 MCM in 2005 and 5
MCM in 2010.

irrespective of

to the system,

the organisation of access

For
the
Member States may choose between two procedures
which must operate in accordance with objective, trans-
parent and non-discriminatory criteria. The first proce-
dure concerns the ‘negotiated access’ whereby natural
gas undertakings and eligible customers negotiate volun-
tary commercial agreements and whereby the relevant
gas undertakings have to publish the terms of use of
their system before 10 August 2001 and on an annual
basis thereafter. The second procedure is the ‘regulated
access’ whereby natural gas undertakings must give
access on the basis of published tariffs set by a relevant
authority in the Member State.

(56)

The Directive allows for an important conditional dero-
gation procedure whereby the Commission can accept,
that gas undertakings can
under certain conditions,
refuse access if this would cause them serious economic
and financial difficulties because of take-or-pay commit-
ments accepted in one or more gas purchase contracts.

(8) OJ L 204, 21.7.1998, p. 1.

In the Netherlands, the recently introduced proposal for
a new gas law goes considerably further
than the
minimum requirements of the Gas Directive. Consumers
with an annual consumption of 10 MCM (accounting
for 44 % of total annual Netherlands consumption) are
already free to purchase gas. As from January 2002,
clients with an annual
consumption of between
170 000 m3 up to 10 MCM will be free. As from
January 2007 all consumers (including households) will
be able to source their gas freely. There is no special
regime for power generators. The Netherlands has opted
for the ‘negotiated access’ and Gasunie has published its
TPA tariffs in August 1998.

i.e.

agreements,

demarcation

In Germany,
the wholesale transmission companies
traditionally had regional monopolies and had concluded
regional
agreements
whereby the wholesale transmission companies agreed
not
to undertake wholesale activities in each other's
designated territory. This is forbidden since 29 April
1998, the date of the entry into force of the Energy
Industry Act. The Act makes 100 % of
the German
market open, i.e. all customers are ‘eligible customers’.
The act also stipulates that municipalities have to make
available rights of way for the construction of pipeline
grids. The new competition act stipulates that network
operators must not deny third parties access to networks
without justified, objective reasons. In case of a refusal,
the matter
competition
authority or directly before the administrative court.
Since February 1999 the industry associations are nego-
tiating the ‘Verbändevereinbarung Gas’ which should lay
down the criteria whereby (negotiated) third-party access
is going to be given, together with indicative prices.

submitted to the

can be

Contractual framework

(59)

The European gas industry has operated on the basis of
long-term contractual arrangements between buyers and
in order to
sellers. The parties have indicated that
achieve the finance necessary for the investment in the
production and distribution infrastructure,
the gas
producers had to conclude long-term agreements with
their buyers. A gas field would only be taken in produc-
tion if a buyer for the gas, typically one or more national
wholesale transmission companies, has been found.

(60) On the basis of such agreements,

investments would
also take place in the necessary distribution infrastruc-
ture (terminals and pipelines). Contracts are concluded
sufficiently in advance of the actual production start to
allow the necessary infrastructure to be built. In turn,
the wholesale
conclude
contracts with their clients whereby they endeavour to
match their aggregated buying volume with long-term
contracts with their clients. It can be said that tradition-
ally the wholesale transmission companies balanced the
demand with the supply.

transmission

companies

L 103/8

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Official Journal of the European Union

7.4.2004

(61)

for

also provide

Typical features of the long-term contracts are the take
and/or pay commitments for the volumes. The contrac-
tual price on each level
is typically constructed as a
netback price minus an agreed margin for the client. A
contract will
three-yearly price-
reopeners whereby the price might be reviewed if there
is a material change in the market of the buyer (gas-to-
gas competition, change in alternative energies and so
forth). The contracts also contain a parallel sales clause
whereby the buyer is entitled to lower his take obliga-
tions with the volume that the seller sells directly in the
buyers' territory. The gas companies [i.e. the buyers]*
argue that
this is necessary to avoid the producers
selling their gas twice (once to the wholesale transmis-
sion company and a second time directly to the whole-
sale transmission company's client). On the other hand,
such agreements are an important element of stability in
the gas distribution chain as it maintains a certain hier-
archy of producer — wholesale transmission company
— end consumer.

(62)

The policy to price gas by means of the alternative ener-
gies of the buyer's clients, also called the market value
principle, is in the view of the European gas companies
the key element to explain the building and expansion
of a European gas infrastructure and, at the same time,
allows the consumers to benefit from competitive prices.
Maximising the income stream from gas sales in this
way and maintaining the acceptance by all gas players of
this principle is thus a key concern for the incumbent
gas operating companies.

(63)

[…]*

Brief overview of the gas column in the Netherlands
and Germany

(64)

the largest gas-producing
The Netherlands is one of
countries in the EEA. It is a net exporter of gas. The
largest equity producers in the Netherlands are NAM, a
joint venture (JV) between Exxon and Shell, and EBN,
the Dutch State's oil and gas company. Exxon and Shell
and the Dutch State (via EBN and directly) own Gasunie,
the wholesale distribution company to which almost all
Dutch gas is sold. Gasunie sells [80 to 90]* % of the gas
consumed in the Netherlands and owns the total Dutch
gas wholesale infrastructure (with the exception of one
pipeline). Gasunie has concluded long term exclusive
supply agreements with all
the regional distribution
companies concerning sales to clients with an annual
demand [below a certain level]*.

(65)

There is gas production in Germany. This accounts for
approximately 20 % of the German gas demand. The
main producers are BEB, the German production and
distribution JV between Exxon and Shell, and Mobil.

Around 80 % of the gas consumption is imported from
Norway, Russia and the Netherlands. The most impor-
tant importer and wholesale transmission company in
Germany is Ruhrgas. Exxon, Shell, Mobil and BP
together with German coal and steel producers are the
owners of Ruhrgas. Other importers are BEB, Thyssengas
(where Exxon and Shell each have a 25 % interest and
RWE-DEA has 50 %; together these companies control
Thyssengas) and VNG (the eastern German wholesale
transmission company, where BEB and Ruhrgas are
shareholders). Mobil and EWE, a company in which the
parties do not have an interest, also import some gas for
German consumption. All of the above are the tradi-
tional
long-distance wholesale transmission companies
whose position has been challenged by Wingas, a JV
between BASF and Gazprom (the Russian gas producer),
by means of their newly constructed pipeline network.

(66) Gas is sold by the German producers and importing
wholesale transmission companies (referred to as ‘long-
distance wholesale transmission companies’) to a series
of regional wholesale transmission companies (referred
to as ‘short-distance wholesale transmission companies’).
The around 19 long and short-distance wholesale trans-
mission companies sell on the gas to around 700 LDCs
who in turn supply the households.

WHOLESALE TRANSMISSION MARKETS

Relevant product market

(67)

(68)

(69)

The parties consider that the distribution and marketing
of natural gas can be divided into a wholesale transmis-
sion segment and a local distribution segment. Whole-
sale transmission companies aggregate gas from produ-
cers. They then sell it to a mix of a second tier of whole-
sale companies (the German short-distance wholesale
transmission companies),
local distributors and large
end-users. Transmission companies utilise high-pressure
pipeline systems and storage facilities to deliver gas at
the location and volumes required by their customers.
Local distributors sell on the gas to end-users (such as
households).

The parties consider that the suppliers at the wholesale
and local distribution levels of trade tend to be different.
The parties have no direct presence in the local distribu-
tion segment.

In addition to the distribution and marketing of natural
gas, the parties qualify in the notification ‘natural gas
transportation — pipelines and LNG shipping’ and
‘natural gas
separate markets. The
to be
Commission agrees with the parties that natural gas
transportation and natural gas storage constitute distinct
product markets.

storage’

7.4.2004

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Official Journal of the European Union

L 103/9

(a) Wholesale transmission versus local distribution

market

sion companies is nothing more than a technical compli-
cation as everybody is able to bring gas to the German
border.

(70)

Long-distance and short-distance wholesale transmission
companies sell gas via high-pressure pipelines to indus-
trial customers, power generators and local distribution
companies. Local distribution companies sell on the gas
to end-users such as households and residential custo-
low-pressure
mers via their extensive (street-by-street)
pipeline network grid. Local distribution companies buy
from the wholesale companies the swing and other
related services. The Commission therefore agrees with
the parties that local distribution constitutes a distinct
product market. As the parties are not directly active on
this market, this product market is not further assessed
in the scope of the present procedure.

(b) Long-distance versus short-distance wholesale
transmission market: long-distance wholesale is
a distinct product market where entry depends
on the goodwill of the incumbents or on a very
high sunk-cost investment

(71) As

explained above,

the German gas wholesaling
industry is characterised by a two-tier structure:
long-
distance transmission companies sell gas that they have
imported directly from foreign producers and trans-
ported over long-distance pipelines to the short-distance
companies. It needs to be assessed whether this type of
service could be easily substituted by the short-distance
increase in the
companies in case of a hypothetical
prices charged to short-distance companies.
In such
circumstances, the only way short-distance companies
could defeat a price increase would be to get directly the
gas from the producers, i.e. to integrate upwards in the
vertical chain. To do so, short-distance companies (or
possibly the end customers) would need to get similar
pricing conditions from gas producers to those enjoyed
by long-distance companies and be able to transport the
gas over long-distance. From its market investigation,
the Commission concludes that even in the face of a
price increase the short-distance companies would lack
the incentives to by-pass long-distance companies.

(72)

[…]*

(i) The parties' view: everybody can import gas

(73)

The parties consider that the relevant market consists of
the sales of German and imported gas by the around 19
long-distance and short-distance wholesale transmission
companies to industrial customers, power generators
and local distribution companies. The parties consider
that the specific activities of the long-distance transmis-

(74)

(75)

(76)

First, the parties indicate that imports of small volumes
are possible. They refer to a couple of small-volume
import contracts such the ones […]*.

Second, the parties consider that the cost of entering
into the business by means of investment in reception
facilities, pipelines and storage is a natural feature of a
long-term capital intensive industry and does not consti-
tute a barrier to entry. Specific reference is made to the
investment made by Wingas to illustrate that it remains
profitable to invest in German gas infrastructure. The
parties also point out that investments are not needed to
import gas […]*.

Third, the parties refer to the provisions of the new
German Energy Law and the legal obligation for pipeline
owners to offer spare capacity to third parties. Therefore,
sales to end consumers in Germany are a realistic possi-
bility and reference is made to the decisions of a certain
number of
local distribution companies to purchase
directly from the producers and the fact that industrial
groups purchase centrally.

(ii) This is not corroborated by the Commission's market

investigation

(77)

The market
investigation has not corroborated the
parties' opinion that importing gas is merely a ‘technical
complication’. The following statements have been made
by some of the 11 German short-distance wholesalers:

— ‘To achieve interesting prices by way of an import
contract, one is required at present to buy very big
as,
quantities with buying obligations
amongst others, own investments or financial partici-
pations in projects or companies. Such an activity is
hence typical
that bundle a big
demand and have large financial means to bear the
import-related cost risk. When importing, the supply
security by way of diversification of
the supply
sources plays an important role.’

for companies

as well

— ‘To import, one would require a parallel pipeline
network to the producers (or to the transmission
points at
the border) or TPA. The short-distance
wholesaler could not estimate the necessary costs
and time involved.’

— ‘It is difficult to sell additional import quantities in
Germany to the clients as these quantities can only
go to regional distributors. Marketing of gas directly
to end consumers is only possible with considerable
efforts and proves to be unrealistic at present.’

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Official Journal of the European Union

7.4.2004

(78)

In their reply to the statement of objections (the reply),
the parties have re-stated that purchasing small volumes
is possible, that the costs for importing are readily avail-
able (by means of own research or via available consul-
tant firms), that the costs for import infrastructure are
typically less than [0 to 5]* % and that supplies and
customers are accessible
(demand is growing and
existing contracts expire). The Commission recognises
that the costs for importing can be calculated. The other
points will be dealt with further below.

(79)

It can be noted that the Bundeskartellamt has in a recent
procedure (9) concluded that the long-distance wholesale
transmission market
relevant
constitutes
product market.

a distinct

(iii) German gas cannot challenge a price increase of imported

gas

(80) German gas is all sold in Germany, where it competes
with imported gas. However, German gas production
accounts currently for around 20 % of total consump-
tion and is expected to decrease to [less than 15]* % by
2010. Wholesale transmission companies that want to
satisfy their demand therefore require increasing access
to imported gas, i.e. to the services of the long-distance
wholesale transmission companies.

(81)

to the

long-distance wholesale

In addition, German gas is committed to a very large
extent
transmission
companies so that, in general, the availability of German
gas for other companies is too limited to challenge a
price increase of imported gas. German gas production
and reserves are held for around [70 to 80]* % by the
long-distance wholesale transmission companies BEB
([20 to 30]* %). The
([40 to 50]* %) and Mobil
remaining [20 to 30]* % of German production (thereby
accounting for about [0 to 10]* % of German demand)
is done by RWE-DEA with around 7,5 %, Wintershall
and Preussag with each around 5,5 % and Erdöl-Erdgas
Gommern with around 4,5 %. RWE-DEA commit to sell
60 % of
their annual production to Ruhrgas and
Preussag commits to sell 45 % of its annual production
to Ruhrgas. The largest part of Erdöl-Erdgas Gommern's
long-distance
sold via VNG, another
production is
wholesale transmission company.

(9) The coal and steel aspects of the case have been dealt with by the
Commission in Case
IV/ECSC.1252, RAG/Saarbergwerke. The
German decision is summarised in the BKartA's biannual working
report and its press release of 4 February 1998.

(iv) Access to foreign gas at competitive conditions is not and
will not be feasible post merger: the potential entrants in
the long-distance wholesale transmission market depend
on the services of the incumbent companies

(82)

The day-to-day business of any short-distance wholesaler
depends, to a significant extent, on the pipeline network,
storage facilities and other services provided by the long-
distance transmission companies. To upset such essential
suppliers through by-passing them for part of
their
services would be a risky decision in view of the scope
for retaliation from the long-distance wholesale trans-
mission suppliers.

long-distance

(83) However, there is one short-distance wholesale transmis-
sion company that does not depend on the wholesale
transmission
transmission services of
companies. This is Erdgas Münster (EGM), a company
that sells German gas produced by its shareholders, the
important German gas producers: BEB ([20 to
most
30]* %), Mobil
([20 to
([20 to 30]* %), Wintershall
30]* %), Preussag ([10 to 20]* %) and RWE DEA ([0 to
10]* %). The shareholders are obliged to sell their whole
production in a specific part of Northwest Germany via
EGM (accounting for [less than 10 %]* of total German
gas consumption) and,
the company is
assured of its gas supplies […]*.

in this way,

(84)

[…]*, BEB and Mobil would, after the concentration,
control the strategic decisions of EGM. Such decisions
include the position of EGM in a future liberalised
market environment
(see further below). The parties
claim that they would not control EGM as […]*. This
reasoning cannot be accepted. Exxon exercises joint
control in the sense of the Merger Regulation over BEB
and, in addition, it would make economic sense for Shell
to agree to […]* as, thereby, Shell would also benefit
from the advantages of being able to control EGM.

(85) Although both Mobil and BEB are long-distance whole-
sale transmission companies, Mobil's position on that
market is substantially smaller than that of BEB. There-
fore, Mobil would have an interest, pre-merger, to main-
tain the possibility to use EGM as an instrument in a
future liberalised market environment. There is, there-
fore, not necessarily an alignment of interest between
BEB and Mobil. This ability to be a potential competitor
would be suppressed post-merger through the establish-
ment of a formal control on EGM.

(86)

The parties have also made some references to direct
calls for tenders to foreign suppliers by a couple of rela-
tively minor local distribution companies. In the call for
tender,
them
the local distribution companies, all of
Wingas customers, request quotes for supplies to the
German border and indicate that they would organise
the transport within Germany themselves. Another
example mentioned by the parties is the decision of
Stadtwerk
directly.
However, it results from the Commission investigation
that these calls for tender were not successful.

(SW) Viernheim to

purchase

(87)

(88)

(89)

(90)

7.4.2004

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Official Journal of the European Union

L 103/11

The fact that there may be sporadic calls for tenders
does not mean that the local distribution companies
consider that it is feasible to transport themselves the
gas within Germany. It therefore does not mean that
they consider that
in competition with the
incumbents.

they act

The producers that would want to enter the market do
not only rely on the German companies to sell their gas
in Germany, but they also rely to a varying extent on
the incumbents for their transit of gas to other export
markets. For instance, Dutch gas transits the pipelines of
the German incumbents to reach Switzerland and Italy
(and possibly even Poland), Norwegian gas
transits
Germany to reach Switzerland and Russian gas transits
Germany to reach France.

It i s unlike ly that sma ller companie s could g e t
i nte r e st i ng p r i c e s or v olu me s or
t r adi -
ti onal sup p li e r s w ould by-p ass t h e i nc u mbe nts

th at

(93)

gas from Norwegian, Danish and Russian producers in
common (Ruhrgas […]* %, BEB […]* % and Thyssengas
[…]* %). By combining their demand,
the consortia
should be able to get, via long-term contracts, better
prices than any other company that would negotiate the
contract on a stand-alone basis. The parties disagree
with this and indicate that purchase prices are unrelated
to volume, but are set by alternative fuels' prices. The
Commission cannot agree to this argument as, if it were
taken to its logical extreme, it would imply that no price
competition is possible within the European gas industry
as everybody would charge the same price, namely the
alternative fuels' price. This is clearly not correct as
parties have a wide freedom to assess the parameters of
the gas price, even using links to alternative fuel indexes.

It also has to be noted that buying in common reduces
the incentive of the producer to by-pass the wholesale
transmission companies in selling directly or indirectly
to others in the their territory. This is so because, when
several
the
producer risks losing all of his/her clients even if he/she
would only by-passes one of them.

companies

purchases,

combine

their

The long-term (10, 20 or 30 years) take and/or pay
contracts whereby the off-take obligation of the whole-
sale transmission company is reduced by the amount
that the producer sells directly (or via other companies)
in the area of the transmission company (also called
‘parallel sales clauses’),
increases the barriers for other
companies to obtain supplies.

Furthermore, the suppliers have no interest in by-passing
their traditional clients if this would lead to gas-to-gas-
competition (GTGC) reducing the prices obtainable in
the market. And if the supplier is not willing to offer
lower prices, there is no reason for the customer to
switch. GTGC and price reduction is therefore the most
likely outcome. As the producer receives net-back prices,
such a price reduction would affect all gas sales. Selling
to newcomers therefore puts the producers at risk of
possible damaging price competition. […]*

(91) According to […]*, parallel sales clauses stimulate the
wholesale transmission company and the supplier to
compete for the same end-user and are thus pro-compe-
titive. However,
such competition is only likely to
happen if the profit made by the supplier on its direct
sales more than compensates both the short-term loss of
net-back value on the
remaining
contracted sales volume to the wholesale transmission
company and the long-term loss of risking to lose sales
to the wholesale transmission company when the
existing contract ends. This is unlikely to happen so that
parallel sales clauses also act as a barrier to entry.

totality of

the

(92)

The Commission also notes that
the most
important German long-distance wholesalers have
purchased a substantial part of their non-German origin

three of

(94) And even if, as the parties argue, other incumbents such
as VNG and Mobil can purchase gas directly and indivi-
dually at similar prices, this does not imply that the
same may be possible for newcomers. The incumbents
will endeavour to use their position and influence vis-à-
vis the producers to push them not to supply to compe-
titors. Wingas has indicated that it had concluded a
number of years ago a supply agreement for Norwegian
gas, but that the GFU (the Norwegian gas sales organisa-
tion) had refused this. In addition, […]* has stated that
‘[…]* will continue to try to prevent that […]* is able to
buy […]* gas.’

(95)

companies

Even if new volumes might be contracted, the long-
distance wholesale
have
transmission
concluded long-term (take or pay) supply agreements
(short-distance
important customers
with the most
supply companies, local distribution companies and so
forth). It may therefore be difficult to sell the volume so
these long-term agreements form an additional
that
to entry in the long-distance market. The
barrier
Commission recognises that these contracts all end one
day and that gas demand is growing by 2 to 3 % per
year. These contracts are, therefore, not an insurmoun-
table barrier to entry, but they undeniably make entry
more difficult than in a market where there are no long-
term commitments between buyers and sellers.

L 103/12

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Official Journal of the European Union

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(96)

Finally, the German long-distance wholesale transmission
companies have spent a lot of money in recent years
and will probably continue to do so in downstream
vertical
integration by buying equity participations in
short-distance wholesale transmission companies and in
local distribution companies. [The Commission considers
that]* this is aimed at maintaining the current supply
structure. This will further increase the barriers to entry
into the market.

(v) Access to the infrastructure or duplication are no options

Du pli c ati on of
e x ce ssi v e sunk c osts

i nfr a str uc tur e would i nvolv e

(97)

(98)

The important capital investments of the incumbents in
reception facilities, pipelines, storage and quality adjust-
ment cannot be used for any other purpose although
some gas pipelines might be converted against a
substantial cost
in oil pipelines. The investment can
therefore be considered to be, for a very substantial part,
a sunk cost.

The parties indicate that the cost of entering the gas
business cannot be reasonably construed as a barrier to
entry as the cost of the import infrastructure is typically
less than […]* of
the gas purchased.
the value of
However, the import infrastructure is not the only infra-
structure required (the most important part might be the
long-distance pipeline network) and it remains that the
important capital
investment is, for a very substantial
part, a sunk cost.

(99)

it is always cheaper and quicker for the
In addition,
incumbents to increase their capacity of pipeline trans-
port by adding compressors than it is for a newcomer to
build a new pipeline.

(100)

It is, therefore, not expected that a newcomer to the
market will start constructing a new, major high-pres-
sure pipeline network in Germany. In other words, the
‘Wingas experience’ is not likely to be repeated. Wingas
is a sort of a ‘lucky combination’ between a very big
(probably even the
largest) German industrial gas
consumer that was not happy with the prevailing prices
and a very big Russian producer that had a conflict of
interest with the incumbents. This conflict of interest
will be further explained in the competitive assessment
part.

(101)

In addition, the net-back that the supplier can expect to
achieve from renewing the contract with the original
wholesale transmission company is greater than the
expected net-back from a newcomer who has to make
a higher
(and therefore
new investments

requires

margin). Furthermore, such a newcomer would have to
‘fight’ to get his volumes sold, which will lead to price
reductions for all players on the market and this is again
reflected in a reduced net-back price for the producer.

T h e i ndustr y -pr opose d th i r d-par ty a c ce ss w i ll
h a v e a li mi te d i mpac t on th e a bi li ty of cu sto-
me r s
i n c omp e ti t i on
wi t h t h e long -di st ance tr ansmi ssi on compa ni e s

to di r e c t ly i mp o r t g a s

(102) For the purpose of this decision, the Commission is not
satisfied that the possible conclusion of the Verbändever-
einbarung Gas (VV Gas) will
lead to market entry by
means of third-party access. This conclusion is based on
the current state of play, namely the proposal by the
German gas industry within the VV Gas negotiations.

(103) The VV Gas is an initiative of four trade federations: (a)
BGW,
the association of the German gas and water
industry; (b) VKU, the association of the local distribu-
tion companies; (c) BDI, the German industry association
(industrial consumers) and (d) VIK, the German Power
Generation Association. Germany has chosen,
in the
context of the Gas Directive, for a ‘negotiated TPA’ and
the VV Gas wants to set the guidelines for such a nego-
tiated TPA. The German competition authority and/or
the Commission will have to assess the VV Gas when
adopted. The aim of the VV Gas is, as indicated in a
common letter of the four federations to the German
Minister for Economic Affairs, ‘to set a signal to the poli-
tical environment that no further regulation for natural
gas is required. The VV Gas shall fulfil the criteria of
market-oriented,
and
simple and thereby it has to help in the development of
a natural gas stock exchange. The VV Gas shall contain
the basic principles and rules for access to the network
as well as a simple calculation of the tariffs. The VV Gas
shall be concluded before the end of 1999.’

competitive,

transparent

fair,

(104) Despite this common declaration, it does not seem, on
the basis of the ‘reference case’ developed by the gas
industry, possible to conclude that by means of this type
of TPA it will be possible to import gas in competition
with the incumbents.

(105) The first element is that the reference case stipulates that
TPA is only possible if pipeline capacity is available and
that long-term take or pay contracts shall be taken into
consideration. It results from the market investigation
that it is difficult to assess whether capacity is available
and the incumbents have contracted up to 100 % of
their demand by means of
long-term take or pay
contracts. The VV Gas will therefore not fundamentally
endanger the situation of the incumbents.

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Official Journal of the European Union

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(106) The second element is that the reference case indicates
that the third-party gas has to be compatible with the
gas specification in the relevant pipeline network of the
pipeline owner. This is defined in such a way that ‘the
specification of the gas is so that it can be taken in the
pipeline without adaptation by the transporter; that it
has a pressure that enables to take the gas without adap-
tation by the transporter and that it has a specification
that allows usage together with other gas
in the
network.’ These might not be easy criteria to fulfil in
view of the different gas specifications currently traded
in Germany (see the discussion below on LCV/HCV gas
and the fact that both LCV and HCV gas is currently
sold in Germany within several distinct specifications).
Natural gas is thus not a fully homogeneous product
and the nature and practicability of TPA for electricity
and telecom is different from TPA for gas. Or, as indi-
cated in a document submitted by the parties,
‘a main
difference with the VV Electricity is that for gas a distinct
agreement is necessary with each pipeline operator and
that
the different gas specifications and the pressure
differences at the starting and ending point complicate
the concrete organisation.’

(107) A third element is that the duration of a transport agree-
ment has to be at least a year, with two starting dates
every year (1 October and 1 April). It can be noted that,
therefore,
the TPA contracts will always include the
winter peak utilisation so that there is all the more
chance that the pipelines will be running at full capacity.
In addition, it is the express aim of this requirement to
prevent the development of a spot market. The relevance
of this is that the development of a spot market would
unbalance the traditional system. The role of the whole-
sale transmission companies would be especially endan-
gered as a spot market would facilitate a direct contact
between the end consumer and the producer with
reduced margin for the wholesaler as a consequence.
[…]* Nothing of this kind is foreseen by the VV Gas.

(108) A fourth element is that ‘[…]*’.

(109) Finally,

the VV Gas does not provide for access to
storage, for access to quality adjustment services (conver-
sion of LCV/HCV) nor for back-up.

Conclusion

(111) The Commission concludes

the German long-
distance wholesale transmission market constitutes a
separate product market.

that

Low calorific value and high calorific value gas

(112) During the course of

the investigation, several

third
parties have argued that in assessing the impact of the
operation on the European gas markets a distinction
should be made between ‘low calorific value’ (LCV) and
‘high calorific value ’(HCV) gas. The Commission agrees
with the parties that LCV and HCV gas is part of an
overall natural gas market. The Commission has reached
this conclusion of the basis of demand-side substitution.
In other words, a relative price increase of LCV gas of
between 5 to 10 % would become unprofitable in view
of
that consumers in the relevant area in
Germany (10) could switch to HCV gas.

the fact

(113) The distinction between LCV and HCV gas has its origin
in the discovery (1959) and exploitation (1963) of the
massive LCV Groningen gas field in the Netherlands, the
largest gas field in Europe and one of the largest in the
the natural gas
world. This field meant
industry in Europe. The whole consumption of natural
gas was thus oriented on gas having the specifications of
the Groningen field. However, the classification of LCV
gas contains a broader spectrum than below or up to
the Groningen calorific value. Based upon the definition
for low calorific gas used in Germany (DVGW-code of
practice G 260/I — Gas Quality) LCV gas is defined as
having a Wobbe Index of up to 13 kWh/m3.

the start of

(114) The specifications of Groningen or LCV gas have an
impact on the total downstream ‘gas column’. High-pres-
long-
sure pipeline transmission (carrying gas over
distances), underground storage facilities,
low-pressure
pipeline transmission (enabling the gas to be supplied at
the appropriate low pressure for the burners used by
households) and the installation by which the gas was
consumed by the final consumer have been designed
and can only run either uniquely for LCV or HCV gas.

(110) The parties point out in the reply that the final agree-
ment on the VV Gas will require the support of end-
users, the German cartel office and the German Govern-
ment. With so many stakeholders
involved in the
process, the parties fail to understand the Commission's
speculation that the end result will not facilitate both
TPA and competition. The Commission has to make its
assessment on the basis of the information that it has
available. This information is the gas industry's reference
case. Hence, to base an assessment on anything else
would be speculation.

(115) Later gas discoveries were of a different quality with a
higher calorific value as the gas contains less inert
In fact, LCV gas was only found in other
nitrogen.
onshore
and northwest
in the Netherlands
fields
Germany. Today, there are still specific LCV gas columns
in the Netherlands, northwest Germany, a part of
Belgium (in the provinces Antwerp and Limburg) and a
part of France (Nord — Pas de Calais).

(10) It is not necessary for the purpose of this case to decide whether
there is a separate LCV and HCV gas market in the Netherlands, as
the outcome of the case would not be materially different.

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Demand-side substitutability:
column from LCV compatible to HCV compatible

switch of

the gas

(a) A relative permanent price increase of LCV gas will speed

up the ongoing substitution

(116) The parties have provided charts illustrating the contin-
uous ongoing substitution of LCV gas consumption by
HCV gas in Germany since 1975 based on industry
statistics
indicating both the absolute and relative
volume of the different types of gas (HCV, LCV, coke-
oven and other gas).

(117) Against this background, the question to be investigated
is what
the reaction of a wholesale transmission
company would be to a price increase by LCV gas
producers. The reaction of the wholesale transmission
company will be influenced by its possibility to switch
itself to an HCV producer and by the incentives coming
from the possibility for its customers to switch to
another wholesale transmission company that might
supply cheaper HCV gas.

is underground storage. This poses

(118) Whereas it is technically easy to switch a whole LCV
pipeline network to HCV,
the main constraint on a
wholesale transmission company to change its infra-
structure
the
problem that one needs to change the LCV gas in the
the
storage to HCV gas. According to the parties,
conversion is simple and straightforward. According to
Wingas, such a conversion takes time (typically three
storage cycles and thus two years for the relevant facil-
the varying calorific
ities) and is costly (in view of
content of the extracted gas when HCV gas is injected in
a LCV facility).

(119) However, already before the end of the third storage
cycle the extracted gas may be of HCV quality. More-
over, all wholesale transmission companies have the
knowledge of ‘blending gas’ (adding LCV gas to HCV gas
to obtain a HCV gas of lower calorific value but within
the HCV gas range, or vice versa) to achieve the desired
specification. It may therefore be relatively easy for them
to adjust the gas that they extract from their storage
facilities during the conversion period by means of
simple blending to keep it within the LCV or HCV speci-
fication. One can imagine that at the start they would be
able to add LCV gas to keep the extracted gas within the
LCV range, and that gradually they would add HCV gas
to bring it to HCV specification. This would probably
reduce the costs of the conversion considerably.

(120) On the basis of the above information, the Commission
concludes that faced with a permanent relative price
increase of LCV gas compared to HCV gas, the technical
restrictions faced by the German LCV storage owners are
not such that this would stop them switching. Therefore,
the relative price increase contributes to the acceleration
of the conversion that will have to take place sooner or
later.

(b) The customers of the LCV gas supplying wholesale trans-
relevant

mission companies have alternatives
German area to switch to HCV supplies by Wingas

in the

Industr i a l
sw i tc h i ng

c ustome r s

and p owe r

g e ne r a tor s

(121) The market

for

confirmed that

investigation has

It could,
an important

their annual gas bill.
feasible

the
switching costs for most industrial customers and power
generators to adjust their burners are low as a percen-
therefore, be
tage of
economically
industrial
consumer or power generator to have a new specifically
dedicated pipeline built linking the customer to a nearby
(up to 50 km at most) HCV high-pressure pipeline. The
question therefore is whether there are HCV pipelines in
the neighbourhood that are owned by other companies
than those that have an interest in LCV distribution. If
this is the case, the risk of losing such clients to another
wholesale transmission company will make the ‘incum-
bent’ LCV wholesale
transmission company more
inclined to undertake the switch itself (if the price was
increased by the producer) or would make a price
increase by the wholesale transmission company unpro-
fitable.

In NRW,

(122) With regard to industrial demand for gas, a distinction
has to be made between Nordrhein-Westfalen (NRW)
and Lower Saxony. In NRW, the gas sales per square
kilometre are around three times higher than in Lower
Saxony and the number of industrial clients per square
kilometre is 2,5 times higher.
the Wingas
‘Wedal’ and ‘Midal’ pipelines are therefore probably in
reach of a sufficient number of clients to make a switch
In addition, Wingas' underground storage
possible.
facility is situated in Rehden, on the NRW/Lower Saxony
border, thereby enabling the company to provide the
necessary swing to its clients in NRW/Lower Saxony. In
Lower Saxony, Wingas also has its HCV high-pressure
pipeline network. It seems that the only important area
that might not be in reach of this network is the Hann-
over area. However,
the available scope is probably
enough to make a price increase unprofitable.

(123)

It remains, however, that a specifically dedicated pipeline
needs to be built from the Wingas high-pressure HCV
pipeline to the industrial customer. This takes time and
costs money and has, in practice, only proven profitable
if the client agrees to an exclusive supply arrangement
with a duration of between five and 10 years. The
incumbent supplier of the LCV gas is therefore in a posi-
tion to increase his price over the prevailing HCV price
by a margin up to the incremental costs of the new
infrastructure. However,
are not
unusual in the industry so that the cost of the additional
pipeline can be offset profitably as has proven the
Wingas experience in other regions.

such agreements

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(124) Wingas argues that in Lower Saxony only a few custo-
mers with significant demand are located within reason-
able distance of its high-pressure HCV pipeline so that
its experience in other regions does not apply in what
Wingas considers to be a distinct geographic market,
namely the northern German LCV gas area.

(125) The Commission acknowledges that switching costs are
not always low for industrial customers. [A company]*
has indicated that industrial consumers that use natural
gas as a feedstock for a chemical process may face costs
of more than EUR 20 million. However, the Commis-
sion is not aware of such clients in the relevant German
area.

(126) Overall,

the Commission concludes that a sufficient
number of German LCV industrial customers and power
generators have the possibility to switch their demand to
Wingas when faced with a permanent price increase of
LCV gas to contribute to make such a price increase
unprofitable.

L DCs sw i tc h i ng

(127) LDCs supply households and other residential customers.
They therefore require suppliers that are able to offer
them high swing. They would only consider a switch if
their new supplier is able to offer them HCV high swing
gas. Wingas has its Rehden storage facility in the area
and is, therefore, able to supply the swing.

(128)

It remains that the distributor and/or the supplier must
also absorb the costs involved in switching the house-
holds. These costs are estimated to be around EUR 60
per household on the basis of a detailed cost estimate
provided, via the parties, by an experienced ‘household
switching’ company. On the basis of a typical household
consumption of 80 MBTU/year, a local distributor price
of EUR 3,4/MBTU and a typical household gas price of
EUR 8/MBTU, a price increase of 5 % for LCV gas
supplied by the LCV wholesale transmission company
reduces the margin of the local distributor by EUR 13,5.
A price increase of 10 % reduces the local distributor's
margin by EUR 27. Therefore,
the switching costs
would be totally recouped by the local distributor within
two to four years. As the typical duration of a supply
contract between a wholesale transmission and a local
distribution company is between 10 and 20 years, the 5
to 10 % price increase would be made unprofitable by
LDCs switching to an alternative HCV gas supplier.
Furthermore, once a household has been switched to
HCV, it can safely run on the LCV gas until HCV enters
is a
the

local distribution grid. The

consequence

if
temporary and marginal loss of efficiency; however,
this switch takes place in the summer months, the effi-
ciency loss will be minimised.

(129)

It has been argued that even if a switch from LCV to
HCV gas would be possible, a LDC would not switch if
it would become, by doing so, an ‘HCV island’ in an LCV
area. This would have important
security-of-supply
consequences that the customer might not be willing to
take. Wingas considers this as the main reason why,
despite offering discounts of 5 to 8 % (information from
the parties) compared to the existing price level,
it
persuaded fewer than five local distributors (Stadtwerke)
in Germany to switch from LCV to the HCV.

(130) This argument cannot be accepted in the present situa-
tion of a permanent relative price increase. In such a
situation,
the clients to switch
would be the same so that, in the end, there would be
no island situation anymore.

the incentives for all

(c) The alternatives of the incumbent wholesale transmission
company's customers will further increase the incentives for
the incumbent to switch

(131) When facing a price increase of LCV gas relative to HCV
gas, it is normal rational behaviour for a wholesale trans-
mission company that concludes that a substantial part
of
its customers have the possibility to switch to a
competing wholesale transmission company to defend
its position. The company will therefore ensure that it
itself is also able to offer the cheaper HCV gas. There-
fore, the ‘incumbent’ wholesale transmission company
will speed up the switch itself.

Conclusion with regard to demand-side substitut-
ability

(132) For the purposes of this procedure,

the Commission
concludes that a permanent relative price increase of
LCV gas would be unprofitable in view of the fact that
(a) sooner or later the LCV gas chain has to be converted
on HCV gas, (b) that such a price increase will speed up
the conversion, (c) that there are alternatives in the rele-
vant German area in the form of HCV supplies by
Wingas and (d) that this knowledge will further increase
the incentives
the LCV wholesale transmission
companies to switch themselves their consumption area.

for

(133) However, it remains that the costs of switching represent
a competitive advantage of the transmission company
that is able to offer the prevailing specification as it
increases the threshold to change to another supplier.

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Relevant geographic market

(134) The parties consider that, in general, the wholesale trans-
mission markets are national. They indicate that distribu-
traditionally been organised largely on a
tion has
national basis through national or regional operators.
However, the parties consider that the trend towards
cross-border purchases following the advent of the Gas
Directive cannot be ignored. The parties consider that
attempts to increase post-merger prices in individual
Member States would be defeated not only by competi-
tion at the national level, but also by increased cross-
border purchases by wholesale transmission companies,
local distribution companies, power generators and large
industrial users.

(141)

[…]*

(142)

[…]*

(143)

[…]*

(144)

[…]* (12)

(145)

[…]*

(146)

[…]*

Definition of the regions

(135) As the ownership of the infrastructure is still organised
on a largely national basis and as the conditions for
third-party access will remain essentially fixed on a
national basis,
the
markets will remain in the near future at most national.

the Commission considers

that

(a) Netherlands

(136) For the reasons indicated in the previous point,
Commission agrees with the parties that
wholesale transmission market is national.

the
the Dutch

(b) German long-distance wholesale transmission

market(s)

such as

the ownership of

(137) With regard to Germany, there are indications that, at
present, the markets may still be regional. The regions
would be defined by (a) the previous existing, but now
illegal, demarcation agreements
those that
Ruhrgas had concluded with BEB and Thyssengas, and
the long-distance high-pressure
(b)
transmission pipelines. Despite the fact that the demarca-
tion agreements are illegal since April 1998, only two
agreements with a German client outside the long-
distance transmission company's own regional territory
for annual
have been concluded, both by Ruhrgas
supplies of […]* MCM each and via the construction of
a new pipeline. […]*

The old demarcation regions are still relevant in view of the
fear of retaliation

(147) The regions would thus consist of

border),

‘BEB’-region

the ‘Thyssengas’-
region (western part of Northrhine-Westphalia along the
Belgian/Dutch
(Hamburg,
Schleswig-Holstein and parts of Bremen and Lower
Saxony), ‘VNG’-region (Mecklenburg-Vorpommern, Bran-
denburg, parts of Saxony and Saxony-Anhalt — a region
where Ruhrgas does not have its own pipeline network)
and the ‘Ruhrgas’-territory (the remainder of the ‘Alte
Bündesländer’ and the parts of Saxony and Saxony-
Anhalt serviced by a short-distance wholesale transmis-
sion company that is jointly owned by Ruhrgas and
VNG).

Position of some other long-distance wholesale transmission
companies

(148) Mobil has never had an ‘own region’ nor high-pressure
pipelines, but was able to reach its customers by way of
third-party access agreements with […]*.

(149) Wingas

competes, by means of
its own pipeline
network,
in each of these territories and most short-
distance wholesale companies are in reach of its pipeline
network (corridor of at most 50 km). However, on that
basis, it cannot be concluded that the competitive condi-
tions within the whole country are equal. […]* the
respective long- and short-distance wholesalers differ-
entiate their prices depending on the fact whether or not
the customer has an alternative in the form of supplies
by Wingas.

(138) The internal documents of […]*, […]* and […]* confirm
the continuing relevance of the old demarcation regions
in view of the fear of retaliation.

The proposed German industry TPA regime (VV Gas reference
case) will not influence the geographic setting of competitive
conditions

(139)

[…]*

(140)

[…]* (11)

(11) […]*

(150)

It results from the description of the VV Gas in the
product market section that the Commission does not
consider that the VV Gas will make it possible to import
gas in competition with the incumbents.

(12) […]*

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(151) For the reason indicated in that section with regard to
the built-in limitations of the VV Gas concept and the
reference case of the gas industry such as (a) the general
difficulty to assess whether capacity is available, (b) the
fact that with a minimum duration of one year the
winter peak is always taken into account when assessing
the free capacity in a pipeline, (c) the difficulties resulting
from the specifications of the gas (caloric value, pressure
and so forth) and (d) the limited scope of the services
offered, the Commission considers that the VV Gas is
not sufficient to consider, from a prospective analysis
point of view, that the market is national. In addition,
the Commission takes into account that in case of a
dispute between a party that requests TPA and a party
that refuses TPA, the procedures before the competition
authorities and/or the courts might take several years
before a ‘precedent’ case is settled.

Conclusion

(152) On the basis of the above, the Commission considers
that
the wholesale transmission markets in Germany
might still be regional, following the former demarcation
lines. However, it may not be necessary, for the purpose
of the present decision, to decide the geographic defini-
tion of the long-distance wholesale transmission market
within Germany as the concentration also leads to the
strengthening of a (collective) dominant position if the
transmission market were
long-distance wholesale
national.

(153) The parties have stated in the reply that the market is
national, not regional. They indicate that gas prices are
determined by competing fuel, not regional
location.
However, this is in contradiction with the information
obtained by the Commission in the market investigation
that prices differ also on the basis whether or not a
client has an alternative supplier (gas to gas competi-
tion). The parties also state that a forward-looking
analysis must take account of the recent elimination of
demarcation and the impending industry agreement on
negotiated third-party access. However, there remain too
many uncertainties to conclude that the final agreement
would lead to a national market where competitive
conditions are the same.

Position of the market participants

(a) The Dutch wholesale transmission market

1. Relationship between Dutch gas producers and Gasunie

the Netherlands. Following NAM's discovery of the large
Groningen gas field in 1959, the Netherlands Govern-
ment organised the Dutch gas industry to reflect the
Groningen field's strategic importance for the Nether-
lands economy. To this end, the Netherlands Govern-
ment in 1963 entered into an agreement with Exxon,
Shell and NAM, under which NAM is assigned the
responsibility to develop and produce the Groningen
concession for the account of the Groningen partnership
in which NAM has 60 % and the Netherlands Govern-
ment, via EBN, 40 %. In addition, Exxon, Shell and the
Netherlands Government
formed a company called
Gasunie, which was entrusted with the marketing of all
Groningen gas. The Netherlands Government holds a
50 % equity interest in Gasunie (10 % direct — 40 % via
EBN), while Exxon and Shell each hold 25 %. Finally, the
Netherlands Government entered into a private law
agreement with Gasunie under which Gasunie must seek
the Government's approval for certain commercial deci-
sions.

(155) Since 1959 NAM has obtained production licences for
other Dutch on and off-shore gas fields and roughly
50 % of its current production comes from these other
‘small’ fields (compared to Groningen). The parties have
indicated that most of
these concessions are also
produced for the benefit of partnerships in which EBN
generally has a 40 to 50 % participation. The gas of
these fields has been sold to Gasunie. In addition, all
future discoveries by NAM must be sold to Gasunie as a
consequence of [… (13)]*. In total, NAM accounts for 75
to 80 % of total Dutch gas production (in view of EBN's
equity interest in NAM's production, NAM accounts for
about 45 % of production on a net equity basis). EBN
has also consistently marketed all its equity interests via
Gasunie. […]*.

(156) Until 1994, Dutch producers were obliged to sell all gas
to Gasunie.
that was destined for the Dutch market
Dutch producers could sell themselves to the export
market, although the prices were and are still controlled
by the Government. Furthermore, Gasunie is obliged to
buy gas from the small fields prior to production at
financial conditions fixed at the start if the producer has
chosen to offer the gas to Gasunie. […]*

(157)

It appears that, in general, the Netherlands Government
would not give its approval on the price in an export
contract of Dutch gas if
this price were below the
Gasunie ‘net-back’ price, called the ‘norm inkoop prijs’
(NIP or normative buying price).
the
Government ensures that it receives its share of the ‘gas
cake’.

In this way,

(154)

In 1947, Exxon and Shell formed a 50/50 JV, called
(NAM), with the
Nederlandse Aardolie Maatschappij
object of exploring and producing hydrocarbons within

(13) […]*
(14) […]*

(158)

[…]* (14)

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(159) NAM owns two of the three Dutch underground storage
facilities (depleted gas fields) which it has leased for
100 % to Gasunie. The third facility, operated by BP
Amoco, is also leased totally to Gasunie. Therefore, only
Gasunie is able to offer underground storage facilities in
the Netherlands. Whereas there are a couple of depleted
Dutch gas fields that could be turned into underground
storage facilities servicing the Dutch market,
it is not
likely that these facilities will be developed by others in
the risks involved. Such risks relate to the
view of
required investment and to the fact that Gasunie could
always lower its tariff, thereby making such investment
unprofitable. It is also noted that […]*.

(165)

[…]*

(166)

[…]*

(167)

[…]*

(168)

[…]*

(169)

[…]*

4. Mobil's position on the Dutch market

2. Gasunie's corporate governance structure

(160) Gasunie is owned 50 % by the Dutch State and 25 %
each by Exxon and Shell. Decisions are taken with […]*
majority voting. There are no specific shareholder agree-
ments. Therefore Exxon has no de jure control over
Gasunie within the meaning of the Merger Regulation.

(161) As to de facto control, the parties argue that there is no
[…]*.
common interest between Exxon and Shell.
However,
is not
it
for the reasons indicated below,
necessary to decide whether or not Exxon has de facto
control over Gasunie within the meaning of the Merger
Regulation.

3. Gasunie's gas selling position in the Dutch market

(162) Gasunie is the dominant Dutch transmission company
with around […]* % of total sales. Gasunie explicitly
recognises its dominant position in the introduction of
its new tariff system. […]* (15). Furthermore, according
to Gasunie's ‘Plan of Gas sales 1999’, Gasunie will
supply […]*.

(163) Gasunie owns or has exclusive rights to (a) the whole
Dutch high-pressure pipeline grid (with the exception of
one line in the south of
the Netherlands by which
British gas is imported), (b) all processing and blending
facilities, (c) all (underground and Liquid Natural Gas)
storage capacity.

(164)

It also appears from several [documents]* that Gasunie
faces and will continue to face little competition. These
documents, quoted in the following points, support
Gasunie's internal assessment that it is a company with a
dominant position.

(15) […]*

(170) Mobil

is one of

three actual competitors.

It has,
according to the parties, a [less than 5]* % share on the
total market. Statoil (or the Norwegian joint negotiation
committee that markets all Norwegian gas) has an esti-
mated 4 % market share by means of its supply contract
to an important power generating plant. EnTrade, a
trading company of the Dutch RDC Pnem/Mega, is the
other competitor with a 4 % market share resulting from
the sale of British gas to industrial consumers and a
power generator within the reach of its partly owned
Zebra HCV pipeline in the South of the Netherlands. It
has a TPA transport agreement with Gasunie for the
supply to one customer.

(171) Mobil's position in the Netherlands stems from its Euro-
pean gas sales strategy […]*. This European strategy will
be described in the following paragraphs. This descrip-
tion is also of relevance for the assessment of the posi-
tion of Mobil on the German market

M ob i l ' s E u r op e a n g a s s a le s st r a t e g y

(172)

[…]*

(173)

[…]*

(174)

[…]*

(175)

[…]*

(176)

[…]*

M ob i l i n th e N e t h e r l a n d s

(177)

[…]* (16)

(178)

[…]*

(179)

[…]*

(180)

[…]*

(16) […]*

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Official Journal of the European Union

L 103/19

(b) The German long-distance wholesale transmis-

sion market(s)

BPAmoco and Preussag. It has to be noted that the Schu-
bert shareholders have contracted to supply […]* % of
their proven domestic reserves additions to Ruhrgas.
These supplies to RG are transported by […]*.

Market participants

(181)

In the product market definition section, the Commis-
sion has reached the conclusion that the long-distance
wholesale transmission market
is a separate product
market where the entry depends on the goodwill of the
incumbents. It has also been concluded that new entry
by means of a new own infrastructure investment is not
likely to occur.

(182) The incumbents are those companies that (a) purchase
gas from foreign producers, (b) are able to transport this
to their customers by means of a high-pressure pipeline
network, (c) are able to provide swing and (d) are able to
provide other related services. They either perform these
services on the basis of
their own investments or
because they have received for parts of them third-party
access of the others.

(183) Ruhrgas, BEB, VNG, Thyssengas and Wingas are the
most important players on the market. They all perform
the above services by means of their own investment.

(184) Exxon is an active player on the German market by
means of its long-standing 50/50 JV with Shell, BEB.
Exxon acknowledges that it has joint control together
with Shell over BEB within the meaning of the Merger
Regulation. Exxon is also active on the relevant market
by way of its 25 % share of Thyssengas. The remainder
of the shares is held by Shell (25 %) and RWE (50 %).
Exxon acknowledges that it has joint control with RWE
and Shell over Thyssengas within the meaning of the
Merger Regulation.

(186) Ruhrgas is formally controlled by the ‘Bergemann pool’,
a shareholder pool representing 59,76 % of the votes.
The pool groups the 25 % shareholding of BPAmoco
together with the votes held by a group of German coal
and steel producers (that are also very often active in
electricity production and distribution). These compli-
cated rules must prevent
that Ruhrgas would be
controlled by multinational oil and gas groups.

(187)

[…]* (17)

(188) Furthermore,

in view of

the shareholders agreement
between BEB and Ruhrgas, a […]* % vote is required if a
question is ‘essential to BEB’. This gives BEB therefore a
veto for all questions that are essential to it. The parties
have indicated that this clause has never been invoked.
[…]*

(189)

[…]*. It therefore seems that, despite the absence of de
jure control, the oil companies have de facto influence
on Ruhrgas.

(190) Verbundnetz Gas (VNG)

is a long-distance wholesale
transmission company active in the new German Länder.
It was founded in the 1960s and privatised after the
German re-unification.
shareholders are
Ruhrgas (36,8 %), Wintershall (15,8 %), local communes
(15,8 %) and BEB (10,5 %). In addition, Statoil, Erdöl-
Erdgas Gommern, PreussenElektra and Gazprom each
hold 5,2 %. It follows that all VNG's shareholders with
the exception of the local communes are gas producers
and/or long-distance wholesale transmission companies.

Its current

(191) Wingas is a 65/35 % JV between Wintershall (a BASF

subsidiary) and Gazprom.

is part of

(185) Ruhrgas is the most important German long-distance
transmission company. Both Exxon, through BEB, and
Mobil are shareholders of Ruhrgas. BEB's shareholding
accounts for 29,5 %. The largest part of the voting rights
attached to this shareholding, (25 %) is voted directly;
the ‘Schubert pool’
the remainder (4,5 %)
within Ruhrgas. The Schubert pool accounts for 15 % of
the votes in Ruhrgas. Members of the pool are Mobil
(7,4 % share), BEB (4,5 %), BPAmoco (0,5 %) and
Preussag (2,6 %). The votes must be expressed as one
block and the Schubert pool rules stipulate that no
member can have more than […] % of the voting rights
within the pool. It is claimed by the parties that, as a
consequence of these rules, the current voting rights of
BEB in the Schubert pool would be attributed, post-
to
merger,

(192)

[…]*

is not

(193) EWE is de facto a short-distance wholesale transmission
company as it
in the business of re-selling
imported or own-produced gas to other companies
operating a high-pressure grid (long and short-distance
wholesale transmission companies). However, it imports
directly from Gasunie a substantial part of its gas sales
via its own high-pressure (LCV) pipeline. It is, therefore,
considered to be a long-distance wholesale transmission
company.

(17) […]*

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Market position

(a) L oc a l

(201) The abovementioned import

figures give the long-
distance wholesale transmission companies the following
market shares: RG [50-60]* %, BEB [10 to 20]* %, VNG
[10 to 20]* %, Wingas [0 to 10]* %, TG [0 to 10]* %,
Mobil [0-10]* % and EWE [0 to 10]* %.

(194) BEB has indicated that it has a market share of [40 to
(Schleswig-Holstein,
northern Germany
50]* % in
Hamburg, Bremen and Lower Saxony. However,
this
‘Northern Germany’ region is larger than the BEB demar-
cation region that only comprises parts of Bremen and
Lower Saxony. The remainder
is ‘Ruhrgas territory’,
whereby Ruhrgas had concluded in turn a demarcation
agreement with Erdgas Münster. It therefore results that
the BEB market share in its demarcation region is in
excess of [40 to 50]* %.

(195)

[…]*

(196)

[…]*

Mobil's German strategy

(202) Mobil has described in its European strategy paper its

position in Germany as follows:

[…]*

(203)

[…]*

(204)

[…]*

(197) RG's strategy paper from October 1998 indicates that as
a consequence of GTGC, it cannot maintain its 100 %
share in its area. Although no precise data are available,
the fact that RG accounts for around [+ 50 %]*of the
supplies to the short-distance wholesale transmission
companies operating in its area is the best available
proxy for its market share.

Competitive assessment

(a) Dutch wholesale transmission market

The parties and Gasunie acknowledge in their internal docu-
ments that Gasunie is dominant and will remain so

(198) VNG has, even according to the parties' reply to an
Article 11 request, a [9 to 100]* % market share in
1997. TG has according to the parties [70 to 80]* % in
1997. […]*

(205) On the basis of the documents described in the section
on the position of the parties in the market, it can be
concluded that Gasunie is dominant and will remain so
(its current market share — [80 to 90]* % — is likely to
remain at the same level for the next […]* years).

(b) O n t h e G e r ma n ma r ke t

The competition pressure of
remains limited

the other actual

competitors

(199) All sales data in this section refer to 1997. Total gas
for 75,6 billion cubic

imports in Germany account
metres (BCM).

(200) BEB produces half of the German gas accounting for
[…]* BCM of production. It also purchases another […]*
BCM from Gasunie, Gazprom, DONG (the Danish state's
oil and gas company), from the GFU (the Norwegian gas
sales entity) and a small share of other German produ-
cers. Thyssengas imports […]* BCM. Mobil
imports
[…]* BCM of its Dutch equity production and from
is also a German gas producer (some
Norway. Mobil
[…]* % of German production, accounting for […]*
BCM). Ruhrgas imports […]* BCM from the Netherlands,
Norway, Denmark and Russia. It purchases […]* BCM of
German-produced gas. VNG imports […]* BCM. Wingas
imported 6,9 BCM. EWE imports, as indicated above,
gas from Gasunie. This volume accounts for […]* BCM.

(206) Apart from Mobil, there are two other actual competi-
tors, Statoil and Entrade. Statoil has indicated that ‘its
policy in the Dutch (and German) gas wholesale distribu-
tion markets can in short be characterised as a “wait and
see” approach.’ […]*.

(207) The ‘direct sales’ by Statoil to the Eems plant is the only
sales contract ever done directly by Statoil so that, on
the basis of the above, the Commission considers that,
overall, Statoil cannot be considered as a competitor that
will remain active on the market. […]*.

(208) The other actual competitor is Entrade. Entrade has
contracted […]*. Entrade's sales potential along its pipe-
line seems to be more or less exhausted. The potential to
increase further the sales via TPA with Gasunie seems to
be limited […]*.

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L 103/21

(209) Mobil has annual gas sales of […]* under contract.
Around […]* is of British origin, the remainder from
Mobil's north Friesland concession (Anjum). One of
these contracts is a […]*. Mobil has indicated that it has
no more uncommitted high swing of own production.

the scope for development of potential competition is
quite minimal as Gasunie itself does not expect to lose
much more market share anyway […]*. This estimate
was made in the full knowledge of the own TPA tariff
structure and the Netherlands Government's liberalisa-
tion plans.

Potential competition

(210)

[…]*

(211) The parties refer to the proximity of the existing Zeeb-
rugge LNG terminal with spare capacity and connecting
pipelines that make immediate entry of LNG possible
in their reply, that
into the Netherlands and indicate,
Sonatrach,
the Algerian gas company, could thereby
enter the Dutch market. The parties did not provide data
concerning the existing spare capacity in the Zeebrugge
terminal and connecting pipelines. However, new LNG
gas supplies are much more expensive (cost of 16 to
19 ct (HFL)/m3) than pipeline supplies and there is no
indication of vertical
integration by Sonatrach in any
other European gas market. Therefore, potential entry of
Sonatrach in the Netherlands is not considered to be
very likely.

facilitates

(212) The parties also indicate that the recent TPA agreement
the
that Gazprom secured with Ruhrgas
possible entry of Gazprom into the Dutch market.
Whereas this agreement might
facilitate the possible
entry, it does not make such an entry more likely. […]*.
In the reply, the parties have indicated that the potential
relief from the parallel sales agreement is only for direct
marketing by Gazprom to an existing Gasunie customer.
However, all customers except those of Statoil, Entrade
and Mobil (representing [80 to 90]* % of the market) are
Gasunie's existing customers, so that the protection is
substantial.

(213)

In the reply, the parties indicate that large continental
wholesale transmission companies possess gas at various
points along the Dutch border. Distrigaz, Thyssengas,
Wingas, SNAM, Gaz de France, BEB and Ruhrgas all
have supplies which can be potentially sold into the
Dutch market, and no parallel sales agreements exist
between Gasunie and these companies for such sales in
the Dutch market. It is true to say that all these compa-
nies possess gas at various points along the Dutch
border as all of them except Wingas purchase gas from
Gasunie. Even if the contract would allow these compa-
nies to re-sell the Gasunie gas in the Netherlands or even
if they have access to nearby gas from other sources to
sell in the Netherlands, it is unlikely that these compa-
nies would ‘attack’ their supplier in view of the risk for
retaliation by Gasunie […]*.

(214) Even if it cannot be excluded that one or more of the
above companies or any other companies might enter
the Dutch market, the Commission can conclude that

(215) With regard to the Gasunie tariff,

the Commission
recognises that all possible services necessary to operate
a gas business in the Netherlands are included in the
tariff. In this way, the scope of the tariff contrasts with
the rather
limited ‘pipeline transport-only’ approach
taken by the German gas industry in the ongoing VV
Gas. However, these tariffs do not make such an entry
more likely. The tariff is based upon the customer's alter-
native cost to provide the service itself and is thus calcu-
lated on Gasunie's replacement costs for the infrastruc-
ture. Whereas the Commission recognises that the tariff
passes Gasunie's economies of scale on to the customer,
[…]*.

(216)

[…]*

(217)

[…]*

Mobil is in a unique position

(218)

[…]*

(219) The parties argue that Mobil has no unique strengths to
compete in the Dutch market and that any new entrant
can replicate and exceed Mobil's Dutch market position.
The parties indicate that any Dutch producer with
uncommitted reserves has several marketing options:
export, sell to a trader, to a Dutch end-user, an RDC or
to Gasunie. Whilst this is true, it has to be noted that all
reserves are and have been committed to
current
Gasunie except a part of the reserves of Mobil. Mobil
has […]* BCM of proven reserves in the Netherlands of
which […]* BCM are not yet committed. In addition,
Mobil has another […]* BCM of probable reserves. […]*.
Again, this makes Mobil ‘unique’.

(220)

In addition, reference is made to Mobil's strategy which
clearly indicates […]*.

The merger will eliminate Mobil as a competitor

(221) A merger between Mobil and Exxon would in normal
circumstances lead to a greatly diminished incentive for
Mobil to compete against Gasunie. Exxon has an impor-
tant and lucrative stake in Gasunie and would suffer
from lower returns resulting from price competition
between two of its ventures. However,
in view of the
contractual arrangements on which Gasunie has been
allowed to continue
founded, Mobil will not be
competing against Gasunie.

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(222) Exxon's 1963 agreement with Shell and the Netherlands
Government requires the sale of all Exxon's Dutch gas to
Gasunie. Therefore, Exxon would require agreement
from both Shell and the Netherlands Government prior
to competing directly with Gasunie. Even if one assumed
that the Netherlands Government would give its agree-
ment to Mobil competing with Gasunie in view of the
Government's support for the liberalisation of the gas
market, it would not be in the economic interest of Shell
to give such an agreement in view of the enormous
profit loss for Gasunie resulting from price competition.
[…]*

(223) The concentration therefore has as an effect that one of
only two ‘active’ actual competitors of Gasunie will be
eliminated from the market. The Commission therefore
considers that the concentration strengthens the domi-
nant position of Gasunie as a result of which effective
competition would be significantly impeded on the
Dutch gas wholesale transmission market.

(224)

In the reply, the parties indicate that Gasunie's market
conduct has not been altered by Mobil's presence as a
competitor nor will it change if Mobil and Exxon merge
because gas pricing is fixed by reference to alternative
fuels and services are priced comparably with services
this
provided elsewhere in Europe.
reasoning is
accepted,
to indicating the
it becomes
competition in the gas industry is irrelevant. This is
clearly not true, even on the basis of the internal docu-
ments of Gasunie itself.

If
tantamount

The Merger Regulation applies to the strengthening of a domi-
nant position that is not held by the parties to the concentra-
tion

(225)

It can be noted that Article 2(3) of the Merger Regu-
lation states that a concentration which creates or
strengthens a dominant position is to be declared incom-
patible with the common market. Article 2(3) is thus, in
terms, not limited to the prohibition of an operation
which will give rise to the creation or reinforcement of a
dominant position on the part of one or more of the
parties to the concentration — see also recitals 1, 5 and
7 in the preamble to the Regulation.

(227) However, the Court, in point 171 of the Kali und Salz
judgment, confirms in general terms that the dominant
position that is created or strengthened does not need to
be one of the parties to the concentration:

‘A concentration which creates or strengthens a
dominant position of the parties to the concentration
with an entity not involved in the concentration is
liable to prove incompatible with the system of
undistorted competition laid down by the Treaty.
Consequently, if it were accepted that only concen-
trations creating or strengthening a dominant posi-
tion on the part of the parties to the concentration
were covered by the Regulation, its purpose as indi-
cated by the abovementioned recitals would be
partially frustrated. The Regulation would thus be
deprived of a not insignificant aspect of its effective-
ness, without that being necessary from the perspec-
the Community
the general structure of
tive of
system of control of concentrations.’

(228) The Commission considers that the creation or reinfor-
cement of a dominant position by a third party is not
excluded from the scope of application of Article 2(3) of
the Merger Regulation. In addition, it should be born in
mind that Gasunie is a JV in which one of the parties to
the concentration has a substantial interest.

(229)

In the reply, the parties indicate that there is no prece-
dent for the above application of Article 2(3). This is
correct, but irrelevant. In addition, the parties claim that
it is not necessary to apply the Merger Regulation to
such cases as European and national antitrust authorities
have other means at their disposal to curb abuses of the
dominant position of a third party. However, the Merger
Regulation provides
‘not
a
allowing the creation or strengthening of a dominant
position’, rather than an abuse-control system.

structural

control,

for

(b) Long-distance wholesale transmission market(s)

in Germany

Uncompetitive German gas market

(226) The reasoning by the Court of Justice in the Kali und
Salz (18) judgment and of the Court of First Instance in
Gencor (19) does lend indirect confirmation to the above
conclusion. The Commission acknowledges that
the
support is indirect as both cases deal with oligopolistic
dominant positions.

(18) Joined Cases C-68/94 and C-30/95 France and Others v Commission

(1998) ECR I-1375.

(19) Judgment of 25 March 1999 in Case T-102/96 Gencor v Commission

(not yet reported).

(230) As indicated before in the geographic product market
there are two ways to approach the long-
section,
distance wholesale transmission activity in Germany. It
is possible to conclude that the markets are still regional
whereby the regions are defined along the lines of the
‘old demarcation regions’. However, one could also
consider that the market is national. The Commission
has examined the long-distance wholesale transmission
market from both approaches and considers that, as a
consequence of the notified operation, the existing single
(regional market) and/or collective (national market)
dominant positions are strengthened.

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L 103/23

B a r r i e r s to e nt r y a r e ve r y h i g h i n t h e G e r ma n
long -di stan ce w h ole sale tr ansmi ssi on ma r ke t .

(231) As indicated in the relevant product market section, the
barriers result from the sunk cost investment nature of
the important capital expenditure necessary to have an
own long-distance wholesale transmission infrastructure,
the long-term take-or-pay contracts between producers
and long-distance wholesale transmission companies, the
parallel sales clauses in those contracts and the long-
term agreements between long-distance wholesale trans-
mission companies and their clients. This makes the
industry very stable. In Germany, the stability was until
May 1998 regulated in private arrangements (the demar-
cation agreements). It was also indicated in that section
that on the basis of the proposed German industry TPA
regime (reference case VV Gas), it is not likely that on
the basis of this TPA the position of the long-distance
wholesale transmission companies can be challenged.

(234) Ruhrgas, BEB and Thyssengas buy in common a substan-
tial part of their non-German origin gas (RG […]* %,
BEB […]* % and TG […]* %). This, therefore, results in
symmetry of costs at the ‘border level’. In addition, these
companies also transport a substantial part of their gas
via pipelines with common ownership (20). They there-
fore also have an insight into this part of the cost.

T r a n s p a r e nc y of t h e ma r ke t

(235) Finally, the market is transparent in so far that each of
the long-distance wholesale transmission companies
would know immediately when one of
their clients
changed supplier and they would know immediately
who the other supplier is.

N o i nce nti v e s
di sta nc e w h ole sa le c omp a n i e s

t o c omp e t e

for oth e r

long -

Supp ly c onc e nt r ati on

in Germany. This makes

(232) RG, BEB, TG and VNG account for [80 to 90]* % of gas
imports
the supply very
concentrated and the documents cited in the geographic
market section (regional markets) show that because of
the common fear of retaliation, the stable relationship
amongst the four companies will continue.

(236) None of

the market participants apart

from Wingas
would have an interest in entering the region of another
market participant. VNG cannot be expected to endea-
vour to do this. This is so in view of the minority equity
interests of Ruhrgas and BEB in VNG, the short-distance
wholesale transmission JV between RG and VNG in
certain of the ‘new’ Bundesländer and the fact that VNG
has no own high-pressure pipelines nor storage facilities
outside its core territory in the ‘new’ Bundesländer.
Furthermore,
the other shareholders would have no
interest in the company challenging RG and BEB in their
area (the TG area is too far away) and risk retaliation.
The shareholders would prefer the company to return
some dividends as soon as possible from its core busi-
ness in the ‘new’ Bundesländer.

L i nks a mong mar ke t play e r s fur th e r li mi t t h e
to c omp e te a mong R u h r g a s, B EB
i nc e nti ve s
and Th y sse ng a s

(233) The six long-distance wholesale transmission companies
already all had, prior to the merger, some form of equity
link with each other. BEB and Thyssengas are jointly
controlled by Exxon and Shell. BEB and Mobil are share-
holders in Ruhrgas. Ruhrgas, BEB and the two share-
holders of Wingas (Gazprom and Wintershall) are all
shareholders in VNG. It results from the above that the
links between Wingas and the other companies are less
and
strong than those between BEB, Thyssengas
Ruhrgas.

(237) EWE might have a certain potential to increase its share
of the imports for its own re-sale in the ‘Ems Weser’ part
of its sales area by substituting purchases from Gasunie
for purchases from BEB. However, sales by EWE outside
its ‘Ems Weser’ sales area make the company vulnerable
to retaliation by BEB and RG. And as it is much more
vulnerable to retaliation by BEB and RG than BEB and
RG for retaliation by EWE, it is unlikely that EWE will
expand its position on the long-distance wholesale trans-
mission market by buying gas from Gasunie for sales
outside its ‘Ems Weser’ area.

(20) DEUDAN (pipeline bringing Danish gas to Germany): [...]* %, BEB
[...]* %; NETRA (pipeline bringing Norwegian gas
to North
Germany): BEB [...]* %, Ruhrgas [...]* %; Salzwedel-Berlin (extension
of NETRA to Berlin): BEB [...]* %, Ruhrgas [...]* %, VNG [...]* %;
NETG (pipeline bringing Dutch LCV gas to Germany): Ruhrgas
[...]* %, Thyssengas [...]* %; METG (pipeline bringing Dutch HCV
gas to Germany): Ruhrgas [...]* %, Exxon and Shell each [...]* %;
SETG (extension of METG): Ruhrgas [...]* %, Exxon and Shell each
[...]* % (the NETG-METG–SETG pipelines are extensions of one
another); EVG (pipeline link in Central Germany): Ruhrgas [...]* %,
VNG [...]* %.

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L i mi t e d a bi li ty of Wi ng as to fur th e r i n cr e ase
i ts ma r ke t sh a r e

(244)

(238) Wingas

is,

in view of

its historic position as an
outspoken challenger, quite clearly not a member of the
oligopoly. It was the first and so far the only company
to bring gas-to-gas competition in Germany by building
and currently further expanding an own high-pressure
HCV pipeline grid. It has never concluded a demarcation
agreement with Ruhrgas, BEB or Thyssengas. However,
the Commission's investigation has resulted in a number
of elements that support a conclusion that Wingas will
not be in a position to challenge the oligopoly much
more.

(239) The company has announced that on the basis of its
current investment it would be able to reach a 15 %
market share. According to the parties,
it has around
12 % of the market under contract. It therefore comes
close to its target. On the basis of internal documents
from the parties, it is clear that the market was attaining
stabilisation and that Wingas was already on the way to
becoming established. For instance, […]*

(245)

(240)

[…]*

(241)

[…]*

(242) This new cooperation with RG has led to RG taking a
4 % participation in Gazprom and the conclusion of a
new long-term take-or-pay contract by means of which
RG obliges itself to purchase […]* of its German natural
gas demand from Gazprom and whereby Gazprom is
prepared to supply up to […]* %. As part of this agree-
ment, RG is discharged from its purchase obligations in
so far as Gazprom/Gazexport sell gas in Germany in
[…]* (21). One of Wingas
competition with Ruhrgas,
shareholders and its major gas supplier (Gazprom) has
thus agreed with the main competitor (Ruhrgas) to limit
the further growth of Wingas. The Commission can
therefore reasonably conclude that the future potential
of Wingas to attack the incumbents is very limited.

Indi cati ons of u nc ompeti ti v e c ondi ti ons

(243) Reference is made to the important ROCE of

the
German wholesale transmission companies. […]*. Only
VNG has so far returned minimal profits. With regard to
VNG it can be noted that this is probably due to the
enormous investments it had to make following the
German re-unification. However, it also seems that the
current shareholders have an interest to show a low
value for the company as this decreases the risk that the
BVS (former Treuhandanstalt) might ask for a high retro-
active payment through a court decision.

(21) [...]* — Annex 49.21 (italics added). Also [...]* — Annex 49.26.

In 1996, prices to the final consumers in Germany are,
on a weighted average, higher
than in the United
Kingdom, Netherlands and Belgium. They are a bit lower
than in Italy. France is the most expensive market (22).
For the period 1997 to May 1999, German prices to
commercial customers, firm and interruptible industrial
customers were continuously amongst the highest of the
above six countries. This conclusion is valid for prices
before and after tax.

Single dominance in old demarcated region

In the section of relevance to the market participants, it
was indicated that each of Ruhrgas, BEB, Thyssengas and
VNG have estimated market shares in their respective
regions in excess of 50 %. Although the old demarcation
agreements are no longer valid, there may still be a very
the own territory in place
substantial protection of
between the ‘traditional’ long-distance wholesale compa-
nies. First of all in view of the common purchasing of
the imported gas. As there are clear arrangements
between the companies on what part of the common
they are not
imported gas goes to which company,
going to ‘attack’ each other with their share of
the
imported gas on the others' territory. Secondly, there are
the ‘parallel sales letters’. By means of such letters the
sales of the one party into the territory of the other can
be deducted from the purchase obligation that
the
‘attacked’ party has vis-à-vis the attacking party. […]*.
Thirdly, there is the fear of retaliation. On the basis of
the above, Ruhrgas, BEB, Thyssengas and VNG are
considered to have a dominant position in their own
region.

Oligopolistic dominance

(246) Market growth is expected to remain steady at, at most,
2 to 3 % per year. Whereas the parties have indicated
that as a result of such a growth there might be a supply
gap […]* onwards, such market growth cannot but be
considered moderate at most.

(247) The price elasticity for gas demand is limited: it is rather
price inelastic. There are numerous indications in the file
that a ‘price war’ would destroy the margin for every-
body and that both producers and wholesale transmis-
sion companies (see the section on ‘the old demarcation
regions are still relevant in view of the fear for retalia-
tion’ above) are aware of this and act accordingly.

(22) Table 3.13 in ‘Competition and Liberalisation in European Gas
Markets — A Diversity of Models’, Jonathan P. Stern, Royal Insti-
tute of International Affairs, 1998.

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Official Journal of the European Union

L 103/25

(248)

In the light of the uncompetitive nature of the market as
discussed above, the limited growth of the market and
the limited sensitivity of demand to price movements,
the Commission considers that
there is already pre-
merger an oligopolistic dominant position between at
least Ruhrgas, BEB and Thyssengas on the German long-
distance wholesale transmission market.

(249) The best

illustration of

the existence of a collective
dominant position is that BASF, probably the largest
user of natural gas in Germany, considered it necessary
to invest in an own pipeline network to have access to
cheaper gas. It has used the leverage of its demand to
help to create Wingas.

Result of the merger

Mobi l — u ni q ue ly place d to be a p r otag oni st i n
a mor e li b e r a l i se d G e r ma n g a s ma r ke t

(250) Mobil currently holds a [0 to 10]* % market share. This
is however a significant underestimate of its competitive
potential in the German market. […]*.

(251) Mobil is in a somewhat atypical situation in Germany.
Mobil produces a substantial part of the German gas
([…]* %) and thereby accounts for […]* % of German
gas consumption. Mobil also has an equity interest in
Erdgas Münster and in Ruhrgas (Supervisory Board
member). It is therefore a part of the German gas estab-
lishment. This is probably the reason why Mobil was
able to import gas without having its own high-pressure
pipeline network by means of TPA with especially BEB
(their close partner in the German production). […]*.

(252)

[…]*

(253) The potential of Mobil bringing more competition into
the German market thanks to liberalisation will comple-
tely disappear. Unlike Mobil
individually, the merged
entity has more to lose than to win from a liberalisation
than the individual companies Exxon and Mobil before.

to certain elements of the wholesale transmission busi-
ness as seen for instance with regard to the discussions
on Gasunie's future role, provide a sound basis for a
commonality of interest. This implies that, following the
merger, only BP needs to be convinced to align itself
with common Exxon/Shell interests, compared to BP and
Mobil before the merger. This therefore substantially
increases the scope of the merged entity to increase its
de facto influence on Ruhrgas.

the merged entity to increase its

(256) Furthermore, even abstraction made from the possibility
of
influence on
Ruhrgas, a reinforcement of the equity links between
companies on the same market increases the possibility
for the use of market power. In order to appreciate the
level of concentration in this market pre-merger and the
impact of the merger, the Commission has estimated
HHI indices that take into account the existence of cross
shareholdings among most of the players in that market.
This calculation was based on the work of Bresnahan
and Salop (23). The assumption was made that BEB is
identified with its owners, Exxon and Shell. Under this
assumption the HHI would rise 139 points from 4 243
to 4 382. Such an increase at this level of concentration
is a sign of the scope for a material increase of market
power.

C ontr o l of E r dg a s M ü nste r , a p o te nt i a l c o mp e -
ti t or

(257) As a consequence of the merger, BEB and Mobil would
the corporate governance structure of EGM.
control
Mobil would have an interest, pre-merger,
in main-
taining the possibility of developing the only short-
distance wholesale transmission company that does not
depend from the wholesale transmission services of the
long-distance wholesale transmission companies into a
potential competitor in a future liberalised market envir-
onment. This ability to be a potential competitor would
be suppressed post-merger through the establishment of
a formal control on EGM because, unlike Mobil individu-
ally, the merged entity has more to lose than to win
from a liberalisation than the individual companies
Exxon and Mobil before.

R e i nfor ce me nt of e q u i ty li nk be tw e e n E x x on/
Sh e ll a nd R u h r g a s

Conc lusi on

(254) As a consequence of

the merger,

the equity links
between Exxon/Mobil and Shell with Ruhrgas will be
further reinforced. The parties argue on the basis of the
formal corporate governance structure of Ruhrgas ([…]*)
that this will not increase the combined entity's impact
on Ruhrgas, but rather decrease.

(255)

[…]*. The Exxon and Shell
interests in European gas
production and in gas wholesaling in the Netherlands
and Germany are all held in common. Consequently,
their economic interests are parallel. This should, despite
the distinct philosophy of Exxon and Shell with regard

(258)

It can, therefore, be concluded that the concentration
strengthens (a) the individual dominant positions of each
of Ruhrgas, BEB and Thyssengas within their region and/
or (b) the collective dominant position between Ruhrgas,
BEB and Thyssengas on the German long-distance
wholesale transmission market as a result of which effec-
tive competition would be significantly impeded on
these markets.

(23) Bresnahan, T.F. and Salop, S.C., ‘Quantifying the competitive effects
of joint ventures’, International Journal of Industrial Organisation,
vol. 4 (1986) pp. 155-175.

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(259)

In the reply, the parties indicate that on the basis of Mobil's mere [0 to 10 % maket share]*, […]*
and the fact that BEB and Thyssengas, the other entities controlled by the parties, have a market
share of only [10 to 20]* %, the notified operation cannot impede, much less significantly impede,
competition whatever the market definition. The parties argue that the Merger Regulation establishes
a two-pronged test and that this principle has been accepted by the Commission and confirmed by
the Community courts.

(260) However, as indicated above, the changes on the relevant market resulting from the concentration
result not only from the current position of Mobil on the long-distance wholesale transmission
market, but also from Mobil's potential […]* and the reinforcement of the equity links between the
incumbents as expressed in the HHI calculation.

UNDERGROUND STORAGE

Relevant product market

(261) Underground storage facilities are key facilities in the provision of ‘swing’. This is particularly rele-
vant for the gas demand of the local distribution companies. The Commission therefore agrees with
the parties that this forms a separate product market.

Relevant geographic market

(262) There are two types of storage facilities: pore versus cavern (see LCV/HCV discussion previously).
The economic radius for pore storage is less than 200 kilometres whereas for cavern, the economic
distance from the end-user is limited to 50 kilometres.

(263)

It is thus possible to delineate a distinct relevant geographic market of the pore storage facilities in
the south of Germany, namely an area of around 200 m around Munich.

Underground storage facilities servicing the south of Germany

(264) There are for the moment five pore underground storage facilities located relatively close to Munich.
In addition, taking into account the 200 km radius of a pore storage, one other facility (Eschen-
felden) covers the entire region around Munich. These facilities serve the south of Germany, which
is a substantial part of the common market.

(265) The following table gives the overview of these facilities, the storage volume and the maximum

withdrawal rate as well as an indication of the ownership interests.

NAME

OWNERSHIP

STORAGE VOL

MAX. WITHDRAWAL

Wolfersberg

RWE-DEA 100 %

Schmidthausen

Preussag, Mobil and BEB:
33,3 % each

Breitbrunn-Eggstadt

RWE-DEA 80 %; Mobil
20 %

Breitbrunn

Bierwang

Ruhrgas

Ruhrgas

Inzenham-West

RWE-DEA

Eschenfelden

RG 2/3; EWAG 1/3

Total

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

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(266) Of the above capacity, the […]*.

(267) RG has the beneficial interest (ownership + lease) in […]* % of the storage volume and the daily

withdrawal potential. […]*

(268) However, the parties have an interest in […]* of the 16 depleted Bavarian reservoirs that can reason-
ably be assumed to be suitable for conversion into an underground storage facility serving the
Munich region. According to the parties, the four depleted reservoirs in which they do not have an
interest could be converted in storage facilities with a working gas volume of around […]* MCM.
However, according to the concession holders and other interested third parties, the potential of
these reservoirs would be only around […]* MCM and doubts have been expressed with regard to
the suitability of some of the fields involved.

(269) On the other hand, the […]* depleted reservoirs in which the parties have an interest have,
according to the parties, a potential of around […]* MCM working gas volume. In addition, the
parties have an interest in the individual fields with the highest potential in working gas volume.

(270)

[…]*

(271) However, as a consequence of the concentration, these opportunities in the Munich area will be
evaluated taking into account the 36 % equity ownership of BEB and Mobil in Ruhrgas. Therefore, it
is much more unlikely that (a) Exxon/Mobil will start competing themselves in the area and (b) that
competitors of Ruhrgas will be given the opportunity to develop additional storage.

(272)

It can, therefore, be concluded, that the barriers to entry for potential competitors in the market for
swing capacity in the south of Germany will be increased as a consequence of the concentration.
Therefore, the concentration strengthens the dominant position of Ruhrgas in the market for swing
capacity in the south of Germany (Munich area).

Compendium of abbreviations

NATURAL GAS

German gas production and long-distance wholesale transmission JV between Exxon
and Shell

billion cubic metres

Deutscher Verein des Gas- und Wasserfaches, German industry association deciding
technical issues on gas

Energie Beheer Nederland, the Netherlands State Oil and Gas Company

Erdgas Münster

gas-to-gas-competition

high calorific value

kilowatt hours

low calorific value

local distribution company

liquified natural gas

million british term units

million cubic metres

Nederlandse Aardolie Maatschappij, the Dutch Exxon/Shell gas production JV

North Rhine-Wetphalia

Ruhrgas

Stadtwerk (German LDC)

Thyssengas

third-party access

eastern German long-distance wholesale transmission company

BEB

BCM

DVGW

EBN

EGM

GTGC

HCV

kWh

LCV

LDC

LNG

MBTU

MCM

NAM

NRW

RG

SW

TG

TPA

VNG

VV Gas

Verbändevereinbarung Gas, the negotation between the German Industry Federa-
tions to set the basis for the liberalisation of the market

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D. BASE OILS, ADDITIVES AND LUBRICANTS

INTRODUCTION

(273) The lubricants industry involves three different products with a vertical relationship: base oils,

chemical additives and lubricants. Base oil is blended with chemical additives to produce lubricants.

(274) On the basis of market investigation, the Commission is of the opinion that the merger will lead to

the creation of a dominant position held by Exxon and BP/Mobil on the EEA market for base oils.

DESCRIPTION AND FUNCTIONING OF THE MARKET

Base oils are the end product of crude oil refining

(275) The base oils used to formulate lubricants are, generally, mineral oils produced by oil refiners from
the residue of crude oil left after separation of the other major oil products. A minor part of the
base oil market is the result of chemical processes and are called Esters or PAO's (polyalfaolefins).

(276) Base oils have various performance capabilities due to their different chemical/physical compositions
resulting from different crude feedstocks and refinery processes. Base oils are classified on the basis
of their inherent characteristics. Independent bodies (API/ACEA/ATIEL) have defined standards by
which the quality of base oils can be closely monitored (24).

Characteristics

(277) An individual base oil is defined by its viscosity, its viscosity index (VI), its volatility and a number

of subsidiary specification points.

(278) Viscosity is the measurement of a fluid's resistance to flow. High-speed/low-temperature/low-pres-
sure conditions call for a low-viscosity oil. Low speed/high-temperature/high-pressure conditions
call for a high-viscosity oil. The viscosity is expressed in grades, but for better understanding, the
Commission will refer to low-viscosity base oils (so called ‘light neutral’, or LN) and high viscosity
base oil (so called ‘heavy neutral’, HN, and ‘solvent bright stock’, SBS).

(279) The viscosity index is one of the most important characteristics of almost any lubrication product. It
is the measure of the flowability at definite temperatures. All
lubricants change viscosity with
temperature changes (lubricants become thinner as temperature increases). Viscosity changes at
varying rates depending on the base oil. This rate of change is measured by a ‘viscosity index’ and a
specific base oil is said to be of a certain ‘VI’. The higher the VI of an oil, the lower its tendency to
change viscosity with temperature, which is, especially for engine oils, crucial to ensure efficient
lubrication. Base oils can be classified according to their viscosity index by the terms LVI, MVI, HVI,
VHVI, and XHVI. Although these are marketing terms, and not recognised by Exxon and Mobil,
they are widely used in the industry. The table below provides a definition for the terms which will
be used in the document:

LVI

MVI

HVI

VHVI

XHVI

VI = 80-< 90

VI = 90-< 95

VI = 95-< 109

VI = 109-< 120

VI = > 120

(24) API stands for American Petroleum Institute and regroups oil companies; ACEA stands for association des construc-
teurs européens d'automobile and ATIEL stands for association technique de l'industrie européennes des lubrifiants.
Their respective roles are further explained in this section.

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(280) Volatility is an important factor in engine oils and their consumption rate. The more volatile a
petroleum liquid, the higher its consumption rate. Volatility is related to the shape of the distillation
curve and is measured in Noack.

(281) The pour point is the lowest temperature at which the oil will pour. This is, of course, very impor-
tant for engine oils and other lubricants used at low temperature. The pour point is directly related
to the type of crude and processing used.

Classification

(282) Depending on their performance, base oils are classified in five categories ranging from conventional
base oil with viscosity index 80–120 and an acceptable level of impurities (group I) over base oils
with a viscosity index of 120 or greater (group III) (25) up to PAO's (group IV) used in synthetic
lubricants with a high viscosity index. Group V includes all other base oils such as naphthenics and
very high quality ester base oils.

Crude feedstocks

(283) Base oils may be categorised by type of crude: paraffinic crude; naphthenic crude and mixed crude.
Paraffinic crude is most commonly used for base oils although naphtenic crude has certain superior
characteristics for some applications. Since the parties have stated that they do not produce
naphthenic base oil anywhere in the world, the assessment will be limited to paraffinic base oil.

(284) The selection of the crude slate has an impact on the production capacity of a base oil refinery. The
difference between a crude suitable for base oil production and a crude which is not is the concen-
tration of those base oil molecules and the ease with which they are extracted from the crude. Arab
Light is considered to be an excellent quality crude for base oil production, unlike for instance west
African crudes.

(285) Since base oils refineries are usually integrated with fuels refineries and share many common facil-
ities, the chosen crude slate is also determined by an economic analysis of the entire production
slate of the refinery where the base oil plant is located. The crude necessary for fuels refinery can
determine up to a certain extent the base oil production level (and vice versa).

Additives

(286) Additives are the chemicals compounded with base oils to help the oil perform a specific lubricating
job. Lubricants use specific additives depending upon the applications and the base oil. Additives
can be split into two categories: detergent inhibitor packages (or ‘DI packages’) and viscosity index
improvers (or ‘VI improvers’). In most automotive lubricants applications VI improvers have to be
used with DI packages. It must be noted that all additives use base oils as a support.

(287) DI packages serve to suspend oil contaminants and combustion by-products as well as to prevent
oxidation of the oil with the resultant formation of varnish and sludge deposits. A DI package will
typically include approximately six individual additive components, the most important being deter-
gents, dispersants, corrosion inhibitors and antioxidants. The combination of these components and
their proportion varies according to the end-use and specification of the finished lubricant.

(25) Group II is not currently used in the EEA.

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(288) VI improvers modify the viscometric characteristics of lubricants by reducing the rate of thinning
with increasing temperature and the rate of thickening with low temperatures. VI improvers thereby
provide enhanced performance at low and high temperatures. They can be considered as synthetic
oil thickeners which are relatively inactive at lower temperatures but react with heat to counteract
the natural tendency of the base oil to thin at higher temperatures. All multigrade engine lubricants
contain VI improvers.

(289) The additives market is very concentrated. The five leading suppliers hold more than 90 % of the
world market. Lubrizol is market leader and accounts for [30 to 40]* % of the market. The Infineum
joint venture (combining the additive-interests of Exxon and Shell) takes the second place with [30
to 40]* %. Ethyl and Oronite (owned by Chevron) each have around [10 to 20]* %.

Lubricants

(290) Lubricants have several uses but their main function is to reduce friction and wear between moving
parts. Lubricants have four general types of application. They are used in the automotive vehicles
(automotive lubricants), for industrial applications (industrial lubricants), in ships (marine lubricants)
and in jet engines (jet lubricants). Finished lubricants are produced by lubricant blenders through
blending chemical additives into base oils to obtain the properties required.

(291) Roughly 50 % of lubricants consumption is for automotive applications, 48 % for industrial applica-
tions (including a significant part for ‘process oils’ – 36 %). Marine and jet engine applications
account for the remainder. Jet lubricants are dealt with in section F.

Automotive lubricants and industrial lubricants

(292) Automotive lubricants include (passenger and commercial) engine car motor oils, automotive trans-

mission fluids, brake oil, automotive gear oil, etc.

(293)

Industrial lubricants include industrial gear oils, metal working fluids, turbine oils, transformer oils,
compressor oils, hydraulic fluids and process oils/aromatic extracts (used as components in the
production of, inter alia, tyres). Industrial oils need to have specific characteristics provided by the
additives.

Development of lubricants

(294) Development of lubricants involves the interaction of four categories of actors: base oil producers,
additive producers, lubricant blenders and the quality standard entity (either anoriginal equipment
manufacturer — OEM — such as an automotive manufacturer or an industrial end customer). Lubri-
cants are developed in two steps between the customer who defines the product specification, the
lubricant blender who chooses the suppliers and the additive producer who will give special charac-
teristics to the lubricant.

(295) The first step is between the lubricant blender and the OEM (or other end-use customer). Together

they identify which performance requirements the new lubricant will have to meet.

(296) The second step is between the lubricant blender and the additive producer. The additive supplier
has then to develop an additive package which together with the selected base oil is capable of
giving the lubricant its required properties. The additive supplier can also take the initiative to
ensure that its additives packages will work with the available base oils, often without the knowledge
or the cooperation of the blender.

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(297) The finished lubricant blender can specify the base oil to be used in combination with the additive
package or rely on the base oils for which the additive supplier has already formulated an additives
package. The additive package gives to the lubricant the required specification at the lowest cost
possible. Once the blend has been composed, it has to be tested in order to prove its performance
in industry recognised test programs.

(298) According to additives suppliers, the testing is financed either by the lubricant manufacturer or by
the additive manufacturer depending on who initiates the development and the commercial agree-
ment between both parties.

(299) Additive producers tend to develop also general additive packages (‘off-the-shelf packages’) which
are suitable to be blended with a number of base oils (26). In such a case, the investment to meet the
required specifications for these ‘off-the-shelf packages’ is made by the additive supplier. The invest-
ment will depend on the existence of a ‘cover’ which means that a number of base oils from
different suppliers can be used as the effect of using base oils from different suppliers on the finished
lubricant is known and documented. If such ‘cover’ does not exist, an ‘interchange programme’ will
be undertaken leading to a documented base oil read-across. According to additives suppliers and
lubricant blenders, the cost of using ‘ off-the-shelf packages’ is significantly higher than the cost of a
base oil specific additive package. A generic additives package would need to be designed to work
with the ‘weakest’ base oil in respect of each performance bench test. As different base oils can have
conflicting appetites, the weakest for any test might be different. In other words, some base oils
would need to be over-treated with additives in order to equal the set performance requirements.

Quality requirements for industry and marine lubricants

(300)

Industrial and marine lubricants are either approved as the result of commercial trials or else they
meet a standard ‘product specification’ whereby the product has the properties required (for instance
ISO or DIN). Although the performance accreditation process is kept ‘in-house’ (as opposed to auto-
motive lubricants), the base oil/additive combination is important. Industrial customers buy products
based on performance reputation, which must be protected. A base oil switch would require valida-
tion tests of a number of key products and critical performance parameters. Certain industrial tests
verifying that the additives will not behave differently in a changed base oil are time-consuming (for
example a 4 000 hour oxidation test) preventing a rapid base oil switch. According to additives
suppliers, the accreditation process for industrial and marine lubricants can take over one year to
in the range of
complete, but
USD 25 000 to USD 50 000 per accreditation.

typically lasts six months. Accreditation costs typically fall

Standard-setting and accreditation systems for automotive lubricants

(301) The European standard-setting system for automotive lubricants accords a prominent role to OEMs.
This is because the demand for such products originates from individual customers who do not
have the means or expertise to make sure that the lubricant they buy is the right one for their
needs. That role is currently filled by the ACEA, which represents the interests of all European
manufacturers of cars and trucks. In December 1995, ACEA introduced a new classification system
consisting of nine different sequences to define engine oil quality for European automotive service
fill applications. The system is based on a schedule of physical, chemical and engine tests similar to
those used in the United States of America and set out by the API (American Petroleum Institute).
The system consists of two codes of practice — one developed by ATC (the technical committee of
petroleum additive manufacturers in Europe) and one by ATIEL (Association Technique de l'Indus-
trie Européenne des Lubrifiants) — and defines the process for developing, testing and reporting the
necessary performance data.

(26) As confirmed by the competitors, all DI manufacturers have generic approvals in Exxon, Mobil and Shell base oils

that are available for base oil customers.

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(302) Together, ATIEL and ATC regulate the conditions under which lubricant and additive suppliers can
change the constituents of their lubricants or additive packages, respectively, while continuing to
employ previous test data and to make the same performance claims. ATIEL, a group of lubricant
suppliers (both pan–regional and national integrated), has established the nomenclature to identify
lubricants that have met ACEA standards. It further regulates in a code of practice the conditions
under which lubricant blenders may alter lubricant constituents (mainly by changing the VI
improver or base oil) while still claiming to satisfy the performance standards for which the lubri-
cant has been tested. ATC establishes a code of practice governing the tests that must be satisfied
before a lubricant can make various performance claims, and the means of registering and
conducting tests and sharing test data.

(303) ACEA/API accreditation is granted for the blend of a specific base oil with a specific additives
package, through series of tests. The approval will explicitly specify the components used in the
blended lubricant; the base oil from a specific manufacturer and the identified additive package are
locked into the accredited formulation. Since accreditation is only valid for the base oil of a specific
producer and not for base oils with comparable quality from other producers (27), an ACEA or API
performance claim has to be supported for each and every formulation (i.e. combination of base oils
and additive packages). If a lubricant blender wishes to switch one or more components with other
components (base oil or additives), then the formulation needs to be tested according to rules set
out by API or ACEA.

(304) According to additives suppliers, the accreditation process can take from one month to over a year
to complete, but typically lasts six months. Accreditation costs range from USD 50 000 to several
million per accreditation, but typically falls in the range of USD 200 000 to USD 400 000 per
accreditation (separate accreditation is needed for ACEA and API). The exact scope of investment
(both in time and money) depends on many factors including performance level, previous testing
history and degree of change required (28). The ease of switching will mainly depend on the extent
to which the new supplier (base oil or additives) has already gained accreditation with the preferred
If this ‘cover’ does not exist then the cost to complete an ‘interchange
base oil or additives.
programme’ would be USD 100 000 (for a simple base oil
to
USD 1 000 000 (for a complex test protocol related to infrequently traded base oils), assuming the
base oil/additives combination is technically capable of achieving the desired performance.

read-across programme)

(305)

In the event that a lubricants blender would be forced to change the base oil with an infrequently
traded base oil, then a fuller, more fundamental programme of testing would become necessary,
costing between USD 500 000 to USD 1 million. Such a process would take 18 months or longer.

(306) All OEMs have adopted these ACEA (or API) specifications as minimum standards for lubricants.
Some individual OEMs, such as Mercedes-Benz for automotive and Volvo for truck lubricants,
impose more stringent limits, which require extra testing with other performance parameters and
certification in their specific equipment. Achieving an OEM approval requires additional testing
(both test benches and field trials) and triggers additional investments in both time and money. Each
OEM retains a degree of freedom and flexibility in approving products and this includes the area of
base stock interchange. Additive companies provide services to obtain these OEM approvals
although some OEMs require testing to be performed by independent bodies.

(307) A lubricant blender has to store base oils that are used in lubricants having ACEA/API accreditation
separately from base oils that do not have/need such accreditation. In order to economise on storage
capacity, or to increase their buying power vis-à-vis the base oils supplier, blenders may not differ-
entiate according to the lubricant application. In such cases they would tend to use base stock used
in lubricants having ACEA/API accreditation for both automotive and industrial applications.

(27) Exceptions exist for group III and IV base oils.
(28) As described in documents such as ‘API 1509’ and ‘Atiel code of practice’.

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MARKET DEFINITION

Product markets

Base oils

(308) According to the parties, base oils are homogeneous products and therefore would form one single
relevant product market whatever their application or group. As explained above there are many
applications for lubricants and each of these applications require a different base oil with varying
characteristics. It could therefore be argued that there are as many relevant product markets as there
are specific requirements. There seems however to be a high level of supply-side substitutability
whereby the same refinery could produce any quality of base oil within group I. Finally, group I and
groups III/IV base oils do not appear to belong to the same relevant product market.

Demand-side substitutability: no possible distinction between automotive and industrial applications

(309) The following list shows the technical requirements for base oils according to the application the

lubricant blender may use the base oil for:

— automotive crankcase lubricants: group I (HVI), group II (although not in Europe), group III

(VHVI and XHVI), group IV (synthetic base stock) and group V,

— automotive gear and transmission oils: group I (MVI and HVI) and group III/IV,

— industrial lubricants and marine lubricants: group I (LVI, HVI and HVI) and group II,

— additive manufacturers: group I (LVI, HVI) and group III (XHVI),

— exports, waxes and process oils: group I: LVI, MVI and HVI,

— white oils: group I and III,

— jet engine lubricants and some industrial lubricants: group IV (synthetic base stock) and group V.

(310)

It follows from this list that most group I base oils can be used for both automotive applications
and industrial applications apart from a number of exceptions (notably the LVI grades which are
used for rubber process oils, refrigerator oils, greases, metalworking fluids and shock absorbers). In
addition, it results from the market investigation that there are only minor quality or price differ-
ences between group I base oils for industrial applications and automotive applications and no
supply differentiation.

Supply-side substitution is possible within group I base oils

V i scosi ty i nde x

(311)

In Europe, more than 90 % of base oils are HVI. At the level of the viscosity index, base oils are not
fungible products, as each type of lubricant needs a specific performance level determining viscosity
index (VI). A base oil competitor has for example indicated that ‘HVI oils of 150 viscosity, low vola-
tility and VI below 99 form an important subgroup for automotive applications’. Segregation must
be maintained between base oils in user facilities to maintain accredited product status.

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(312) However, a refiner can obtain group I base oils with higher viscosity indexes through solvent extrac-
tion by more severe processing. This supply substitutability reduces the yield and has therefore an
effect on the production capacity of the base oil plant. Throughput reductions may be substantial
and have an impact on base oils production capacity (10 % or more depending on the crude and
hardware configuration of the refinery). More severe processing can however not lead to obtain the
very high VI's which are typical for the group III base oils. Additional additives used in the finished
lubricant formulation can compensate for low base-oil VI. The output in terms of VI also depend on
the refinery configuration and the lubricant feedstock.

V i scosi ty a nd oth e r c h a r a c te r i sti c s

(313) Group I base oils obtained through the normal solvent extraction separation process can be divided
into two categories on the basis of viscosity: low-viscosity or light base oils (N150 for example) and
high-viscosity or heavier base oils (500N and brightstocks for example). Lighter base oils are prefer-
ably used in areas with a more moderate climate and are driven by the automotive engine oil
requirements asking for low-viscosity base stocks. They give better performances and have proper-
ties that allow better emission control and fuel consumption. Demand outside the EEA and North
America is predominantly for the higher viscosity grades because of the warmer climate. Exxon,
Shell, BP/Mobil, Total and Elf for instance export very significant volumes to their affiliates in Africa,
Asia, and Latin America. Up to a certain degree, there is also a difference in base oil demand
between the north of Europe (lighter base oils) and the south of Europe (heavier base oils).

(314) The parties argue that the relative volume split between light and heavy neutrals can be varied
substantially, depending on crude quality, distillate capacity, demand requirements, and hardware
limitations. Although there is a certain degree of supply substitutability from the production side,
market investigation has shown that this is only possible up to a certain degree, as a specific feed-
stock can only assure a limited output of light grade base stock.

G r o u p I b a se oi ls a r e not su b sti t u ta b l e w i th g r ou p III a n d g r ou p IV ba se oi l s

(315) There are significant price differences between the various groups of base stock. Group III for
example costs two to four times as much as group I HVI. In addition, group I and III base oils can
be produced on the same refining hardware (although refinery tankage must be allocated to group
III base oils to prevent commingling with group I base oils) but are not produced from the same
feedstock. Group I base oils are produced from crude or crude fractions (reduced crude, vacuum gas
oil, residue) while group III base oils are produced from the bottom stream that comes from certain
hydrocrackers (hydrocracker residue) in fuels refineries. The group IV polyalfaoleofins (PAO's) are
the result of a chemical process.

(316) Base oils belonging to group III and group IV are used for blending high value added lubricants.
They are also sometimes blended with lower-viscosity index base oils in order to obtain finished
lubricant with increased properties (for example, HVI can be blended into finished lubricants with
synthetic base stock although such group III equivalent is more expensive to blend than it is to
purchase the group III base oils on the market). Similarly, refiners can change the quality of crude
or further refine their output in order to alter quality of their production of base oils for one specific
group (although not to such extent that properties of a higher group can be obtained). Finally, addi-
tional amounts of additives can be blended with base stock in order to improve properties.

(317)

In Europe, more than 95 % of base oils are group I, while group III quality actually accounts for less
than 5 %. Market investigation has indicated that group III is likely to grow over the next few years
by 8,5 % a year and group I decline by 0,5 % a year. Demand for group I is declining due to the
evolution of engine technology, the higher requirements of OEM's on fuel consumption, perfor-
mances, oil drain intervals and more rigid emission legislation.

7.4.2004

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L 103/35

(318) On the basis of the above, group III and group IV can be considered as belonging to different
product markets from group I base oils. The economic drive is to maximise the use of group I base
oils and to meet the lubricant requirements with a balance of base oils and additives based on cost
considerations. The choice to use group III or IV in a finished lubricants formula is made when their
specific properties (other than just their VI) compensates the higher cost in meeting the required
performance. […]*, it is not necessary to further delineate on group III and IV as separate product
markets (group II is currently not used in the EEA).

Additives

(319) According to the Commission's Infineum JV decision,

‘VI improvers, DI packages for automotive
applications and DI packages for industrial applications are separate markets’ (29). The parties have
identified only one affected market, relating to DI packages for automotive lubricants. As regards DI
packages for engine and transmission applications, the results of the investigation suggest that from
a demand-side point of view these products probably do not constitute one product market, but
that there could be different markets depending on the application. However, as Mobil represents
less than […]* % of additives production, it is not necessary to further delineate the product market
as regards DI packages for engine and transmission applications.

Lubricants

(320) The notified operation does not give rise to competition concerns in any of the possible lubricants
markets (apart from aviation lubricants), so the definition of the relevant product markets can be left
open.

Relevant geographic markets

Base oils

(321)

It is the parties' opinion that the market for base oils is at least EEA-wide but is more likely world-
wide. The parties base their contention on the following considerations. First, the same types of base
oils are sold and used throughout the world. Secondly, base oils may be shipped economically over
long-distances and there is already significant trade from the EEA. Thirdly, base oils prices and gross
margins present some correlation. None of these contentions resist closer examination and the
market is therefore EEA-wide.

(322) Base oils prices and margins in different regions of the world indicate that the EEA forms a distinct

relevant geographic market

(323) Fob prices have been consistently different in the EEA, the US and Asia with Exxon's IABP prices in
Singapore and the USA being in average greater than EEA prices by from […]* % (for SN 150 in
Singapore) to […]* % (for SN 600 in the USA). This difference is even greater when taking into
account the transportation costs. The parties explain that transportation from Sicily to the Middle
East costs around USD […]* per tonne. Taking this as an estimate of transportation costs from Asia
to the EEA and intra-EEA transport costs at […]* % of landed prices, that still leaves Exxon's Singa-
pore prices at a higher level than EEA prices. Only 1998 and 1999 prices in Singapore would be at
a level that could make imports into EEA profitable if EEA prices were hypothetically increased by
[…]* %. However, these prices are the result of the crisis in south-east Asia and are not likely to
remain on a lasting basis at such levels. […]* (30).

(29) Case IV/M.1137, Exxon/Shell of 25 May 1998.
(30) [...]*

L 103/36

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Official Journal of the European Union

7.4.2004

(324) Another important element is the fact that export prices from the EEA have been typically lower
than the prices charged in the EEA. The parties have estimated that difference in average at a level
of USD […]* per tonne. That is […]* % below the current EEA prices. This is roughly equivalent to
the freight costs and shows that no arbitrage is possible between the EEA and other areas of the
world unless there are exceptional circumstances such as the Asian crisis. This is underlined by the
fact that there is almost no trading activity.

(325) Europe has historically been the base oil producer with the largest excess capacity production, and
is consequently the swing producer. Exports from Europe to Asia, Africa, the Far East and Latin
America have been important in the past since these countries were in need of the heavier base oils.

(326) New production capacity plans have been announced or have emerged in these countries (mainly
group II or III capacity through Exxon, Mobil or Shell projects), which were previously net importers
of European base oils. The EEA surplus production is mostly composed of heavy grades for which
there is limited demand in the EEA and sufficient demand outside the EEA. Heavy grades (for
instance 600 solvent neutral) are therefore dumped on the spot export market. Surplus production
for light grades (for instance solvent neutral 150) is sold in the EEA market. Exports are predomi-
nantly for heavy grades; on the basis of the figures provided by the nine most important competitors
to Exxon and BP/Mobil, the breakdown into viscosity grades is 24,3 % for light neutrals, 12,63 % for
medium neutrals and 63 % for heavy neutrals. Heavy grades are also used as process oils.

(327) Exxon has explained in its management documents that […]* (31) (32) (33) (34) (35) (36) (37).

(328)

If EEA prices were to increase by, say, 5 % relative to Singapore prices, imports into the EEA would
not be able to compete readily with EEA production. Since lubricant formulations are bound by
base oils interchange rules of ACEA and API, major investments would have to be made to obtain
accreditation for these infrequently traded base stocks. Market investigation has indicated that none
of the major additives companies have invested in accreditation programs for imported base stocks
from companies other than Exxon, Mobil or Shell. Even if the base oils interchange rules issue were
solved (which would be costly and take at least 18 months) this would only have an effect on the
ACEA accreditation and not on API. Transportation and handling costs would in any case need to
be added.

(329) Finally, it must be noted that, contrary to the parties' assertions, there is no real spot market for
base oils in Europe with any material liquidity. All traders that were questioned have responded that
they have not imported base stock volume in the EEA in the past years. Traders play only a small
role as intermediaries in export business. All but one competitor to the merging parties (apart from
Repsol: 24 KT) have indicated that they do not use traders for exports or imports from outside of
the EEA.

(330) From the discussion above it can be concluded that the production and sale of group I base oils in
the EEA forms a relevant market. This is notably due to the current specific European consumption
profile and to its quality requirements.

Additives

(331) The parties have argued that the relevant geographic market is at least the EEA. The determination
of whether the market would be the EEA or wider does not alter the competitive assessment of this
transaction and therefore the market definition can be left open.

(31) [...]*
(32) [...]*
(33) [...]*
(34) [...]*
(35) [...]*
(36) [...]*
(37) [...]*

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Official Journal of the European Union

L 103/37

Lubricants

(332) For all the possible lubricant markets (with the exception of ester-based turbine lubricants that is
discussed later), their geographical scope can be left open since, on the basis of the above market
definitions, the concentration will not create or strengthen a dominant position which will signifi-
cantly impede competition.

COMPETITIVE ASSESSMENT

Base oils

Current market structure

Market positions for base oils; a two-tier competition

(333) The producers of base oils can be divided into four groups:

(i) the pan-regional companies: integrated oil companies who have base oil refineries worldwide
with a strong EEA presence and production which exceeds their needs: Shell, Exxon, BP/Mobil;

(ii) the regional companies who have national base oil offer with production that for some of them
exceeds their internal needs: Cepsa, Repsol, Agip, Fortum, Elf, Total, KPI, Petrogal and DEA;

(iii) producers of infrequently traded base oils like Iplom, MOH, SRS. These base oils are likely to be
of a lower quality and are destined mainly for exports, high volume industrial lubricants and
process oils. The four major additive suppliers have indicated that they have not undertaken
accreditation for these base oils;

(iv) the unconventional base oils producers like Nynas (naphthenic base stock for speciality indus-

trial lubricants) or Fortum (previously Neste) producing PAOs.

(334) Exxon supplies base oils throughout the EEA from three plants located in Fawley, United Kingdom,
Port Jérôme, France and Augusta, Italy. BP/Mobil has five plants located respectively in France:
Gravenchon and Dunkirk (the latter including a 40 % participation of ELF), the United Kingdom
(Coryton), Germany (Neuhof) and in Spain where it operates, together with Cepsa, the base oils
plant in Algeciras. Shell has four plants,
in the Netherlands (Pernis), France (Petit Couronne),
Germany (Hamburg) and the United Kingdom (Stanlow). Exxon, BP/Mobil and Shell control 12 of
the 24 base oil refineries in Europe, among which eight of the 10 largest. In order to calculate the
volume of the EEA market for group I base oils and the parties' market share the Commission has
taken the following elements into consideration. The market shares were calculated according to
three methodologies: first, on the basis of nameplate capacity as proposed by the parties, secondly,
on the basis of effective production and thirdly on the basis of group I production.

Nameplate capacity and effective production

(335) All figures are based on 1998 data provided by Exxon, Mobil and their base oils competitors (third
parties) for their respective plants. Where third parties had not presented the requested figures (as is
the case for MOH, SRS and to a minor extent AGIP), the Commission used the data as presented by
the parties in the form CO. As third parties have requested to consider the provided data on effec-
tive capacity, production and sales as confidential, only ranges of percentages have been retained in
the table. The following base oil production and capacity table compares the effective capacity and
output with the Enerfinance '96 nameplate capacity provided by the parties.

L 103/38

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Official Journal of the European Union

7.4.2004

EEA production and capacity

Capacity (in Kta)

Production (in Kta) in 1998

Nameplate
capacity
'96 (1)

Nameplate
capacity
'96 (1)

Effective
capacity
'98 (3)

Base stock including
process oils (6)

White oils
and paraf-
fins (3)

Waxes (4)

Company

Group I:
Share of
EEA
production

Group II/III:
Share of
EEA
production

Share of
EEA
production

Share of
EEA
production

[…]*

In (Kty)

In %

In %

Exxon

1 825

BP/Mobil (2)

1 443

Shell

Agip (7)

Cespa

DEA

Elf

Total (5)

KPI

Fortum (Nesté)

Repsol

Petrogal

Nynas

Iplom

MOH

SRS

Addinol

OMV

1 280

520

166

250

174

545

230

92

300

150

250

340

160

170

0

0

23,1

18,3

16,2

6,6

2,1

3,2

2,2

6,9

2,9

1,2

3,8

1,9

3,2

4,3

2,0

2,2

0,0

0,0

Grand total

7 895

100,0

100,0

100,0

100,0

100,0

(1) On the basis of parties' figures.
(2) Mobil indicates a production imbalance of […]* Kta due to inventory movement.
(3) Effective production capacity excludes white oils.
(4) Waxes are a by-product of base stock and therefore not included in nameplate capacity.
(5) Total’s paraffin production is considered as white oils.
(6) White oils production are not included in base oils production.
(7) Capacity utilisation on the basis of the parties’ figures.

(336) Process oils are considered as base oils. Aromatics, parrafins, white oils and greases are not included
in base oils sales as they are either a by-product or need further refining. White oils, paraffins and
waxes depend very much on the raw materials output and competitive advantages and economies of
scale lead to very large market shares. These products are, however, either the result of a further
step in the refinery process of base oils or a by-product of base oils production. The assessment of
the parties' competitive position therefore is linked to that of base oils.

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L 103/39

Market shares based on sales to third parties

(337) Merchant market sales have been defined as sales to third parties both inside and outside the EEA
including spot-market sales. Sales to affiliates are considered as captive sales. Sales to clients outside
of the EEA has been kept in the calculation to reflect the parties position that exports could be redir-
ected to satisfy the EEA demand. Sales to additive companies are considered as merchant market
sales (except in the case of AGIP additives and sales by Shell and Exxon to their additive activities
prior to the JV).

Company

Share of merchant market

(%)

Exxon (1)

BP/Mobil (2)

Shell

Agip (3)

Cepsa

DEA

Elf

Total

KPI

Repsol

Petrogal (4)

MOH (4)

SRS (4)

[30-40]*

[10-20]*

[10-20]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

100

Grand total

(1) Difference of […]* Kta (production — sales).
(2) Mobil indicates a production imbalance of […]* Kta (inventory) which is allocated to captive sales.
(3) Capacity utilisation on the basis of the parties' figures.
(4) On the basis of the parties' figures.

(338) Exxon's ability to sell to the merchant market, due to investments in base oil capacity in the 1950s
and 1960s, is extremely important: […]* of its production is available for the merchant market
while BP/Mobil's capacity for the merchant market comes to […]*.

(339) On the basis of 1998 sales figures,

the calculations indicate Exxon's significant share of the
merchant market ([30 to 40]* %), with BP/Mobil taking second place with [10 to 20]* %. Shell is
third with a stake close to BP/Mobil (although it has to be indicated that nearly half of the volumes
Shell has available for the merchant market are sold as process oils). Total and Agip have market
shares below 8 %. Smaller competitors, such as DEA, Cepsa, Repsol, KPI, Petrogal, SRS, Petrogal and
MOH, have between 3 % and 5 % of the merchant market. Elf is to be considered as a net buyer on
the market.

(340) Finally it must be stressed that the market shares indicated above have not materially varied in the

past few years.

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Official Journal of the European Union

7.4.2004

(341) Overall, it appears that whatever the methodology chosen, Exxon is the clear market leader in the
base oil market both in terms of absolute production and in terms of production available to third
parties. The main competitors to Exxon are BP/Mobil and Shell but they sell a smaller proportion of
their output to third parties.

Barriers to entry and exit

(342) According to the parties, new capacity in the EEA is unlikely at current overcapacity and depressed
prices, and if new capacity were to be installed, it is likely to be group III capacity for which
increased demand is to be expected in the future. The parties have estimated that the construction
of a new plant (group II/III) would require USD […]* million for a […]* KT/year capacity. Third
parties have confirmed this by indicating that the construction of a new plant would take two to
three years and involve investment of USD 400 million for a 400 KT/year plant.

(343) Converting existing group I capacity to group III is feasible and requires an investment of USD […]*

compared to a USD […]* grassroot investment. […]* (38).

(344) Closing a refinery entails significant costs, notably because of the need to rehabilitate the land.
Nevertheless, three base oil refineries have closed over the past two years: Llandarcy (BP/Mobil UK:
with a nameplate capacity of […]* Kty.), Addinol (170 Kty in former East Germany) and one of the
two DEA base oil plants in Germany. These base oil refineries were producing heavier grade base
oils and were therefor hit by the drop in export prices since 1997. Although there is a significant
cost, refiners take the decision to close when the break-even point for closing is reached. Other base
oil plants are said in the industry to be likely to be closed in the near future because of low produc-
tivity.

Privileged role of Exxon, BP/Mobil and Shell with limited constraints exercised by smaller
base oil producers

Base oils interchangeability for all refineries and limited accreditation constraints.

(345) API/ACEA accreditation is given for the finished lubricant blend of base oil and an additive after
having passed the necessary tests. This accreditation precisely defines the producer of the base oil
(accreditation for the base oil is given for all plants) and the specific additives package. If the origin
of components is changed, re-accreditation is necessary (10 % group I interchange is accepted
without testing required). The consequence of this is that pan regional base oil suppliers (that have
invested (39) in obtaining interchange for their base oil production plants) have to pass accreditation
of their base oil with a certain additive package only once. As they have several production units
and multiple storage units with geographic coverage, they are in a better position to supply several
blending plants. Regional base oil producers, who do not have this geographic production spread,
either have to face higher transportation costs from their refinery to the customers premises or have
to buy base oil on the market close to their customer (the blenders) in order to avoid higher trans-
port costs but then have to pass accreditation for each base oil bought on the market.

(346) Competitors to Exxon and Mobil (both for base oil and for lubricant blending) have indicated that
blending plants are very sensitive to the certainty of continuous supply and quality of base oils as
the stocks they have available at their plants are limited. Supplying relatively small volumes from a
single base oil plant to a pan-regional network of blending plants at regular intervals therefore
imposes significant costs for even the largest of national integrated base oil companies with suffi-
cient merchant market capacity.

(38) [...]*
(39) BP/Mobil have spent approximately USD [...]* million in order to obtain interchangeability between its (then) [...]*

European refineries.

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L 103/41

Advantages derived from plant economies of scales

(347) The parties have acknowledged that economies of scale play a certain role in the production of
group I base oils. Exxon, BP/Mobil and Shell control […]* of the 24 base oil refineries in Europe
among which […]* of the 10 largest. That brings them a certain cost advantage over their smaller
competitors because they can better spread fixed costs over the production. Only Agip in Italy and
Total in France have plants of comparable size and could benefit from comparable economies of
scale. As Mobil has indicated in its business plans (40), […]*. Shell is considered by the parties as effi-
cient and profitable thanks to a integrated (fuels and lubricants) view of business and profitable
waxes/greases/white oils.

(348) The following table provides a ranking according to base oils plant dimension:

Ranking

Refinery

Owner(s)

Parties
estimate
of name-
plate
capacity

Groups

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

Augusta (Italy)

Livorno (Italy)

Gonfreville (France)

Port Jérôme (France)

Fawley (UK)

Pernis (Netherlands)

Exxon

Agip

Total

Exxon

Exxon

Shell

Gravenchon (France)

BP/Mobil

Dunkirk (France)

BP/Mobil (60 %) — Elf (40 %)

Petit-Couronne (France)

Shell

Coryton (UK)

BP/Mobil

Hamburg (Germany)

Heide (Germany)

Nynashamn (Sweden)

Stanlow (UK)

Europort (Netherlands)

Shell

DEA

Nynas

Shell

KPI

Neuhof (Germany)

BP/Mobil

Algeciras (Spain)

BP/Mobil (50 %) — Cepsa (50 %)

Porto (Portugal)

Petrogal (75 %) — Total (25 %)

Theodori (Greece)

Salzbergen (Germany)
(landlocked)

Escomberas (Spain)

Puertollano (Spain)

MOH

SRS

Repsol

Repsol

Huelva (Spain)

Cepsa (66 %) — Elf (34 %)

Finland

Fortum (Neste)

860

540

500

485

440

370

340

340

340

330

330

250

250

240

230

215

200

180

170

170

150

150

100

50

I

I

I/III

I

I

I

I/III

I/III

I/III

I

I/III

I/III

Other

I

I/III

I/III

I

I

I

I

I

I

I

III

(40) […]*

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(349) Additional benefits derived from dimension are (a) that large plants can optimise the crude intake,
and (b) that free production capacity is created, which is important in optimising the production
process as it offers more flexibility: this is important when producing several base stock categories.

Advantages derived from economies of logistics

(350) As indicated previously, Exxon, BP/Mobil and Shell have multiple refineries in the EEA. This Europe-

wide spread is further supported by storage capacity at strategic places in Europe

(351) This contrasts with the smaller national producers who only have one refinery from which it is not
as easy or economical to organise distribution to potential customers not located close to their
production. This is obviously the case for those landlocked refineries such as SRS and DEA, which
can supply local customers only by truck and train. These means of transport limit the maximum
distance for which it is economically viable to transport the product, but also impose additional
transport costs. Competitors have indicated that transport by land is limited to a radius of 500 km
by truck and 1 000 km by train. Transportation costs are not comparable due to the limited
volume truck and train can transport and vary between 6 % and 10 % of the sales price of the
product.

(352) Even single refineries based on the sea face higher average transport costs. The parties have esti-
mated the average EEA transport cost at […]* % of the landed price. They also explained that EEA
transport costs comprise from […]* % (United Kingdom to the Netherlands) to […]* % (Italy to the
Netherlands) of variable costs. Assuming that the fixed costs remain constant for the two possible
journeys, this means that the cost of transport from Italy to the Netherlands is […]* % higher than
from the United Kingdom to the Netherlands (41). In other words if transport costs from the United
Kingdom to the Netherlands were […]* % of landed price, they would be […]* % if the products
were transported from Italy. The geographic spread, coastal location or connection to blending
plants therefore determine the competitive position of a base oil refinery and its ability to compete
on the EEA merchant market as opposed to local or outside EEA export market.

The dynamics of the base oil market reinforce Exxon, BP/Mobil and Shell's advantages

A b i l i ty t o se t t h e sta nda r ds for fu tu r e lu b r i c a nt de v e l op me nt

(353) Because of the need to obtain accreditation for blends of base oils and additives, size is a self-reinfor-
cing competitive advantage in the base oil market. On the basis of market information, additive
packages for new lubricant formulations are typically developed first for Exxon, BP/Mobil and Shell
base oils. The major European automotive additive suppliers formulate additive packages for the
base oils selected by the lubricant blender. In general, independent blenders select Exxon, BP/Mobil
or Shell base stock, while national integrated oil companies with blending activities may select their
internally produced base stock. Additive producers will independently invest in additional accredita-
tions, but will only do so for the major traded base oils (principally Exxon, Shell and BP/Mobil), as
for these base oils, the additional accreditation investment will be outweighed by the opportunity to
secure extra sales. Other base oils than Exxon, BP/Mobil and Shell tend to be accredited in an ad hoc
manner to meet customer demands if such appears to be technically possible and commercially
viable.

(41) [...]*.

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L 103/43

(354) Additive suppliers have indicated that, on average, more than half of their additive sales are made of
‘off-the-shelves packages’. The Commission has asked the four main additive suppliers to indicate
with which base oils they have developed duly accredited ‘off-the-shelf DI packages’, either for indus-
trial or for automotive lubricants purposes. On average, more than 70 % of all the packages avail-
able are formulated on the basis of Exxon, BP/Mobil and Shell base stock. Apart from these compa-
nies, only Total and Elf (and to a minor extent AGIP and KPI) have accreditations with multiple addi-
tive suppliers. Exxon, BP/Mobil and Shell are therefore the reference base oil suppliers with few
other smaller base oil suppliers being compatible. Additive suppliers have confirmed that they tend
to propose and develop formulations for automotive applications only with base stock from the big
three since they can expect to generate more sales for these base oils which are readily available on
a pan-regional market in the necessary volumes and at constant quality.

(355) Finished products composed of Exxon, BP/Mobil and Shell base oil can be more rapidly adapted to
new standards since base oil interchange ensures that the product can be purchased close to the
blending plant without imposing additional accreditation. If a multi-regional blender would opt for
purchasing base oils from different local producers, multiple testing and accreditation would be
required for obtaining finished lubricant accreditation. That makes them less attractive for additives
suppliers.

(356) According to third parties (both blenders and base oil producers), this inherent advantage of base
oils produced by Exxon, Shell and BP/Mobil is of paramount importance in an industry that has
witnessed over the recent years a shortening of the product life of lubricants. It is today in the range
of three to five years for automotive lubricants. Moreover, OEM qualification requirements are
becoming more severe. Lubricant manufacturers therefore constantly have to develop new formula-
tions. Because of the shorter time available to develop new products and to amortise these costs,
lubricant blenders tend to turn to the three major base oil producers, with whom additive manufac-
turers systematically develop adequate packages. Additive suppliers indicate that they first develop
the new formulations with Exxon, BP/Mobil or Shell base oils since only these base oils can generate
enough sales to recoup the investments made. OEMs, sometimes in collaboration with oil compa-
nies, steer the next generations of lubricants. Competitor lubricant blenders have indicated that
OEMs will tend to discuss their requirements with Exxon or BP/Mobil and to a lesser extent with
Shell (principle of one-stop shopping) as the only global players with presence on all levels of the
supply chain. […]* (42). Competitors have indicated that their limited ability to compete with Exxon,
BP/Mobil and Shell will be further restrained by the ongoing shortening of the product life of lubri-
cants.

(357)

Industrial lubricant blending is equally affected by this trend, as blenders try to minimise storage
and the diversity of base oils/additives. Lubricant blenders subscribing to high quality standards do
not store base oil of different suppliers in the same base oil tank (not even for base oil with similar
specifications). Due to limited storage, the blender therefore tends to use a ‘compliance base oil’ that
can be used for both automotive and industrial lubricant applications.

T h e b a se oi ls ma r ke t i s dr i ve n by th e h i g h e r q u a li t y r e qu i r e me nts

(358) Blending plant logistics also add to the cost of switching base oils as blending plants are normally
optimised to keep the number of storage tanks needed for base oils and additives to a minimum
(some of the very large blending plants may store over 30 grades of base oil). A ‘compliance base
oil’ is therefore often used. A compliance base oil is locked into particular specifications across a
wide range of products. This means that the base oil used for top-tier products is also used for

(42) [...]*

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7.4.2004

lower-tier products. Changing the formulation of a top-tier product leads to a wide span of formula-
tion costs driven by the choice for the top-tier base oil. The alternative is to purchase new tankage
capacity and carry greater stocks, which can be expensive, or to specialise in the production of
either only automotive lubricants or only industrial lubricants (although the parties have indicated
that this is a recent and growing trend, they have claimed that there is no separate base oil product
market for industrial and automotive lubricants). The fact that base oil and additive combinations
are locked in by accreditation also affects the blender-additives relationship as a lubricant blending
company typically deals with additive suppliers on the basis of a whole basket of additives it needs
to purchase. If the blender changes the lubricant formulation by switching base oils suppliers, then
the additive supplier will need to agree on a new (joint) development programme. If this under-
standing is absent, the oil company would be forced to shop around for base oil-additives combina-
tions that are already fully accredited,
thus reducing his buying power vis-à-vis the additives
producer.

(359) Virtually all branded automotive products are approved against standard industry specifications (API,
ACEA) under tightly managed and documented test regimes. Achieving these minimum performance
standards are qualifiers, merely allowing the product to be used for the particular application.
Choice of approved product is then up to the channel customer or end-user (OEM). Major oil
companies liaise with OEM's and contribute to their strategic thinking, which may direct their tech-
nical development to specific customer requirements. When an OEM changes its specifications, this
will prevent any sales of a lubricant, whatever its brand, until the new specifications can be complied
with. Pan-regional competitors (Exxon, Shell, BP/Mobil) are increasingly adopting a single pan-Euro-
pean product range (both for automotive as for maintenance lubricants).

(360) A lubricant blender cannot afford to see its competitive position endangered when the launch of a
new product formulation might be delayed because of the time needed to acquire extensive testing
documentation for a less frequently traded base oil. When an additive supplier has the choice of
initiating a new product formulation, he would generally opt for Exxon, BP/Mobil or Shell base oils.
Base oils interchange and finished lubricants accreditation limit the frequency of changes in base-
stock suppliers once a lubricant is formulated. […]* (43).

(361) The degree of customer switching as provided by the parties indicate that national base oils produ-
cers compete for local blenders (both automotive and industrial), specialist industrial blenders, addi-
tive suppliers […]* (44) and will occasionally win a contract for first fill or major blender in their
home market. Exxon and to a minor extent BP/Mobil are focused on term contracts with the pan-
regional blenders and OEM first fills.

(362) Exxon and BP/Mobil have lost a number of small blenders as clients to competitors, such as Total,
Elf, KPI and Shell. Sometimes this was on the basis of quality and sometimes on the basis of price,
but in all cases the winning competitor had production capacity close to the client. This does not,
however, imply that Exxon and BP/Mobil do not compete on price; in a number of cases, the lost
customer was recuperated the year after.

(363) Although Exxon and BP/Mobil have […]*, they often lose out when competing with Petrogal,
Repsol, Cepsa, KPI, Total, Elf or even small amounts of eastern European base oils. It is however to
be noted that, as the parties indicate, ‘additivers may be able to use relatively low quality base oils’
and that additive suppliers sometimes buy these volumes additional to their Exxon, Shell or BP/
Mobil term contract on the spot market. As additive suppliers do not impose stringent accreditation
or quality requirements, less powerful competitors ambitiously compete on price (even if this leads
to additional transportation costs) to capture this demand.

(43) [...]*
(44) [...]*

7.4.2004

EN

Official Journal of the European Union

L 103/45

(364) Pan-regional demand (Texaco, Fina, Castrol, Fiat lubrificanti, Fuchs, etc. ) is increasingly captured by
Exxon, BP/Mobil and to a minor extent Shell as pan-European contracts are concluded. Occasionally,
some supply is lost to a national base oils competitor who is close to the blending plant (Agip in
Italy, Repsol in Spain) but more often volume is gained from these competitors. Quality, certainty of
supply and no accreditation restraints are crucial for these blenders, […]* (45).

(365)

In any case, it can be concluded, […]*, that Exxon functions as a swing producer as it supplies
products to both national base oils producers (Elf, Total, Agip, KPI, MOH) and BP/Mobil and Shell
whenever these producers are confronted with product shortage, refinery maintenance or need for
specific grades. When the market becomes long or when production capacity is back at normal
level, these clients fall back on their internal production.

A s a conse q u e nce sma lle r ba se oi l r e fi ne r s foc u s on loca l sa le s a n d on e x p or ts

(366) Depending on their relative strength (local champions), regional

integrated oil companies with
blending activities might be able to win contracts for blenders for certain regional markets (for
instance, an OEM first-fill for cars produced in the home country of the base oils producer but not
in other countries), are present in industrial lubricants for which requirements are based on general
performance rather than formulation and have developed strong finished lubricant sales positions.

(367) Small independent lubricant blenders also tend to acquire positions in niche markets. They will
essentially be active in the industrial specialities field where the competitive factors are not strongly
related to (integrated) strong positions in base oil productions and where geographic spread and
economies of scale are less determinant. Local small blenders who have specialised in industrial
lubricants will be very price-sensitive and will change base oil suppliers to increase their leverage.
Customer technical assistance, flexibility and know-how in specialised applications are the primary
competitive assets and smaller, local refiners often excel in this. These local blenders will not have
pan-regional suppliers; they will prefer to initiate joint-development programmes with local additives
suppliers and guaranteed base stock supply nearby their blending operation. The importance of base
stock is also less relevant in these speciality lubricants. For example, a speciality metalworking fluid
will be sold at three times the price of an industrial hydraulic oil. The base oils of which this metal-
working fluid is composed will account for 5 % of the total production cost compared to 35 % for
the additives.

(368) However, even for industrial lubricants and marine lubricants the base oil/additive combination is
equally important despite the fact that performance accreditation can be kept ‘in-house’. OEMs are
becoming increasingly aware of the potential effects of different base oils. A base oil switch would
require validation tests of a number of key products and critical performance parameters.

(369)

In addition to base oil interchange and finished lubricant accreditation, regional location and OEM
approvals are crucial as well. This is illustrated by a base oils refiner that profits from multi-plant
base oil interchangeability, who has indicated that base oil interchangeability does not automatically
lead to guaranteed sales. This company has confirmed that it has very limited sales for automotive
applications and has only a few base oil/additives accreditations. According to the company, they
lack regional presence and economies of scale to compete with Exxon, BP/Mobil and Shell on a pan-
European level. They point out that they are increasingly losing national automotive sales to the
benefit of Exxon and BP/Mobil due to increasing OEM requirements and an evolution to pan-Com-
munity demand. For 1999, only supply contracts for industrial applications have been renewed.
They also indicate that, even if they had full accreditation with all major additives suppliers, they
would not be able to win pan-EU supply contracts because of their local presence (cost of transport
within the EEA is 10 to 12 % including handling). Only 9 % of their production is destined for the
pan-European market and is exclusively used for industrial lubricants.

(45) Toll blending refers to the blending of lubricants under the brand of and according to the specifications of a lubri-

cant blender (who may be without production capacity in that region).

L 103/46

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Official Journal of the European Union

7.4.2004

(370) The market dynamics described above have left the smaller base oil companies little choice but to
increase their sales on the export markets. From the market investigation conducted by the Commis-
sion, it appears that between 20 and 40 % of their current production is sold on the export spot
market. As indicated before, a large part of these volumes consist of heavy grades for which there is
insufficient demand in the EEA. Most of the time these sales are done on a spot basis and at prices
which are materially lower than on the EEA market (at current prices between 20 % and 30 %
lower).

[…]*

(371)

[…]* (46) (47) (48).

Competitive constraints exercised on Exxon, BP/Mobil and Shell by the smaller players: limited possibility to
increase their sales in the EEA market

(372) As explained above, the ability of national players to compete with pan-regional base oil suppliers is
limited by the greater transportation costs they have to bear and the smaller extent of their base oil
accreditation. This restricts these smaller players to supply mainly local blenders which are mostly
oriented towards industrial lubricants or to export their production. The parties have argued that
the EEA base oil market is affected by strong overcapacity which limits the ability of any player to
manipulate prices or production. In the course of the Commission's market investigation, competi-
tors have put in doubt the relevance of the alleged structural overcapacity as a check on Exxon/
Mobil's possible behaviour. In effect, there is no overcapacity on the market but rather surplus
production that cannot be sold on the EEA market. This is due to the following factors.

A c tua l ov e r c a pac i ty i s mi sst a te d b y th e par ti e s

(373) The parties have defined overcapacity as the difference between nameplate capacity and actual
production. Nameplate capacity appears however to be an unreliable indicator of the production
capacity of a base oil refinery. Instead of speaking of overcapacity, it seems more relevant to focus
on surplus production (that is, the difference between current EEA production and current EEA
consumption).

(374) First of all, the parties have updated their data on nameplate capacity, admitting that the nameplate
capacities mentioned in the form CO are significantly higher than actual production capacity. On
the basis of production capacity that has been shut down alone, the parties have revised their initial
‘more than 30 % overcapacity’ to less than 24 % although different appreciations of overcapacity
circulate (49). These figures are still questionable. For instance, the parties had revised downward
many of the publicly available nameplate capacity estimates of their own plants but not those of
competitors. In addition, these figures are based on capacity without differentiating the output.
Competitors like NYNAS only produce naphthenic base oil (group V) for specific industrial applica-
tions which cannot compete with paraffinic base stock used for automotive or general industrial
lubricants (excluding specific applications such as printing inks or rubber) due to the price differen-
tial and technical characteristics. The same goes for those refineries which produce group III or IV
base oils.

(46) [...]*.
(47) [...]*.
(48) [...]*.
(49) [...]*.

7.4.2004

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Official Journal of the European Union

L 103/47

(375) There are many reasons why nameplate capacity is an overestimate of the real capacity of base oil
refineries. This is for instance due to bottlenecks in the production process and refinery shutdowns
for maintenance that lower the effective production capacity. An important base oil competitor
explains that because a number of Community base oils plants are old, the actual average produc-
tion capacity tends to be below nameplate capacity. These refineries no longer benefit from de-
bottlenecking […]* (50).

(376) The parties have abundantly cited a study of the European refinery industry made by Roland Berger.
One finding of this study was that refineries, because of their very high fixed costs, tend naturally to
produce at any time at their maximum capacity available. Indeed, competitors to Exxon and BP/
Mobil have indicated to the Commission that their plants run at maximum capacity (except for base
oil refiners producing other than group I base oils) and that it would not be economically viable to
reduce the utilisation of their refineries. Cepsa indicates that even with significant volumes exported
outside EEA (at lower prices than inside EEA) the plant runs at 100 %. According to Cepsa, reduced
utilisation of the production capacity is economically not viable.

(377) The overall surplus production ratio calculated as the proportion of exports among merchant sales
is of 26 %. However, around […]* of this surplus production is in the hands of the merging parties.
The surplus production held by third parties amounts to approximately […]* % of the merging
parties EEA merchant sales. As explained below, it is nevertheless unlikely that any of this excess
production could meet the EEA demand.

B a se oi l p r oduc ti on de sti ne d for th e E EA ma r ke t could not be e a si ly an d r e a di ly
i nc r e a se d th r ou g h r e - tu ni ng of r e f i ne r i e s

(378) The parties have argued that base oil production in the EEA could be at no cost increased by 5 to
10 % through better crude intake and tuning of the refinery. However the market investigation
conducted by the Commission has revealed that most of the EEA refineries are already running on
the most appropriate crudes to produce base oils. Similarly, it would be irrational to expect refiners
not to have optimised their production already through the proper tuning of their refineries. Some
of the most important competitors to Exxon and BP/Mobil have indicated that they are tight on
light grades.

(379) Finally,

it could be argued that some refiners would rather further refine base oils in order to
produce fuels and could at any moment stop that process and therefore increase their production of
base oils. The parties have however explained that further refining base oils into fuels has never
made economic sense for the past 10 years.

(380) A refiner can, however, decide to attribute base oils production capacity to fuels production; a
smaller competitor producing group III base oils has indicated that they are considering switching to
fuels production if they are not in a position (due to low demand) to raise output of base oils.
[…]* (51).

(381) Crude/feedstock selection influences the volume of the effective output. For instance, it appears that
smaller refineries would adjust to declining prices for export by using crude slates that allow them
to steer the feedstock into increased fuel production and therefore lower base oil production. Kuwait
Petroleum International (KPI), an important base oil competitor puts it as follows: ‘A refiner will
maximise local opportunities. After that he will either not produce base oils and use the feed mole-
cules for the production of fuels, thus not utilising the base oil refining capacity. Either he can
decide to produce the base oil and sell it into export (non-EU) market’ or another competitor: ‘We
will direct feedstocks to increased fuels production if capacity utilisation rate is low’.

(50) [...]*.
(51) [...]*.

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Official Journal of the European Union

7.4.2004

B a se oi l e xpor ts fr om th e E EA could not be e a si ly r e di r e c te d to t h e E E A mar k e t

(382) Base oils exported from the EEA could normally not be consumed locally because they do not meet
the local requirements. Although the standard qualities (for instance a 150 solvent neutral) offered
and sold by all European refiners are the same in export markets as in the EEA, demand is different
in the export markets when compared to EEA demand.

for higher industrial

(383) High grades have historically been highly in demand by the export regions for engine oils in
warmer climates,
lubricants consumption (heavy industries in emerging
markets) and for higher process oils consumption (tyre production). Until Asian capacity competed
with these exports, heavy grades were sold at a premium. Light grades consumption in the EEA has
increased as engine lubricant requirements have gone up while there is more volume on the market
for heavy grades and less demand (Asian crisis). This difference in qualities is illustrated by the mate-
rial differences in prices reported on the export market compared to the EEA market, as is explained
in the section below.

Aug 98

Sep 98

Oct 98

Nov 98

Dec 98

Jan 99

Feb 99

Mar 99

Apr 99 May 99

(USD/tonne)

Icis 150 EEA

272,5

268,7

266,0

265,0

262,3

255,6

255,0

250,0

245,0

245,0

Icis 150
Exports

240,0

236,2

231,1

218,0

204,0

196,8

189,1

179,8

175,0

175,0

Difference

32,5

32,5

34,9

47,0

58,3

58,8

65,9

70,2

70,0

70,0

% of EEA
price

Exxon
SN600

Mid-ICIS
500SN
Export

Difference
% of
price

EEA

12 %

12 %

13 %

18 %

22 %

23 %

26 %

28 %

29 %

29 %

[…]*

237,5

233,7

228,6

215,5

192,1

179,3

177,5

173,6

170,0

170,0

[…]*

(384) The table above shows the evolution of prices for two typical base oils within the EEA as compared
to the export for the same quality. It is striking that the price differential rises from 11 to 12 % of
the EEA price in August 1998 to 26 to 29 % in May 1999. If exports could be redirected in any
way to meet the EEA demand, there is little doubt that the EEA refiners would have done so long
ago because of the longstanding price differential and even more likely in the past year because of
the material increase in the price differential.

7.4.2004

EN

Official Journal of the European Union

L 103/49

(385) Export spot prices are significantly below EEA prices for a given base oil (for example SN 150) and
this can, apart from the effect of term contracts and potential quality differences, only be explained
by supply and demand effects. As the parties have indicated, a refiner will choose to dump a certain
volume on the spot market as tankage approaches maximum levels and will be ready to accept
market price levels covering the cost of producing the base oil versus having unused capacity. In a
long market, this value could be lower than total operating costs but still could be economic for the
producer. It is however important to stress that Exxon, Shell and to a minor extent BP/Mobil, have
very few spot-market sales as compared to national base oils competitors. As indicated before,
Exxon, Shell and BP/Mobil sales are mostly term, competitors are spot-oriented. If flexibility existed
in the industry to redirect volumes from export to EEA consumption, then it is clear that, at the
actual price premium of 28 %, this flexibility does not exist for producers who are mainly spot-sales
oriented. As indicated before, single base oils plant refiners with limited accreditation are focused on
local blenders or sell on the spot market (both within and outside the EEA). In any case, the volume
of light grades exported outside the EEA is limited, as these volumes are sold on the EEA market
because of higher prices and lower demand outside the EEA. The viscosity breakdown of base oil
volumes exported in 1998 by the nine most important competitors to Exxon-Mobil is as follows:
light neutrals ([…]* %), medium neutrals ([…]* %), heavy neutral: […]* %. Some competitors have
even described the light base oils market as becoming increasingly tight.

(386)

In an internal Mobil memo (52), the effect of rationalisation on light grades is described as follows:
[…]*.

(387) Based on figures provided by the most important competitors (Agip, Cepsa, DEA, Elf, KPI, Repsol,
Shell, TotalFina, Petrogal) to the parties, the viscosity breakdown of base oil volumes produced in
1998 is as follows: light neutrals (45 %), medium neutrals (8,9 %), heavy neutrals (46,1 %).

D e sp i te th e h i g h e r p r i ce s a v a i l a ble i n th e E E A , ba se oi l p r o du c e r s do not h a v e th e
p ossi bi li t y of
li g h t g r a de s for w h i ch th e r e i s twi c e as
mu ch de mand in the E EA as for h e a vy gra de s. E EA base oil p r oduce rs ca nnot
swi tch to i nc r e a se d li g h t g r ade s pr odu c ti on wi t h out h e a v y i nve stme nt a s comp e ti -
t or s h a v e i n d i c a te d t h a t th e y h a v e op ti mi se d L N p r odu c ti on

i ncr e a si ng t h e ou tput of

(388) Competitors have indicated that the flexibility of base oils production is relatively limited. A given
crude contains only a fixed potential of a certain viscosity. Selecting crudes other than the crudes
currently used by the major competitors to Exxon and BP/Mobil will only have very limited (3 to
5 %) effect on light grades output. Switching crude oils also presupposes that the refiner has suffi-
cient lubricant vacuum capacity. If he has not, an investment of around USD 50 million is necessary
(figures based on competitors' estimations).

(389)

Increased light grades output can be obtained by converting heavy feed molecules into light which
would involve the construction of a hydrocracker (representing an investment of around USD 100
million).

(390) The parties have indicated the possibility of running more suitable lubricant feedstocks. Competitors
have indicated that the economics for doing so are strongly negative as lubricant qualified feedstock
comes at a premium of USD 10/tonne versus the normal feedstock (as used by the fuels refinery).
Supposing that the yield of the light base oil is around 20 % of the feedstock, then this would result
in a debit of close to USD 50/tonne on the production cost of the incremental light base oil, redu-
cing gross margins by about […]* % (53). To this have to be added transport costs of lubricant feed-
stock and the loss of revenues for HN sales. Several competitors have indicated that they are not
able to find lubricant feedstocks without facing unviable transport costs.

(52) [...]*.
(53) [...]*.

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Official Journal of the European Union

7.4.2004

(391) Volatility is the second element. A refiner has two choices: improving Noack volatility (as required
by current generation lubricants) at the price of at least 10 % decreased productivity when refining
more heavily or export a product with less tight volatility specifications on the less quality-driven
export market. An important base oil competitor puts it as follows: ‘Volatility restraints on 150 SN
tend to reduce the volumetric production capability for these grades as opposed to overcapacity’.

(392)

It is possible that some refiners choose to produce light neutrals of considerably better quality than
Exxon and BP/Mobil and thus have reduced light grades production. On the other hand, the parties
have stressed in their form CO that Cepsa, Repsol and Petrogal guarantee/market low-volatility light
base oils and that this constitutes an individual strength of these refiners. The Commission concludes
that these producers would not choose to produce such low-volatility light grades if there were no
underlying market demand for this and that volatility is an important element in assessing the possi-
bility to increase light grades production.

(393) The above shows that the surplus production on the base oil market exists mainly for the heavier
base oils which do not compete on the European market for automotive applications. Refineries run
at full capacity or have at least production of the required quality up to the capacity of their plants.
Further conversion to group III base oils might lead to inefficient base oil plants shutting down
rather than creating excess capacity and additional production in former import countries outside
Europe is compensated by reduction of capacity in Europe. As currently demand for group III base
oil is still marginal, the current group III production capacity will not be increased as is illustrated
by the grassroot plant of Neste which is only running at a fraction of its capacity. Exxon, BP/Mobil
and Shell have significant capacity for the merchant market and if regional players have excess capa-
city than the accreditation rules and limited geographical spread restricts their ability to compete on
a European level.

(394) Exports have declined due to the Asian crisis and the emergence of new capacities in former export
destinations. However, at the same time as Shell and BP/Mobil have installed high-capacity plants in
Asia (Singapore), three EEA base oil plants have been shut down, reducing capacity in the EEA by
more than 7 %. The overcapacity created by reduced exports outside the EEA has therefore been
balanced by the closure of EEA production capacity.

Market prices and margins and the effect of overcapacity

(395) On the basis of information provided by the parties, EEA base oil prices have been more or less
stable over the past 10 years. The evolution of gross margins as a percentage of selling price shows
that there has been no downward trend over the past 10 years. The gross margin as calculated by
Exxon for SN 150 and SN 600 remained in the range […]*. When comparing gross margins and
costs for the period […]*, it appears that there is a high correlation between their amounts and also
between their absolute variations. In other words, prices have been marginally influenced by varia-
tions in costs over that period. This is not a typical characteristic of a market allegedly affected by
important overcapacity. Indeed, one would expect that in an oversupplied market, a drop in costs
would be immediately followed by a drop in prices. In other words, although there is overcapacity,
it affects Exxon to a much lesser extent than its competitors who are positioned in the third and
fourth Solomon Cash cost quartiles.

(396)

[…]* (54).

(397)

[…]* (55).

(398)

[…]* (56).

(54) [...]*.
(55) [...]*.
(56) [...]*.

7.4.2004

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Official Journal of the European Union

L 103/51

Unique role of Exxon

(399) The Exxon Augusta plant (located in Sicily) is running essentially to supply term customers in the

export markets. […]*.

(400)

[…]* (57).

Effects of the merger on competition in the base oil market

Post-merger market structure

(401) Post merger, Exxon and BP/Mobil would have a combined market share in the range between [40 to
50]* % and [40 to 50]* % depending on whether it is calculated on the basis of the nameplate capa-
city or the ability of the parties to sell on the merchant market (see table above). Their closest
competitor would be Shell with a market share in the region of 18 % (on the basis of nameplate
capacity) and 10 to 14 % on the basis of sales to third parties. Total and Agip would have market
shares below 8 %. All the remaining competitors would have market shares below 5 %.

(402) The parties have indicated that a number of national integrated base oil producers have significant
capacities available for the merchant market. They would therefore, on the basis of their strong
competitive position, be able to counteract readily and immediately any attempt of the parties, post
merger, to increase prices. They add that the merger would not lead to the creation or strengthening
of a dominant position since the market is characterised by significant structural overcapacity of
[…]* % of nameplate capacity. The parties also indicate that the use of the more advanced group III
capacity will even increase availability of group I capacity. Equally, the parties argue that EEA
exports would be redirected to the EEA to profit from the price increase.

(403) As explained in the above sections, none of these allegations have been confirmed by the market

investigation conducted by the Commission.

The merging parties could profitably raise their prices or exert price pressure.

(404) The only potential constraint on Exxon/Mobil's behaviour could come from Shell. According to
information received from the market, Shell's base oil strategy is orientated on captive use and its
capacity for the merchant market would be insufficient to counter the combined Exxon/Mobil
market power. In addition, Shell and Exxon have joint interests and control in a number of ventures,
notably the additive manufacturer, Infineum. Shell has indicated that a 5 % price increase would not
be sufficient incentive to consider raising base oils output. Shell's base oils policy is to supply their
internal needs first. Profitability of the remaining production output is evaluated from the combined
fuels-lubricants refinery activities point of view and is heavily supported by specialities production
(white oils, greases and waxes) and process oils. Shell would therefore follow the price leader in base
oils production.

(405) Exxon could discipline its competitors if they were to oppose its price movements. […]*. The
prospect of seeing the market price fall because of such a move from Exxon could dissuade any of
its competitors from undercutting it aggressively.

(57) [...]*.

L 103/52

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Official Journal of the European Union

7.4.2004

(406) Base oil competitors have indicated that in case of price increases, they will (at current prices) follow
the price leader. Although the parties have emphasised the issue of EEA overcapacity, this has not
been confirmed by third-party base oil competitors. The most important competitors (with multiple
finished lubricant accreditations, such as Shell, Total, DEA, KPI) have all indicated that they do not
have idle capacity nor export volumes which could compete economically on the EEA market. This
is further illustrated by Total's acquisition of Fina. […]*. Total has indicated to the Commission that,
although it has more capacity than needed for its internal EEA market sales, it does not have suffi-
cient light base oil capacity and that it has no possibility to increase its light grades production capa-
city without major investments. It is therefore the Commission's understanding that Total will not
be able to supply base oils for Fina's blending activities.

Limited countervailing power of customers

L i mi te d a lte r nati ve s

(407) The parties have argued that they could not exercise any market power because they would be
facing a concentrated and sophisticated demand in the person of the lubricant blenders. This argu-
ment cannot however be accepted, as the bigger lubricant blenders would have little choice but to
go to either Exxon-P/Mobil or Shell. Whereas before the merger, lubricant blenders could play one
of the three against the others, this possibility will be suppressed after the merger has taken place,
with Exxon-BP/Mobil dominating the market place. Major lubricant blenders have clearly indicated
that quality and certainty of supply prevail over price and that they tend to limit the number of
suppliers to their pan-regional activities to two or, at most, three. After the merger, they will be left
with little choice as Shell has only limited capacity for the merchant market that is not already tied
up in term contracts.

(408) Competing blenders have stated that if Exxon–BP/Mobil were to raise prices with five percentage
points, they would have difficulties switching base oil suppliers for the reasons set out above. The
alternative to switching both base oil and additives supply would be considered, as one could shop
around the additives companies to take existing fully accredited combinations. This could not,
however, be done quickly, especially given the lead-time needed to clear existing additives, to re-
stock and to obtain OEM approvals. Base oil competitors have given estimates between 12 and 18
months at a cost of between EUR 300 000 and 700 000. In practice, the blender would accept the
price increase while starting a complete new formulation from scratch if the expected sales volume
could compensate the R & D budget necessary. Lubricant blenders would be squeezed between the
higher prices for base oils and the lubricants customers given the fact that the lubricant market
appears to be competitive.

ATIEL proposed reforms are unlikely to have an impact on the market

(409) The parties have further argued that the ATIEL rules relating to interchangeability of base oils (and
thus the ease in which base oils can be switched in lubricant formulations) will be changed in 1999.
The changes proposed to ATIEL would enable smaller base oils producers to form base oils families
which are interchangeable. It is true that ATIEL, a trade organisation whose membership comprises
a large number of lubricant companies, has ordered a revision of its base oils interchange guidelines.
This revision was requested some years ago by the national refining companies and lubricant blen-
ders. It seems to have been motivated by indicating that multiple refining companies are at a consid-
erable advantage in terms of pan-European supply by comparison with the single refinery compa-
nies. Since the revision has not happened as yet, it is the Commission's point of view, that assess-
ment of the proposed merger is to be based on the existing requirements of the ATIEL base oils
interchange guidelines, rather than on a potential revision in the future.

7.4.2004

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Official Journal of the European Union

L 103/53

(410)

Indeed, the occurrence of these changes is still very unlikely. ATIEL represents the lubricants sector
and has representatives from the independent lubricant blenders and the national integrated oil
companies. Although the pan-regional integrated oil companies (Exxon, BP/Mobil and Shell) are in
the minority, the change of rules will have to be adopted by unanimity. The fact that a request for
changing the ATIEL rules was introduced three years ago clearly indicates that the process of
reaching an agreement has been tedious and long and is not accomplished as yet. Even if the
proposal were to be unanimously adopted, it would still have to be adopted by the ATC and ACEA.
No significant problems are to be expected from the ATC (additive suppliers), but ACEA (repre-
senting the OEM's) on the other hand will require proof that a change of ATIEL rules will not nega-
tively affect the quality of the finished lubricant (and hence product liability) which may hinder a
swift implementation (or even acceptance) of the proposed changes.

(411) Even if the revision were adopted fully in line with the proposal (towards a system whereby two or
more companies could carry out testing together in order to claim interchangeability), the Commis-
sion does not believe that the potential relaxation of base oil interchange could be a material factor
in assessing the operation of the market. The major European motor manufacturers have agreed to
adopt, via their representation in ACEA, certain minimum technical specification requirements for
gasoline and diesel engines of which the matter of base oil interchangeability is covered by the
ATIEL code. In Europe, the usage of API and ACEA specifications by OEMs is broadly 50/50 as Japa-
nese and American manufacturers will tend to use API specifications, while European manufacturers
rely on ACEA. Non-European manufactured cars will therefore rely on API specified lubricants and
automotive lubricant blenders will therefore meet both accreditations in order to sell sufficient
volume in the market. In fact, virtually all automotive lubricants on the market give an API specifica-
tion as consumers are believed to be more familiar with API specification. Additive suppliers have
indicated that lubricants with ACEA accreditation are generally not marketed in isolation and would
carry other approvals. Consequently, automotive lubricants have to meet both accreditations in
order to make sufficient volume in the market. The proposed changes would therefore only affect
the EEA first-fill market where Exxon (and to a lesser extent BP/Mobil) are very strongly represented.
National base oil producers/lubricant blenders expect that less rigid ATIEL rules will eventually lead
the way to a common ACEA-API standard although nothing has been accomplished on this level (or
is even foreseen) as yet. As API changes specifications every two years, the actual burden of accredi-
tation and absence of base oils interchangeability will remain unchanged.

(412)

In addition, ACEA imposes only minimum technical specification requirements. Individual OEMs
impose more stringent requirements. Ford for instance has its own product specifications to which
the suppliers have to comply not only EU-wide but worldwide. These specifications are based on
API. Volkswagen, to mention another example, only uses API standards.

Exercise of market power

(413)

It can be concluded from the above developments that Exxon and BP/Mobil will hold a dominant
position in the EEA market for base oils. Market investigation has indicated that the concentration
will not create or strengthen a dominant position in additives or finished lubricants. However, the
exercise by a combined Exxon-BP/Mobil of their market power on the base oils market and the
already strong position of Infineum in additives may lead to a stronger position in finished lubri-
cants. For future-generation lubricants development, such control over the lubricants supply chain
may even lead to a situation where competition could be significantly impeded.

(414) After the merger, the combined Exxon-BP/Mobil could use its base oils dominance through various
strategies. For instance, it may have the incentive to use its dominance at the base oil level in order
to raise the costs of independent competitors at the lubricant markets level. To do this, it could exer-
cise pressure upon smaller players through increased prices of base oil, through standardisation of
products with an increasing number of new formulations accredited against its base stock/Infineum
additive packages or even through sudden price increases, combined selling of base stock additives
and restricted sales of raw materials. Shell would also benefit from such a strategy, as it would
strengthen them in consolidating their position at the lubricant level. Small base oil producers

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would not be able to counteract since their base oils are not used as references by the additive
suppliers. They are obliged, even if they have an international dimension, to supply base oils from
different sources (own-production in some countries, but competitors' base oils in other countries)
which forces them to spend more time and money on approvals (both API/ACEA and OEMs) and
weakens their competitive position.

(415) Following the merger, a combined Exxon-BP/Mobil could have an increased incentive to challenge a
changing base oil market by gaining market share from national integrated oil companies through,
for instance, low prices. Only Shell would seem to adapt to low prices and the other players facing
little EEA demand may have to divert their sales to the export market. This would undermine the
competitive position of national players and increase the pressure on the industry to close the obso-
lete base oil refineries, as it would no longer be economically viable for some plants to continue
operation. Capacity shut down would eliminate the current small effective overcapacity. If such
strategy were successful, Exxon-BP/Mobil could afterwards again raise its prices.

(416) Through a combination of its strength in the base oil market ([40 to 50]* %) and in the lubricants
markets ([20 to 30]* %), Exxon-BP/Mobil might be able to extend its dominant position on the base
oil market to additives and lubricants activities. The combined entity would be in a position to
capture future developments of new lubricants and establish close links with OEMs and additive
manufacturers which in turn would raise barriers to entry for their competitors.

(417) The market for additive packages is determined by the market for finished products containing such
additives: market power is exercised through concentrating the lubricants supply chain. As additives
packages are increasingly tied to specific base stock in order to provide higher performance
requested by OEMs, surplus capacity in base stock is no longer a guarantee of a competitive market.
Independent blenders would increasingly take Exxon-BP/Mobil and possibly Shell base stock since
these are readily tested and accredited by additive suppliers. Developing blends of additives with
other base stock would come at a premium price, as additive producers are no longer assured of
sufficient sales volume on these base stocks.

(418) Development, testing and accreditation for base stock other than Exxon-BP/Mobil would increasingly
have to be financed by the lubricant blenders. These steps in the lubricant development otherwise
(partly) financed by the additive supplier would impose significant costs on these blenders. Small
independent blenders would be hit first and would disappear from the market. National integrated
blenders would restrict their activities to their home countries. Highly profitable blenders, such as
Castrol, Fuchs or Texaco, would also be affected by increased costs and would reach the point
where they could no longer compete with Exxon-Mobil and Shell on price. Their research and devel-
opment and marketing budgets would decrease, further confirming Exxon-BP/Mobil's market leader-
ship.

Conclusion

(419) On the basis of the above, it can be concluded that the operation leads to the creation of a dominant

position in the EEA base oils market.

Additives

(420) The additives market is very concentrated: the five leading suppliers hold 86 % of the world market
(and more than 90 % of the engine oil additives). Lubrizol and Ethyl (respectively numbers 1 and 3
in the market) restrict their activities to additives. Texaco (number 5) has its own additives company
but has no base oil production and the number 4, Chevron (Oronite), only markets lubricants in
Europe. Infineum takes the second place and was formed in the beginning of 1998 by combining
Shell's and Exxon's additive activities. All five producers supply both DI packages and VI improvers.

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Although Infineum will not be significantly reinforced by Mobil's limited ([…]* %) share of the addi-
tives market, it is to be noted that, after the merger, Infineum will have direct links with all pan-
regional base oil producers who have excess capacity for the accredited automotive merchant
market. In view of the limited overlap, the concentration will not create or strengthen a dominant
position in the market for lubricant additives.

Lubricants

(421)

In the current competitive landscape, there are several major players competing on a pan-European
basis. These market participants are either vertically integrated companies such as the notifying
parties or independent blenders such as Castrol or Fuchs. Both Exxon and Mobil have significant
lubricant activities and face competition from (national) integrated oil companies, such as Agip,
TotalFina, Elf, Repsol, Statoil, Nynas, Texaco, Shell (which is to be considered as the world's largest
producer of automotive and industrial
lubricants) and independent lubricant companies such as
Castrol, Fuchs/DEA.

(422) Exxon's share in the 1996 EEA finished automotive lubricants market was 10 %, BP/Mobil's (on the
basis of aggregation) was 13 %. For the same period, Enerfinance estimates that Shell had 13 %,
Castrol 7 %, Elf 6 % and TotalFina 6 %. Exxon's share in the 1996 EEA finished industrial lubricants
market was 8 %, BP/Mobil's (on the basis of aggregation) was 17 %. For the same period, Enerfinance
estimates that Shell had 11 %, Castrol 6 %, AGIP 6 %, KPC 4 %, Elf 3 % and TotalFina 5 %.

(423) As to marine lubricants, Shell is market leader with 21 %. Exxon (12 %) and Mobil (18 %) have a

strong presence. BP's market share is around 14 %. Castrol, Elf and Texaco have each around 10 %.

(424) Although the parties will, by combining Exxon's efficiency and Mobil's brand strength, become by
far the largest lubricant blender and marketer, the concentration will not lead to the creation of a
dominant position except through exploitation of their dominance in the base oil market. The lubri-
cants industry is likely to remain competitive with competitors such as Shell, Castrol, TotalFina or
Elf. Moreover, the influence and buying power of customers such as distributors or OEMs is likely
to increase even further in the future.

E. REFINING AND MARKETING OF FUELS (DOWNSTREAM OIL)

GENERAL OVERVIEW

(425) Downstream activities include crude oil refining and the marketing and distribution of refined

products to end-users.

The supply chain

Refining

(426) Crude oil refining generally consists of the following processes: (i) fractionation of crude oil into its
component hydrocarbons,
(ii) conversion, which involves changing the chemical nature of the
products, (iii) treatment, which consists of reducing unwanted elements or types of specific mole-
cules to acceptable levels and (iv) blending, which is the combination of various refined products so
as to meet market specifications.

(427) Refined products are often classified as light distillates (LPG, motor gasoline, naphta), middle distil-

lates (diesel fuel, gas oil, kerosene) and heavy products (fuel oil and bitumen).

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Refined products sales and marketing

(428) Refined products are sold through either the retail distribution channel or the non-retail distribution
channel. Retail sales involve sales to motorists through service stations. Products sold through retail
distribution are motor gasoline and diesel. In some countries retail channels also distribute automo-
tive LPG.

(429) Non-retail sales consist of wholesale sales to three categories of customers: independent retailers
(unbranded service station operators such as hypermarkets), other independent resellers, industrial
and commercial consumers (hospitals, car rental fleets, factories). The supply is done by refiners or
other marketers having at their disposal massive volumes of refined products due to the fact that
they own nearby either a production site (refinery) or a large storage facility (terminal).

(430) Ex refinery sales consist of sales made in large lots on a spot basis by refiners to other oil companies,
traders, resellers, large industrial customers. These transactions typically involve una tantum (single
deliveries) purchases of cargo lots (1 to 3 Kt barges or up to 20 Kt tanker lots), and are priced on
the basis of market quotations. The delivery location is ex refinery. Ex refinery sales supply what the
industry refers to as the ‘cargo market’. Since these transactions typically involve big quantities of
refined products which can travel
long-distances given the relatively low transport costs, cargo
market prices around the world track each other closely. These prices are published on a daily basis
by organisations such as Platt's and Petroleum Argus, making it possible for buyers to negotiate
using up-to-date pricing data.

Transportation of refined products

(431) Refined products that are sold ex refinery into cargo markets are collected by tanker or barge. Trans-
portation and physical distribution of refined products consist of three different steps: (i) transporta-
tion of refined products from oil refineries to distribution terminals by means of waterway, pipeline,
and rail (primary distribution), (ii) storage of the bulk fuels products at distribution terminals, and
subsequent loading onto delivery vehicles and (iii) transportation and delivery to customers primarily
by truck, but also by rail and barge (secondary distribution). There are a number of independent
participants at each of these levels and users of these services have a wide variety of competitive
options available.

Logistics

(432) Distribution terminals are an essential component for distribution of fuel products to end customers.
Oil companies generally hold storage depots disseminated on the territory and pipelines to secure
timely deliveries to customers, including service stations. However, storage facilities are also owned
by independent terminal operators who lease storage capacity to all interested parties under short
and long-term arrangements. There are generally two types of storage depots, large terminals with
capacity above 50 000 m3, which are supplied by massive transportation means (pipelines, ships,
barges, rail tanks), smaller peripheral depots which ensure the distribution of smaller quantities of
fuels to the final destination by secondary means of transport (trucks and barges).

The competitive environment

(433) The oil downstream sector is characterised by the presence of many vertically integrated oil compa-
nies active in the refining, wholesaling and retailing of refined products. However, each segment of
the downstream fuels sector also includes several independent non-integrated companies.

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(434) With regard, more specifically, to motor fuel retailing, the competitive environment is characterised

by the presence of essentially three categories of operators:

(i) the traditional vertically integrated oil companies, which are active at all levels of the chain,
notably refining, wholesaling and retailing. Within this category, it is possible to distinguish
further between the majors, that is to say large vertically integrated multinational corporations
which all operate in most EEA countries (Exxon, Shell, BP/Mobil), the mini-majors, namely
smaller multinational corporations with their activities focused in some EEA countries (Total,
Texaco) and the national champions, i.e. vertically integrated national-based companies very
well established in their countries of origin (Elf, Agip);

(ii) the independent retailers, meaning those operators that are active only at the retail level and
procure motor fuels from refiners and other traders. White pump stores are an example of inde-
pendent retailers. They are generally lower volume (in comparison with the industry average),
dealer-owned and operated facilities formerly owned by major oil companies. Single or multi-
outlet operators acquire these facilities and, with minor investment, keep them operating as
white brands;

(iii) the hypermarkets and supermarkets, which are non-traditional retail motor fuel suppliers.
While sharing similarities with traditional independent retailers, they differ from such competi-
tors in a number of respects. Typically, hypermarkets are large mass-merchandising retailers of
groceries and other consumer goods, with a motor-fuels retailing facility located in their
parking lots. Unlike most independent retailers, hypermarkets do not generally regard the sales
of motor-fuels as a part of their core business, but as an additional service they offer to their
customers or as an additional way to draw them to their stores. Because of the number of their
customers, they usually achieve considerable throughputs and they generally compete on price.
Finally, unlike a number of usual independent retailers, they generally operate in densely popu-
lated rather than rural areas.

(435) Retail outlets may be owned or leased by the supplying company (COSS) or by independent dealers

(DOSS). The COSS channel can be further divided into two kinds of station operators:

(i) company-operated/commission-agent

stations operated by company employees
compensated through salary and wages, or by agents compensated by commission. In both cases
the supplying company retains ownership of the fuels stored on the station premises and estab-
lishes pump prices;

(COCO)

(ii) independent licensees/tenants, meaning sites operated by independent licensees who purchase

branded motor fuels (CODO).

The DOSS channel can also be divided in two categories:

(i) dealer-operated,

that

is to say independently owned service stations where the supplying

company sells fuels to the dealer;

(ii) agency-operated,

is,
supplying company's fuel.

that

independently owned service stations where the owner sells the

At the CODO and DODO sites the dealer can, in principle, establish the pump prices as he owns
the fuel sold at the site. However, as a matter of fact the supplying company generally retains strong
control over the pricing policy of these stations essentially through some mechanisms of financial
compensation designed to cover the dealer's losses resulting from a pump price reduction that the
company wishes to implement. Also, the contractual relations between the independent dealer and
the supplying company are such that the dealer generally accepts to implement the pump price
recommended by the company.

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Product market

Retail sales of motor fuels

(436) Retail motor fuels sales include sales made to motorists from branded and unbranded service
stations. The products sold are predominantly gasoline and diesel. From the demand side there is no
substitutability between these products, as motorists must use the type of fuel suitable for their
vehicle. However, from the supply side there is substitutability as refineries can be run to produce
different outputs of different types of fuels. There is considerable flexibility based on the input
quality of crude oil and the way in which the refinery is configured. At the distribution level, both
products are always available at the same point of sales. Also, market shares for each type of fuel
will roughly coincide with the aggregate market share. As a consequence, for the purposes of this
case, in the retailing channel the relevant product market is constituted by the retail sales of motor
fuels with no need for a further distinction.

Motor fuel retailing in toll motorways

(437)

In some countries,
it is possible to consider fuel retailing on motorways as a separate product
market. Such a distinction is based on the different competitive conditions characterising a
motorway. First, the demand is captive, in that motorists travelling on motorways are generally not
familiar with the region in which they travel. As a consequence, the possibility to leave the
motorway to buy fuel in a service station located off the motorway is very limited. Second, motorists
choose to travel on motorways for reasons of speed, and thus they are not inclined to waste time in
refuelling. The payment of a toll is another factor which further discourages motorists to exit motor-
ways and buy fuel on off-motorway stations. In general terms, motorists pay a toll in exchange for
speed and will be even less inclined to leave the motorway for refuelling purposes. A strong indica-
tion that motorways can constitute distinct markets lies in the fact that pump prices on motorways
are generally higher than prices on ordinary routes.

Non-retail sales

(438) The non-retail sale of fuels cannot be similarly aggregated. The different fuels are supplied for
different uses to different types of customer. The distribution channels can also differ significantly,
the provision of fuel oil to a power generation plant differing from the supply of LPG for domestic
heating purposes. The investment required for these distribution channels will be different from that
of retail fuels. For the two fuels which are sold in significant quantities in both retail and non-retail
markets, namely diesel and LPG, the use of the fuel depends on the distribution channel. Retail
diesel is purchased by users of diesel powered cars and other vehicles. Non-retail diesel is typically
supplied to large scale transport companies with a substantial fleet of vehicles and their own storage
facilities. Similarly, LPG will be supplied to vehicles through retail sites and to households for
heating purposes though non-retail channels.

(439)

In the light of the above,
product market.

in the non-retail channel each refined product constitutes a relevant

Geographic market

Motor fuel retailing

(440) From a geographic standpoint, the market for fuel retailing is characterised by a local element in so
far as the demand is constituted by motorists who are normally supplied by the service stations near
to their centre of activity. As a consequence, the substitutability between service stations is geogra-
phically limited.

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(441) On the other hand, there is normally a certain overlap between service stations' catchment areas,
which will not only determine the competitive interactions between geographically neighbouring
service stations, but will also, to some extent, have a ‘knock-on’ or ‘chain-reaction’ effect on more
distant service stations. As a consequence, the geographic area to be retained for the competitive
assessment can include several small overlapping areas. In addition, from the supply side, many
important parameters of competition, such as range of products, sources of such products, quality,
service level (opening hours, etc.), advertising, promotion and prices (on campaign products for
example) are not decided on the local level, but on a regional or national level. Moreover, in fuel
retailing taxation so heavily affects the final pump prices (in the United Kingdom taxes account for
more than 80 % of the pump price) that, as matter of fact, variations in prices across most national
markets tend to be relatively small. Also the various suppliers' market positions tend to be broadly
similar in the different parts of national markets in which they operate. In the light of the above, for
the purpose of this case the market for fuel retailing will be regarded as being national.

Motor fuel retailing on toll motorways

(442) The considerations in recitals 440 and 441 apply also to motor fuel retailing on toll motorways.

Non-retail sales of refined products (fuels)

(443) There are a number of indications that the geographic market for non-retail sales is local in scope.
In this market the supply is constituted by those refiners who can sell massive quantities of refined
products from their refineries or their terminals. The demand is constituted by resellers and end-
users who seek a nearby source of supply, given the extra costs they have to bear when transporting
these products from the point of supply to the place of final destination (a service station, a house-
hold, a factory). Accordingly, the degree of substitutability between sources of supply is geographi-
cally limited. In general terms, each point of supply can source a certain geographic area (catchment
area or hinterland), whose radius is function of the transport costs that customers have to bear
when transporting the products to the final destination. These costs can vary according to the
means of transport. However, since customers generally use road transport, this radius is usually in
the range of 100 to 150 km.

(444) On the other hand, there may be a certain overlap between the catchment areas of the various
sources of supply, which will not only determine the competitive interactions between geographi-
cally proximate businesses, but will also, to some extent, have a ‘knock-on’ or ‘chain-reaction’ effects
on more distant points of supply. As a consequence, the geographic area to be retained for the
competitive assessment can include several small overlapping areas.

(445)

In any event, this question can be left open as the operation does not raise any special competitive
concerns irrespective of the geographic market definition being chosen in this case.

Competitive assessment

The assessment of the BP/Mobil joint venture

(446)

In order to assess the competitive impact of the transaction, the position of the merged entity with
respect to the structural links existing between BP and Mobil should first be appreciated. In the
downstream market of oil-related products Mobil has created with BP a joint venture, combining all
the European activities in this sector. In particular, the joint venture includes the refining, the
supply, sale and marketing of refined fuels and lubricants. Within this joint venture BP operates the
overall fuels business, while Mobil operates the lubricants business. This joint venture was notified
and cleared under the Merger Regulation.

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(447)

In the present notification, the parties contend that while Mobil was found to have joint control of
BP/Mobil within the meaning of the Merger Regulation, Mobil has no involvement in the day-to-day
governance of the BP/Mobil fuel business. As a consequence, the parties claim that the combined
entity Exxon/Mobil and BP/Mobil will both have every incentive to continue to compete vigorously
with each other in this sector. Accordingly, it would be inappropriate to aggregate BP/Mobil's shares
with those of Exxon for the purpose of assessing the competitive implications of the transaction.

(448)

In essence, the parties' arguments are tantamount to saying that notwithstanding the fact that Mobil
has joint control over BP/Mobil joint venture, the combined entity Exxon/Mobil and BP/Mobil joint
venture should be treated as two independent undertakings competing against each other, at least
with respect to the downstream fuel business. In other words, according to the parties the existence
of a control relation does not influence the incentives to compete of the undertakings concerned by
this link.

(449) This argument is to be rejected on the basis of a number of considerations. Pursuant to the Merger
Regulation an acquisition of joint control or a creation of a full-function joint venture constitute
concentrations and as such they are subject to the dominance test laid down in Article 2 of the
Merger Regulation. In order to ascertain the existence of a dominant position, the relations between
the JV and the parents are considered on the basis of the generally correct assumption that they
achieve some form of integration and that the parent company is in a position to control the
commercial policy of its JV, so that from a competition point of view they are to be viewed as being
not in competition with each other.

(450) With regard to this case, it should be recalled that BP/Mobil JV was notified to the Commission in
accordance with the Merger Regulation and was treated as a concentrative joint venture. Both BP
and Mobil were regarded as holding joint control of the overall joint venture, irrespective of the fact
that each partner had a special operational responsibility over a specific business (BP over fuels and
Mobil over lubricants). This conclusion was notably based on the fact that the two parents jointly
exerted decisive influence on the joint venture's policy through a supervisory committee whose
tasks included decisions in the following areas: business plans, major acquisitions, closures, disposals,
investment and certain other strategic decisions. Mobil was one of the notifying parties of that trans-
action and at that time never contested those findings.

(451) The argument put forward by the parties that Mobil is not in a position to interfere in the day-to-
day management of the fuel business run by BP is not convincing: on the evidence collected in the
investigation it appears that under the current state of affairs Mobil (and after the merger the
combined entity Exxon/Mobil) indeed exerts a significant and profound influence on all of the rele-
vant competitive decisions involving BP/Mobil fuel business, in particular approving, within the
supervisory committee, major decisions such as the approval of the strategic business plan, the
setting of financial control parameters, the approval of major acquisitions, closures, disposals and
investments, and other strategic decisions. Moreover, the contractual obligation for BP to obtain
Mobil's approval for such decisions involves the disclosure to the latter of a far larger amount of
inter alia, refinery disposals, refinery joint
highly competitively sensitive information such as,
ventures,
improvement
plans, retail volumes), fuels business strategy (including competitive pressures, the competitive posi-
tion, growth, productivity levels), and the fuels operating plan (including the operating environment,
business development, earnings, expenditures, cash forecasts, retail divestments and longer term stra-
tegic goals). In total, the powers conferred to Mobil within the JV with BP are such to allow Mobil,
and thus the merged entity, to exert a decisive influence over the JV's competitive conduct, including
the fuel business operated by BP.

fuels performance (including forecasts, refining margins, retail margins,

(452) However, the parties contend that, in the light of the exceptional circumstances existing in this case,
BP/Mobil and Exxon/Mobil should be regarded as two independent undertakings capable of
competing against each other. This contention is notably based on the fact that (i) BP has the opera-
tional responsibility of the fuel business and (ii) that it is the ‘leading’ parent of the joint venture

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which thus can oppose and resist Exxon/Mobil interference in the competitive decisions inside the
JV. Even if this assumption is accepted, account should be taken of the relevant interest stake of one
undertaking in the other. In this respect, it should be noted that a link of this kind, regardless of its
formal qualification, greatly reduces the incentives to compete between the undertakings concerned.
It is indeed a well established principle under mainstream antitrust economics that, generally, the
existence of links between two competing undertakings in the form of a significant interest stake of
one in the other may change their incentives to compete. First, a link of this nature creates a strong
financial interest of one firm in its competitor's welfare. This automatically can alter the dynamics of
the competitive game as one firm is less interested in competing against the other than in finding a
common commercial strategy profitable for both. In addition, such a link can secure access to
commercially sensitive information. This in turn renders the competitive conduct of each under-
taking vis-à-vis the other more transparent and thus susceptible to be easily anticipated and moni-
tored. Also, and perhaps more importantly, a link of this nature may put one undertaking in a posi-
tion that enables it to influence the strategic choices of its competitor towards decisions in line with
the common interest. Finally, a link of this kind has a disciplinary effect as it can expose one firm to
possible retaliations of the other in case of disagreement. All these factors may push the undertak-
ings concerned towards a convergence of their commercial policies. It should be noted that the
conduct described above is for each of the undertakings concerned absolutely rational as they are
based on a profit-maximising perspective.

(453) The present case should therefore be assessed against this background. Given the relevance of the
link in terms of influence exerted by Mobil (and post merger by Exxon/Mobil) over the JV's competi-
tive conduct, as well as the presence, in the case at stake, of a number of structural features typical
of a market conducive to oligopoly, the relation between Exxon/Mobil and BP/Mobil can be, ulti-
mately, assessed in the framework of the collective dominance test. In short, the competitive assess-
ment of the case would remain unchanged.

(454)

In their response to the Commission's decision to open a second phase investigation, as well as in
replying to the statement of objections, the parties raise two additional objections against the
reasoning described above.

(455) First they claim that Exxon/Mobil cannot simply alter its competitive behaviour solely to the benefit
of BP/Mobil because other competitors would also take advantage of any weakening of Exxon/
Mobil's competitive vigour. In particular, they contend that Exxon/Mobil direct interests through the
Exxon network are greater than its indirect interests through its 30 % stake in BP/Mobil. As a conse-
quence, Exxon/Mobil would have an interest to maximise its profit rather than favouring BP/Mobil
joint venture profit. A fortiori, the argument goes, BP would have no incentive to modify its competi-
tive strategy in favour of Exxon/Mobil, as it has no interest in the latter. In this respect, it should be
noted that the alignment of Exxon/Mobil and BP/Mobil's competitive strategies which could result
from the merger would be aimed at maximising the profit of both entities on the market. This
convergence of competitive strategies is rational behaviour taken by each firm in its own interest.
As to the possibilities of the other competitors to take advantage of the ‘weakening’ of the competi-
tive vigour between Exxon/Mobil and BP/Mobil, the Commission considers that given the oligopo-
listic features of the markets in question (see below), the alignment of the competitive strategies of
the two entities can cause a reduction of competition detrimental to consumers, without triggering
any competitive reaction from the other players.

In particular,

(456) Second, the parties also contend that the Commission approach is inconsistent with recent Com-
munity case-law.
the parties refer to the Gencor/Lonhro judgment of 25 March
1999 (58), where the Court of First Instance found that a company in which a merging party held a
27 % interest nevertheless was a significant competitor of its minority owner. According to the
parties, the pre-merger situation in Gencor is structurally very similar to the post-merger scenario
involving Exxon, BP and BP/Mobil in the fuels area. As a result of the merger the merged entity
Exxon/Mobil will have its own fuel business while retaining a minority interest in a competing busi-
ness, BP/Mobil.

(58) Case T-102/96, Gencor v Commission, not yet published.

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(457)

In response to the parties' line of argument, it should be noted that there are two specific points
which clearly differentiate the present case from the factual background of the Gencor judgment.
First, on the basis of a full assessment of the two factual backgrounds, it appears that the pre-merger
situation in Gencor can in no way be compared to the post-merger situation in Exxon/Mobil. As it
is clearly stated in the judgment, not only did Gencor have no influence over the day-to-day
management of Lonrho, but neither on the marketing and the sale of Lonrho's platinum production.
In short, the Gencor group exercised no influence over the LPD's competitive strategies (see para-
graph 176 of the judgment). By contrast, as already stated above, within the framework of the BP/
Mobil joint venture arrangements, Mobil retains a significant and profound influence over all of the
relevant competitive decisions involving BP/Mobil fuel business. It suffices to recall in this respect
that any major decision relating to the pricing policy of the joint venture would be subject to Mobil
approval.

(458) Second, and more importantly, the comparison made by the parties disregards the difference
between a pre-merger situation and a post-merger one. The question in Gencor was whether the
competitive situation would change following the merger between Gencor and Lonrho. In that
respect, the Commission (and the CFI) could found its findings on the basis of an ex post review of
the competitive conduct of the two firms, and concluded that despite the minority stake of Gencor
over Lonrho's platinum business, the two companies had been competing against each other in the
pre-merger phase. In this respect, both the Commission and the Court clearly emphasise the fact
that ‘LDP and Implats, by retaining separate marketing departments, competed with each other
before the concentration and (…) that during the past decade LDP had, with Russia, been the main
element of competition in the market’ (see recitals 174 to 176 of the decision and recital 177 of the
judgment). By contrast, the post-merger relation between Exxon/Mobil and the joint venture BP/
Mobil is a matter of the future, to be assessed in the context of an ex ante analysis. As a conse-
quence, in accordance with the approach which must be followed in the context of the merger
control review, the Commission is to assume the worst possible scenario for antitrust purposes, that
is to say the alignment of the competitive strategies of Exxon/Mobil and BP/Mobil as a result of the
joint control of the former over the latter.

Mobil's interest in Aral

(459)

In assessing the competitive impact of the transaction in motor fuel retailing, account should also be
taken of the significant links existing between Mobil and Aral. Aral is the leading retail motor gaso-
line operator in Germany, and it is also active in Austria and Luxembourg. Mobil has a 28 % stake
in Aral, the other shareholders being Veba (56 %), Wintershall (15 %) and a number of benzene
producers with 1 % between them. Each of the three main shareholders holds […]* % of voting
rights. According to the parties, Mobil has no joint control over Aral in the meaning of the Merger
Regulation […]*.

(460) However,

it can be argued that Mobil, together with Veba and Wintershall have de facto joint

control over Aral based on the following considerations: […]*.

(461)

In any event, this question can be left open since, irrespective of the question of control, it is indis-
putable that Mobil has a very significant interest in Aral, which creates a strong financial interest of
the former in the welfare of the latter. Moreover, through this stake, Mobil can exercise a relevant
influence over Aral commercial policy. It has the same voting rights as the other main shareholders,
and it appoints the same number of members of the supervisory committee, which in turn elects
the management board. Finally, Mobil has access to a large amount of strategic information which is
exchanged within Aral's decision-making bodies. It is thus clear that the existence of this link is
likely to reduce Mobil's incentives to compete against Aral and vice versa. With such an important
interest of the former in the capital of the latter, competition between the two operators seems to
be seriously weakened.

Motor fuel retailing

(462) Taking the markets at national level, the table below shows the market shares of the parties and
their competitors in those countries where the joint market share resulting from the merger is
above 15 %.

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L 103/63

(463) Motor fuel retailing market positions

1997

AT

DE

FR Motorways

LU

NL

UK

Exxon

[0-10]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

BP/Mobil

[10-20]*

[0-10]*

[10-20]*

[0-10]*

[20-30]*

[10-20]*

Ex/BP/M

[20-30]*

[20-30]*

[20-30]*

[10-20]*

[30-40]*

[30-40]*

[10-20]*

[10-20]*

[10-20]*

[20-30]*

[20-30]*

[10-20]*

[0-10]*

[10-20]*

[10-20]*

[20-30]*
OMV

[0-10]*
DEA

[30-40]*
TotalFina
[20-30]*
Elf

[10-20]*
TotalFina

[10-20]*
Texaco
[0-10]*
TotalFina

[0-10]*
(aggr.)

[0-10]*
TotalFina

[0-10]*
Tesco
[20-30]*
(aggr.)

Shell

Aral

Others

Hypers

Parties’ estimates.

(464)

In percentage terms the position on individual national markets varies somewhat from country to
country. In general terms, it can be noted that the merged entity would become market leader in
most of these countries, with combined market shares of Exxon, BP/Mobil and Aral varying from a
minimum of [20 to 30]* % (French motorways) to a peak of nearly [30 to 40]* % (in both Germany
and the United Kingdom). However, the presence in all of these countries of some strong competi-
tors (large international majors or national champions) with market shares in the range of some 15
to 20 % or more, would exclude the possibility of the combined entity alone being able to exercise
single dominance.

(465) Rather, the question of possible creation or strengthening of joint dominance needs to be assessed,
given in particular the structural features of the markets concerned. In this respect, markets of
motor fuel retailing generally display all the characteristics normally considered necessary to allow
collective dominance to arise. These characteristics are the following:

Supply concentration

(466) The concentration of the market from the supply side is the first precondition for an oligopoly to
exist. An oligopoly is a market characterised by the presence of few large suppliers whose competi-
level, are generally
tive actions are interdependent. Markets of fuel retailing, taken at national
concentrated, with the presence of few suppliers (between three and five) accounting for approxi-
mately two thirds of each national market. The parties contend that the markets considered by the
Commission are not sufficiently concentrated. In particular, in its past practice the Commission has
generally viewed a much higher degree of concentration as being likely to give rise to oligopolistic
concerns. This issue will be further pursued in the sections devoted to each national market. In
general terms, it should be noted that it is undisputed that the higher the number of firms partici-
pating to an oligopoly, the higher is the risk of defection in the oligopoly. Nonetheless, standard
antitrust economics suggest that an oligopoly can function also in less concentrated markets. This is
the case when the transparency of the market in terms of price is such that a reciprocal monitoring
is easily possible even between numerous players on the market.

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Product homogeneity

(467) A high degree of homogeneity simplifies tacit coordination of pricing policies. In the absence of
other characteristics that are likely to differentiate one supplier from another, competition in a
homogeneous product market will therefore tend to focus on prices. In the present case motor fuel
is undoubtedly a commodity, with very little possibility of differentiation or customisation of the
product. It is probably one of the few commodities where customers (motorists) are unable to point
to any difference between two different brands of motor fuel, in terms of characteristics and perfor-
mance. Motor fuel is such a fungible item of trade that refiners systematically resort to swap prac-
tices to source their service stations.

(468)

In their response to the Commission decision to open the second phase, the parties contend that the
retail motor fuel business is characterised by intense competition in terms of total offering to the
consumer. In particular, besides price, the consumer would consider other factors such as conveni-
ence, the range of additional offerings in terms of products in the shop, the availability of other
facilities (car wash), the offerings of features with other perceived value such as promotions and
loyalty schemes. As a consequence, since there are wide differences between competitors' total offer-
ings, the argument goes, there would not be much homogeneity.

(469) These considerations do not appear to be supported by the evidence collected in the investigation.
As to brand recognition and product differentiation, the investigation has confirmed that these
factors do not play significant roles in determining customers' preferences. The large majority of the
retail operators interviewed by the Commission has indicated that brand recognition plays a minor
role in motor fuel retailing. Admittedly, motor fuel retailers have tried to establish a brand recogni-
tion,
in particular through marketing campaigns and loyalty schemes. However, as a general
comment, it can be noted that the policy of the oil majors aimed at creating a brand image in
motor fuel retailing has not proved very successful. As an exception, only in the Netherlands, and to
a lesser extent in Germany, have motor fuel retailers managed to create a certain brand recognition
through loyalty schemes. The matter will be further pursued in the sections devoted to the Nether-
lands and Germany.

(470) As to the ‘additional offerings’ indicated by the parties, no evidence has been provided which shows
that these factors have in any way played a role in conditioning motorists' preferences. Nor has the
industry in its responses ever supported such a view.

(471)

In fact, from the evidence collected by the Commission it appears that motorists' choice when
buying fuel is driven by two essential parameters, convenient location and price. Moreover, a survey
provided by the parties themselves clearly shows that most consumers in the developed countries
see no meaningful difference in fuel quality among motor fuel brands. Instead, an overwhelming
majority of them choose a motor fuel outlet based on locational convenience and on price.

(472) According to this survey, convenient location is the prevailing reason for buying fuel. However,
contrary to what the parties claim, convenience is exclusively relevant for the purpose of defining
the geographic scope of the market. In this respect, as was acknowledged in the section devoted to
the market definition, the motorist's need to buy motor fuel without making a long detour deter-
mines the competitive dynamics in motor fuel retailing local. By contrast, this factor can in no way
be regarded as a factor of differentiation of the nature of the products at stake.

Low technological innovation

(473) The lack of technological innovation is another feature typical of a market conducive to oligopoly
and is directly linked to the homogeneity issue. Without innovation, competitors have no other
choice than competing on price. Also, low technological
innovation ensures that the nature of
competition (and the homogeneity of products) will not substantially change in the near future.
Motor fuel retailing is characterised by low technological innovation. Technological development is
achieved through gradual and relatively slow incremental changes to processes and products rather
than revolutionary fast moving changes.

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Transparency of the market

(474) Market transparency is also one of the basic conditions characterising markets conducive to oligo-
poly. First, such a transparency allows the players on the market to converge towards a given price
with no need of explicit coordination. Accordingly, price transparency can be expected to lead to
price parallelism between the undertakings present on the market. Second, these undertakings have
the possibility to mutually monitor each other's behaviour in order, inter alia, to ascertain that none
of them is cheating. The market in question is characterised by full transparency, in so far as it is a
retail market where pump prices are publicly known. In fact, price information is readily accessible
not only at the marketing level, but at all levels of trade. For example, trading prices of fuel ex-
refinery sales are published on a daily basis by respected organisations such as Platt's and Petroleum
Argus. Price transparency also exists at the level of crude oil. In sum, price information is available
throughout the industry, up to the marketing level. It is also worth noting that the transparency of
the market is an essential condition for an oligopoly to function effectively. In motor fuel retailing
the transparency is such that it makes any form of cheating by the players on the market impossible.
Finally, motor fuel retailing is also a transparent market in terms of quantities sold. In this respect, it
suffices to say that most operators in the industry appear to be well informed of their competitors'
sales due to intense exchange of information at the level of industry associations. Also, in this sector
there are a number of sources of published statistical information.

Moderate growth of the market

(475)

In markets where demand is stagnant or only grows moderately there will be no impetus from
market growth to foster competition in the market for two reasons. Firstly, there is no incentive
among incumbent firms to compete for an increase in demand. Any gain in market share can only
be achieved at the expense of competitors, possibly ending in a damaging price war with no
winners. Secondly, a modest growth rate of demand does not attract outsiders to enter the market.
In the case at stake, as acknowledged by the parties, motor fuel demand in Europe is relatively stag-
nant. More specifically, motor gasoline has been flat while diesel has captured most of the growth.
Motor fuel demand in the EEA has had an average yearly growth of 0,4 % over the past five years.

Symmetry of costs

(476) Oligopolistic dominance is more likely to be sustainable if the members of the oligopoly have
similar cost structures. First, similar cost structures will normally create similar incentives in a given
market situation. Second, similar cost structures increase the risk of retaliation, in the sense that a
supplier will know that its competitors can meet its competitive actions on an equal basis. In the
case at stake, an analysis of the cost structures of fuel retailers will be conducted on a country-by-
country basis taking as a reference motor fuel retailing as a stand-alone business.

Symmetry of market shares

(477) Symmetry of market shares between competitors is viewed as another factor which generally facili-
tates anticompetitive parallel behaviour. This is mainly because such similarity can reflect similarity
of costs between undertakings. Since costs strongly influence the price policy of an undertaking, the
above described symmetries render price coordination easier.
In some of the national markets
reviewed by the Commission below, market shares are unevenly distributed among the various
players. However this factor should not be regarded as precluding in itself the possibility of oligopo-
listic dominance. This is because, although symmetry of market shares provides additional incentives
for parallel behaviour, it cannot be considered to be a prerequisite for such parallel behaviour to

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exist. For instance, even in the presence of market share asymmetries, there can be symmetries of
costs. This is the case in motor fuel retailing where the most important economies of scale are
reached at the level of the station site. And similarly, the oligopoly members may feel that they have
a fair share of the market and that they perceive each other as being on an ‘equal footing’ and
having comparable strength. They would have therefore little to win and much to lose from aggres-
sive competitive actions. This is precisely the case of motor fuel retailing, where virtually all the
alleged oligopoly members are vertically integrated operators, active across the world and with
financial capacities going well beyond the position held at the level of retail in one specific national
market. In sum, for these players the symmetry of national market shares probably does not play an
important role. In this respect, it is worth noting that all the vertically integrated retailers have
created a compensation system designed to support the financial losses that their retailing networks
may suffer when exposed to intense price competition. In the light of the above, it is submitted that
the asymmetry of market shares prevailing in a number of countries considered by the Commission
for the purpose of the oligopoly assessment is of no relevance in the present case.

Vertical integration

(478) Similar degrees of vertical integration among the members of an oligopoly generally increase their
willingness to engage in parallel behaviour and the prospects of stability of such behaviour. This
results first from the fact that integration may confer cost advantages and cost similarities on the
integrated players as opposed to the non-integrated ones. Second, and more importantly, strategic
interests among equally integrated firms tend to coincide at every commercial level. Indeed, changes
in the market conditions will affect similarly the integrated firms, pushing them to react similarly.
As a consequence of that, higher stability in terms of parallel behaviour is expected in such markets.
In the case in question, the oil industry is a business characterised by the presence of large vertically
integrated firms. As to the consequences of this integration in the business of fuel retailing,
it
involves some advantages for the integrated firms such as, inter alia, security of supply and, in the
long term, a better ability to face changing market conditions. Also, it is a fact that vertical integra-
tion results in a commonality of interests between the integrated oil firms covering all the sectors of
the industry. Thus, this integration increases dramatically the prospect of stability of parallel beha-
viour by making the oil majors' interests coincide.

Demand rigidity

(479)

In general terms, if demand is price-inelastic, there is a higher incentive to parallel behaviour. As
total demand volumes will not decrease significantly in the case of price increases, there is therefore
a strong incentive for the market players to engage in supracompetitive pricing. In motor fuel
retailing the demand is rigid given that there are no real substitutes to this product. Several surveys
show that in the event of a price increase, motor fuel average consumption in the long term
remains stable. This is also due to the fact that there is an element of captivity in the demand.

Structural links

(480) The likelihood of oligopolistic behaviour generally increases if there are structural links between the
members of the oligopoly. This is mainly because structural links make market players care about
the welfare of their partners, and make them aware of each other's strategy, cost structure and
plans. Such links may reduce the competitive zeal between the members of the oligopoly, or they
may represent potential means of retaliation and, depending on the circumstances, they could also
result in a certain common commercial interest in the market in question. The downstream oil busi-
ness is characterised by the existence of several links between the major players, either in the form
of corporate links (such as the BP/Mobil joint venture and Mobil's participation in Aral-Germany) or
in the form of unincorporated or other commercial relationships (such as swap agreements in fuels).

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Entry barriers — Absence of potential competition

(481) An oligopoly can function more effectively in the presence of high barriers to entry. These barriers
may render a market difficult to contest and make it immune from competitive pressure coming
from potential competitors. The motor fuel retailing business, and in more general terms the whole
oil industry, are characterised by significant barriers to entry. Vertical integration has proven to be a
not insurmountable barrier over the last years as is clear from the successful presence on the
markets of some non-integrated retailers. However, other significant barriers render any newcomer's
entry on the retail motor fuel market unlikely.

(482) First, in order to compete effectively in the market it is essential to obtain a critical mass of stations
with a high average throughput. This in turn requires high levels of investment, due in part to the
cost of complying with environmental regulations (the parties estimate the cost of opening a new
station at EUR […]*) as well as availability of adequate retail sites. On this latter point, in many
countries licences for building new sites are difficult to obtain owing to the saturation of the
market. This is certainly true for all the countries affected by the present transaction. While it can be
argued that new entry could occur in the future by the reopening of the sites which have been
closed in recent years, these tend to be smaller and unattractive. Also, environmental regulations
make reopening an old site almost as difficult and expensive as building a new one.

(483) As a matter of fact, the only newcomers successful in establishing a significant presence in some
Member States over the last years have been hypermarkets, by virtue of a mix of special conditions:
(iii) central
(i) availability of competitive supply;
purchasing; (iv) access to convenient commercial property; (v) relative ease of permitting; (vi) low
cost structure relative to traditional competitors, and to a lesser extent some ‘low cost’ retailers
capable of establishing an adequate network in terms of number of sites and average throughput
(Save in the United Kingdom, or Jet Conoco in Germany).

(ii) ample distribution and terminal facilities;

(484) On the other hand, many Member States have recorded an impressive consolidation due to a
general decrease in margins, as a result of which a large number of small independent retailers have
been forced out of the market. This is a characteristic common to all of the markets considered
below. In this context, contrary to what the parties claim, the possibility that in the future ‘small’
firms can enter the retail motor fuel market on a small scale seems remote.

(485)

In sum, the only real source of potential competition in motor fuel retailing is constituted by hyper-
markets which in some countries have been extremely successful in increasing their sales (in France,
in less than 20 years hypermarkets have acquired more than 50 % of the market). However, the fact
these operators have little or no presence in countries such as the Netherlands, Luxembourg,
Austria, may indicate the existence of some structural impediments likely to prevent, even in the
future, any development on that front. In other countries where these operators are already estab-
lished (the United Kingdom and Germany), their real competitive potential should be measured by
taking into due account all the numerous factors liable to hinder their further growth. This point
will be discussed in the sections devoted to the country-by-country assessment.

Absence of buying power

(486) The ability of members of the oligopoly to rise prices can be constrained by countervailing market
power of customers. Powerful and concentrated customers may either prevent the members of the
oligopoly from engaging in supracompetitive pricing or provide a sufficient incentive to deviate
from collusion and compete. In motor fuel retailing, purchasing power is completely absent as the
demand is constituted by motorists.

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Multi-market contacts

(487) Multi-market contacts can help to sustain oligopolistic dominance, because they may increase the
scope for retaliation which could also take place in other markets. The oil industry is characterised
by vertically integrated companies which are active at all levels of trade, from the extraction of
crude oil to the marketing of fuel.

(488) Against this background, which is common to all of the abovementioned national markets, it should
then be assessed whether the specific market conditions of each national market are such that an
oligopoly can function effectively as a result of the merger in question. Below, the situation
prevailing in each country will be discussed at length, with particular emphasis on the degree of
concentration of each market, the competitive pressure exerted by operators other than the alleged
members of the oligopoly, the causal link existing between the merger in question and the finding
of a collective dominant position.

(489) The table below shows a comparison of motor fuel prices in the countries affected by the transac-

tion.

Product: Retail motor gasoline — pump price

Average price per metric tonne (USD)

Region

1996

1997

1998

Tax incl.

Tax excl.

Tax incl.

Tax excl.

Tax incl.

Tax excl.

Austria

Belgium

France

Germany

Luxembourg

Netherlands

United Kingdom

1 438

1 500

1 524

1 400

1 148

1 579

1 271

491

398

285

354

401

428

270

1 288

1 389

1 384

1 222

1 028

1 447

1 397

457

370

278

334

383

406

300

1 193

1 312

1 391

1 174

936

1 405

1 487

390

313

266

279

321

347

271

Product: Retail diesel — pump price

Average price per metric tonne (USD)

Region

1996

1997

1998

Tax incl.

Tax excl.

Tax incl.

Tax excl.

Tax incl.

Tax excl.

Austria

France

Germany

Luxembourg

Netherlands

United Kingdom

1 014

937

955

832

1 003

1 044

407

255

334

333

366

249

900

856

822

739

903

1 194

369

239

294

305

329

266

820

854

762

659

842

1 278

314

220

234

247

271

228

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AUSTRIA

GENERAL OVERVIEW

Refining

(490)

In Austria, there is only one refinery, owned and operated by OMV. Traditionally more than 70 %
of petroleum products are sourced from inland refineries directly. Imports into Austria do not seem
to be made by any independent reseller, but by integrated companies. Sufficient capacity is available
in Austria. The crude oil is purchased by OMV and RAG and transported through an oil pipeline,
from the Adriatic Sea to Vienna, where it is refined in OMV's Schwechat refinery. It follows that
OMV is playing an important role in Austria: it owns the only refinery in Austria, it has the majority
shares of the Adria-Vienna pipeline and of the storage Erdöl-Lagergesellschaft, it has shares of the
‘Autobahn-Betriebegesellschaft’ and owns a proprietary pipeline between Vienna and St Valentin.

(491) OMV has contractual production sharing for its refinery with Shell, Mobil, Esso and AGIP.
Combined, these companies utilise 15 % of this refinery. OMV also concludes swaps with Conoco,
Agip and Aral. Shell, Mobil, Esso and Agip are also shareholders of AWP, Erdöl-Lagergesellschaft
(storage) and ‘Autobahn-Betriebsgesellschaft’. The ‘Paritätische Ausschuß für Kartellangelegenheiten’
considered this cooperation of the majors could be close to a cartel. Majors supply each other's
stations with fuel in order to save transport costs.

Infrastructure

(492) Exxon reports that several shipping companies recently offered rates for barge supply from
Rotterdam to the Vienna area of […]* DM/T for distillate and […]* for mogas, resulting in an
average volume-weighted rate for motor fuels of around […]* DM/T. The freight rate from
Rotterdam to a typical destination in Germany (the Rhine/Main area) is about […]* DM/T. Accord-
ingly, the average supply cost for Austria is about […]* above Germany. This higher rate is a result
of the longer shipping distance; canal tolls; the exceptionally high number of locks one must pass
through in the Rhine/Danube canal, which slow the voyage; the lower water levels compared to the
Rhine and a high risk of delays due to low water on the Danube (resulting from the fact that water
levels on the Danube are not controlled by damming).

(493) Besides storage controlled by the majors, independent storage possibilities exist such as Tamoil in
Linz, Roth Öl in Styria and smaller terminals that cover regional demand. Although no figures on
capacity were provided by the parties on these storage alternatives, it has been indicated that capaci-
ties are not significant. In any case, competitors have indicated that there is no risk of foreclosure
on the storage capacity as the majors are opting for renting storage capacity rather than controlling
it.

Wholesaling

(494)

In 1997, 27 % of the consumption on fuel and 35 % of diesel were imported. Majors, traders and
‘outsiders’ import oil products by barge on the Danube, by train or by road. Outsiders or ‘B-brands’
(which means smaller retail networks than those operated by OMV, Aral or BP/Mobil such as Avia,
Jet, Turmöl, Rühl, IQ, AWI, Roth, Hölzl, Champion, A1, and Eurol) import fuel or buy fuel from
majors and wholesalers, and apparently can choose the cheapest offer and set their prices indepen-
dently. Exxon sources […]* % of its needs from third parties purchases. The remainder comes from
transfers from affiliates or from term processing arrangement at OMV Schwechat refinery. BP/Mobil
purchases […]* % of the volumes it sells from third parties. The remaining is in country refining
production.

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Retailing

(495)

In Austria, the fuel retailers consist of branded stations, independent stations (or free stations) and
white pumps. Supermarkets do not play an important role for fuel and run only very few stations.

(496) The main branded networks are those of OMV, Aral, BP/Mobil, Shell and Esso. Other branded

stations are B-brands and white pumps.

(497) 64 % of the stations are branded. These stations are run by agents through a system whereby agents
are bound to fix their prices according to the majors' instructions. It is important to note that
majors (OMV, Aral, BP/Mobil, Shell and Esso) are shareholders of at least […]* % of the stations in
Austria.

(498) The free stations (or B-brands) are Avia, Jet, Turmöl, Rühl, IQ, AWI, Roth, Hölzl, Champion, A1,
Eurol, etc. Other B-brands are partly in the hands of majors: Genol (29 % OMV) and Avanti (50 %
Shell) have a net all over Austria. In Austria, white stations are not owned by independent compa-
nies, but by the majors, who prefer not to brand them (OMV for instance has a white pump
network: Stroh-Tankstellen).

(499)

[…]*.

(500) The service station industry is heavily regulated in Austria. Before 16 September 1981, fuel prices
were regulated by the government. Prices changed only on request of the mineral oil companies if
their costs increased. In 1981, the price for all fuels except diesel were liberalised. The players on
the market have been OMV, Agip Austria AG, BP Austria AG, Mobil Oil Austria AG, Shell Austria
AG and Aral Austria GmbH. On a local level, the majors have to compete with the B-brands (such
as Avanti, Jet, Turmöl) and independents. In their surroundings majors offered their stations lower
prices, in order to compete in these areas (‘Price concentration’). In 1990, a new agreement (the
‘Branchenübereinkommen’) entered into force, in order to make pricing more objective. A market
information system was installed to follow the international and national fuel prices on a weekly
basis. This operation did not really succeed so the agreement has been abandoned, as well as the
regulation of diesel price.

(501) Austria also imposes high environmental requirements but these are no different from those
required in Germany. Small stations cannot afford to meet these high standards (Exxon indicates this
to be the main reason why the market will be further rationalised). Financial support is provided for
closing down stations. All mentioned costs are similar in Germany.

(502) Austria has a very dense service station network (denser than in Germany). As a consequence, the
average throughput per station is lower: 1 422 m3 in Austria compared to 3 170 m3 in Germany.
The number of service stations has decreased by 23 % from 1995 to 1997. Since 1995 there has
not been a new player entering the market except Jet-Conoco who have expanded their network
from 29 to 55 stations.

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION

Market structure

(503) The following table shows the evolution of market shares in Austria over the last four years. It
appears from this table that the market was until now dominated by three companies, OMV, BP/
Mobil and Shell holding together [50 to 60]* % of the market. The two following market players are
Esso and Aral, each with more than [0 to 10]* % market share.

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OMV

BP (59)

Shell

ESSO

Aral

1995

1996

1997

1998

[20-30]*

[20-30]*

[20-30]*

[20-30]*

(%)

[0-10]*

[0-10]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

Other branded

[20-30]*

[20-30]*

[10-20]*

[10-20]*

Others

[0-10]*

[10-20]*

[10-20]*

[0-10]*

(59) Mobil share is added to BP's as of 1997. Mobil's share prior to the setting up of the joint venture is not available.

(504) As explained above the remaining of the market players is composed of other smaller branded
networks, supermarkets and white pumps. A number of the smaller branded networks, accounting
for around [30 to 40]* % of the B-brands, are subject to financial interests from one of the top three
players in the market. According to the notifying parties, market shares of supermarkets have
remained flat at 2 % over the last five years and are not expected to vary significantly in the future.
Similarly, white pumps have declined from 8,4 % to 8,0 % in the same time period. The parties do
not expect that the competitive configuration in Austria will change significantly over the short
term. This would be due to the current restrictive conditions for obtaining permits.

Competitive dynamics — costs and prices

Costs

(505)

It is very unlikely that any of the other branded retailers could exercise any competitive pressure on
the top three players in the market. Indeed, in the course of the market investigation, competitors
have indicated to the Commission that if majors raised their prices, the independents will follow.
Independents want to maintain a good relationship with the majors, as they would not survive a
price war or too strong competition. This is due first to the financial interests held by OMV, BP/
Mobil or Shell in some of these players. Secondly, these players' cost bases are higher than those of
the A-brands. Indeed, their average throughput in 1998 was of about 824 cubic metres to be
compared to an industry average of 1 422 and an average of 2 000 for the top three. At these low
levels of throughputs, fixed costs are spread on a small basis and therefore represent a substantial
share of total costs. Therefore, these differences in levels of throughputs result in significant cost
differences. Thirdly, the smaller competitors depend to a significant extent on supplies at the whole-
sale level from the top three players which share with Exxon the production of the OMV refinery.

(506)

In view of the above, it would appear that the competitive conditions of the Austrian market are
dictated by OMV, BP/Mobil, Shell, Esso and Aral. Given such a small number of actual competitors,
and given that the general conditions of the motor fuels retail sector are traditionally conducive to
oligopolistic behaviour, there would be strong indications that the Austrian market could function
under or very close to oligopolistic conditions.

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7.4.2004

(507)

In Austria, account should also be taken of the fact that BP/Mobil and Aral have structural links (see
general section above), and that all of these companies have specific arrangements with the OMV's
Schwechat refinery.

Prices

(508) An examination of the level and variations of the motor fuels retail prices strongly suggests that the

market is in deficit of competition.

(509)

Indeed, prices (excluding tax) in Austria are amongst the highest in Europe. Net prices for gasoline
and diesel were respectively 33 % and 29 % higher than in Germany in 1998. In addition, motor gas
price shows limited correlation to crude oil price or Platt's quotations for diesel or motor gasoline.
The Puwein study cited by the parties explains that the monthly variations in Germany have been
50 % stronger than in Austria and that a 10 % change of the crude oil price causes a price variation
of 3 % in Austria and 5 % in Germany (excluding taxes).

(510) The parties have justified the higher prices in Austria by the combination of additional logistics
costs, lower throughput and restrictions relating to the service stations shops. Logistics costs would
break down in additional transportation costs (when compared to Germany) of USD […]* and USD
[…]* attributable to additional distribution costs within Austria resulting from the local terrain and
retail network structure. Lower throughput would result in additional unit costs of USD […]* which
would need to be recovered through higher margins. Finally, the restrictions on shops would
include a limitation on their size (80 m2 versus an Exxon standard of […]* m2), the need for a
special
licence to sell tobacco, etc. This would lead to a loss of contribution to the operator's
income of USD […]*. The parties add these three items to USD […]* and conclude that this explains
90 % of the difference between Austrian and German motor fuels pump prices.

(511) The assumption on the loss of income because of shop restrictions seems questionable. First, the
parties refer to a loss of income and not to a loss of margin, which should then be of a lower value
than the total income lost. Secondly, when asked about an evaluation of the additional margins
generated by convenience stores in Germany, the parties referred to an item labelled ‘gross distribu-
tion margin — other’ which featured an amount of USD […]*/tonne for Germany ([…]*). However
when looking at the same line for Austria, this item shows a higher value of USD […]*/tonne.

(512)

In any event, assuming that this USD 85/tonne relies on robust assumptions, the […]* % non-
explained price difference with Germany would still amount to around […]*cents/litre. Given that
the parties have themselves estimated that a margin over cash costs of around […]* cents/litre
would provide an acceptable return on investment, this would represent a […]* % increase on the
return […]*.

Entry barriers — expansion — potential competition

(513) Exxon has considered both orally in meetings with the Commission's services and in its internal
documents that it does not expect any competitive threat coming from supermarkets in Austria.
This was confirmed by the market investigation.

THE POST-MERGER ENVIRONMENT — IMPACT OF THE OPERATION ON COMPETITION

(514) The impact of the operation is to be assessed against the above described background, having also
regard to the features identified in the section devoted to the structural characteristics of retail
motor fuel markets in general.

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(515) The merger between Exxon and Mobil will result in the establishment of strong links between BP/
Mobil, Aral and Exxon's respective activities in motor fuels retailing in Austria. This will lead to a
material diminution of the incentives for Aral and Esso to challenge the leading position held by
OMV, BP/Mobil and Shell. Indeed, Aral and Esso seemed to be the only networks with the capacity
to exert some competitive constraints on the three top companies. Following the merger, the oligo-
poly would involve combined market shares of [70 to 80]* % (including the ownership or interests
in non-A-brands stations) with very small competitors left in the margins with a cost basis which
does not allow them to compete effectively. Moreover these small competitors would be to some
extent subject to the financial
interests of one of the top three players and also dependent on
supplies from the same companies. The merger would therefore result in a creation or reinforcement
of the collective dominance held by OMV, the trio Exxon — BP/Mobil — Aral, and Shell in the
Austrian retail motor fuels market.

FRANCE – MOTORWAYS

GENERAL OVERVIEW

(516) As will be shown below, the competitive environment in the market for motor fuel retailing on
French toll motorways is characterised by the presence of very few players. The supply is very
concentrated and all the players are large vertically integrated oil companies. Given that no foreclo-
sure aspects seem to arise in relation to refining and wholesaling in this market, these points are not
further considered for the purpose of this assessment.

Toll motorway station as a distinct product market

(517) The operation will have a very significant impact on motorways in France. As noted above, toll
motorways can constitute separate product markets by virtue of the specific features characterising
them. In addition, France is one of the Member States where most motorways are toll roads, with
motorists paying toll based on the distance travelled on the motorway. This factor further
discourages motorists to exit motorways to buy fuel on off-motorway stations. Also, from the
supply side, the insulation of the motorway channel is to do with the existence of high entry barriers
(see recitals 554 to 561 below).

(518) The chart below shows the differentials between Exxon motorway and Exxon average network

pump prices in the Member States mostly affected by the transaction (60).

Estimated delta of motorway
pump prices as % of Exxon
average network price

Tax included motor
gasoline

Tax included motor
diesel

Tax excluded motor
gasoline

Tax excluded motor
diesel

[…]*

(519) As may be seen from the chart above, France is the only country among those considered for the
purpose of the present case where price differences between after-tax prices on motorways and
after-tax prices off-motorways are significant (in the range of […]* %). This is presumably due to the
fact that in other countries motorways are subject to a more intense competitive constraint coming
from off-motorways stations.

(60) Since no industry data on average pump prices on motorways are available, Exxon pump prices on motorways are
taken as a proxy of the industry average pump prices. Similarly, the parties could not isolate data concerning solely
toll motorways. The Commission therefore took data covering all motorways as a proxy for toll motorways.

L 103/74

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7.4.2004

(520) The parties consider that motor fuel retailing on French motorways does not constitute a separate
market from motor fuel retailing off-motorways. This point has been also made by other oil compa-
nies replying to the statement of objections issued by the Commission in the course of the
proceeding. All of them refer to the fact that owing to the large fuel capacity of modern cars, motor-
ists can drive long-distances and buy fuel off-motorways. In addition, in France motorists are regu-
larly informed through the publication of special brochures on price differentials between motorway
and off-motorway stations. Also, according to both the parties and the other intervening oil compa-
nies, over recent years average consumption of motor fuel has decreased on French motorways, in
particular if one takes into account the average traffic increase.

(521) More specifically, it is argued that fuel demand on French motorways has significantly decreased
precisely because of the competitive constraint exerted by off-motorway stations. To support their
positions, the parties refer to a survey carried out by the Union Française de l'Industrie du Pétrole in
1992, whereby an increase in sales volumes of motor fuels on concession motorways of approxi-
mately 410 million litres was projected in the following five years, taking also into account an
increase in traffic flow and motorway infrastructure. Ex post, while the increase in traffic flow and
motorway infrastructure did occur, motor fuel sales declined by almost 270 million litres during
that period. On this basis, the parties draw the conclusion that there has been a migration of custo-
mers from motorway service stations to off-motorway service stations.

(522) The evidence provided by the parties is at least incomplete. The fact that there has been a decline in
fuel sales on motorways of 270 million litres in five years is not conclusive of anything if taken
alone. In fact, in order to show that motor fuel sales on motorways have declined in favour of sales
off-motorways, the parties should have compared in a meaningful way consumption patterns in
both networks. Instead, the parties have never made such a kind of assessment. More importantly,
they simply disregard the fact that even in off-motorway stations, logically enough, there may have
been an increase of traffic flow and road infrastructure.

(523)

If anything, a meaningful comparison between motor fuel demand at motorway stations and
demand at off-motorway stations shows that consumption patterns in these two networks are very
similar. The table below shows the total volume sales of motor fuel on French motorways over the
last five years as well as the total volume sales of motor fuel in the French market as a whole. No
account has been taken of the increase of traffic flow and road infrastructure.

FRANCE

1994

1995

1996

1997

1998

(Kt)

ESTIMATED MOTORWAY
VOLUME

Motor gasoline

908

852

799

788

781

Auto diesel

1 449

1 519

1 509

1 587

1 684

2 357

2 371

2 308

2 375

2 465

INDUSTRY RETAIL
VOLUME

Motor gasoline

16 122

15 379

14 738

14 377

14 289

Auto diesel

15 649

16 532

17 139

18 118

19 005

31 771

31 911

31 877

32 495

33 294

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Official Journal of the European Union

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(524) As may be seen from the table above, the trend of motorway sales over the last five years is quite
similar to the overall trend. There has been a slight demand increase which is essentially due to a
growth in the demand for diesel, while consumption of gasoline has slightly decreased. This trend is
common to both the motorway network and the off-motorway network. On the basis of this
evidence, it appears that consumption patterns on motorways are not dissimilar from those charac-
terising off-motorway stations.

(525) A qualitative analysis of motorway stations' customers is also instructive. The table below shows an
estimation of Exxon total volume sales of retail motor fuels in the years 1996 to 1998 broken down
on a monthly basis.

(526) Percentage of sales by month for Exxon motorways:

Jan.

Feb.

Mar.

April

May

June

July

Aug.

Sep.

Oct.

Nov.

Dec.

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

[…]*

Figures are expressed in percentage terms.

(527) From the table above it is clear that the majority of sales of the year on French motorways occur in
those months covering periods of public holidays. In particular, with respect to motor gasoline
consumption, two months of the year, namely July and August, count for more than […]* % of the
overall sales; if April and May are added, four months account for around […]* % of the total sales
over the year. As to diesel, this trend is less pronounced but still present. In general terms, all the
months covering periods of public holidays generate higher sales. In other words, the data above
show a great seasonality of demand, which in turn implies a higher degree of captivity. Seasonal
clients are essentially tourists, who are most likely to refuel on motorways. These findings again
militate in favour of motorways being treated as a distinct market.

(528) Finally, the evidence that motor fuel retailing on French toll motorways constitutes a separate
market lies in the fact that prices are in the range of 5 to 10 % higher than prices off-motorways.
On this point, the parties claim that motor fuel retailers bear higher costs when running motorway
stations. However, this fact does not explain at all why, as a matter of fact, motorists are willing to
pay a premium for fuel bought on motorways. In sum, the ‘insulation’ of the motorway channel in
France from the rest of the market is precisely reflected into prices which are from 5 to 10 % higher
than prices on off-motorways stations.

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION

Market structure

(529) The pre-merger situation is as follows. Unlike off-motorway retailing, the market for motor fuel
retailing on toll motorways in France is already very concentrated. It is characterised by the presence
of only six players, all vertically integrated oil companies, of which one, Agip, has an insignificant
position. The five remaining players can be divided into two categories: the national champions,
namely Total and Elf; the majors, that is to say Shell, Exxon, and BP/Mobil. The two national cham-
pions are the market leaders. This is to do with their historically strong presence on national terri-
tory which on the toll motorways market has remained unchallenged. In this respect, both players
have their own refineries situated in France, which secure timely and cheap supplies of motor fuel;
they both own numerous storage facilities well spread over French territory; they both have a very
high number of station sites which secure a capillary coverage of the motorway network. Of the
two players, Total has a leading position on the toll motorways market. Following the merger with
Fina, it has further reinforced its leadership, reaching a share of roughly [30 to 40]* %. Total is also,
as will be shown below, the most cost efficient retailer when looking at the average throughput per
site. As to the three majors, they are all mid-size players. Shell and Exxon have a comparable
market position ([10 to 20]* % and [10 to 20]* % respectively), both in terms of volume sales and
number of sites, while BP/Mobil follows not very distantly. The pre-merger CR4 is close to [80 to
90]* %.

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Official Journal of the European Union

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(530) There are virtually no independent retailers present on the market. This is due to a number of
reasons, notably the difficulty of obtaining licences on motorways, the scarcity of sites available, the
high investment costs needed (these aspects will be further discussed at recitals 554 to 561 below).

(531) The table below shows an estimate of the market shares (in volume) of the parties and their compe-

titors over the last five years.

France

1994

1995

1996

1997

1998

[30-40]*

[30-40]*

[30-40]*

[30-40]*

[30-40]*

[20-30]*

[20-30]*

[20-30]*

[20-30]*

[20-30]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

Total

Elf

Shell

Esso

BP/Mobil

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

Fina

Agip

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

(532) The market has remained quite stable in terms of trends in market shares over the time. There are
market shares fluctuations involving some players of something in the range of 10 % over a period
of five years. However, the leading players maintain virtually unchanged their market position over
time, with Total in the lead, followed by Elf, Shell, Exxon and BP/Mobil.

(533)

It is also worth measuring the market position of the various players by reference to the number of
station sites.

Number of station sites

Total

Elf

Shell

Esso

BP/Mobil

Fina

Agip

1996

111

128

48

55

22

26

9

1997

113

125

51

56

42

34

9

1998

126

124

57

60

41

24

7

(534) Total and Elf have a comparable number of sites (126 and 124 respectively), followed by Shell,
Exxon and BP/Mobil. In terms of evolution of shares over the time, the stability is less accentuated
than in market shares based on volume, but still very high. In particular, over a period of five years,
Total has increased its number of sites by around 20 % (without counting the acquisition of Fina),
taking the lead over Elf. As to the other leading players, with the exception of BP which in 1997
combined with Mobil their respective networks, they have maintained their position virtually
unchanged.

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Official Journal of the European Union

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(535) Overall, from the above considerations it appears that over recent years the market for motor fuel
retailing on toll motorways in France has remained quite static and no changes have been recorded.
Demand has remained quite flat over five years. The competitors have more or less maintained their
position.

Competitive dynamics — costs and prices

Costs

(536) A major factor in the profitability of a retail network is the throughput. The higher the throughput,
the lower are sites' average operating costs per litre. In order to make a cost comparison of the
above players, the chart below shows the average throughput per site of the various players in the
last five years.

France Motorways — Throughput

Agip

BP/Mobil

Elf

Esso

Fina

Total

Shell

Cumula-
tive

7

29

58

309

124

771

60

389

24

93

126

73

472

1 004

430

3 026

4 199

5 333

6 220

6 482

3 889

7 970

5 891

6 412

9

35

60

296

125

731

64

399

34

106

113

929

70

475

425

2 922

3 911

4 933

5 851

6 234

3 118

8 223

6 078

6 152

9

37

60

292

128

702

67

408

26

90

111

893

66

467

422

2 844

4 139

4 873

5 485

6 089

3 465

8 042

6 390

6 090

8

35

57

318

128

705

64

414

25

89

108

914

67

457

450

2 927

4 392

5 585

5 506

6 476

3 570

8 466

6 719

6 404

9

39

60

328

121

697

59

424

21

78

103

897

66

439

454

2 918

4 364

5 469

5 761

7 184

3 734

8 705

6 881

6 646

1998

Stations

Mofuels, km3/yr

Throughput/Station,
m3/yr

1997

Stations

Mofuels, km3/yr

Throughput/Station,
m3/yr

1996

Stations

Mofuels, km3/yr

Throughput/Station,
m3/yr

1995

Stations

Mofuels, km3/yr

Throughput/Station,
m3/yr

1994

Stations

Mofuels, km3/yr

Throughput/Station,
m3/yr

Source: UFIP

(537) From the table above it appears that Total has the highest throughput with 7 970 m3 per site,
followed by Exxon with 6 482 m3. However, all the leading players have a throughput well above
5 000 m3. In general terms, it can be said that the average throughput is quite high when compared
to the average of the off-motorway stations. However, this is due to the fact that motorway stations
are generally bigger in size than an ordinary off-motorway service station.

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(538) An average throughput of between 3 000 and 3 500 m3 per site is viewed by the industry as
allowing an ordinary service station to reach a minimum efficient scale (m.e.s.). However, given that
motorway stations have higher costs to bear than ordinary stations, a higher average throughput
can be taken to secure a minimum efficient scale. A throughput of 6 000 m3 (twice the average
m.e.s. throughput) can be reasonably taken as a breakeven benchmark. Using this approach,
it
appears that no noticeable differences exist between the various players in terms of cost efficiency.
Three players (Total (61), Exxon and Elf) largely hit the target, while two others (Shell and BP/Mobil)
are very close.

Prices

(539)

In order to fully appreciate the competitive environment in motor fuel retailing on French toll
motorways, it is worth taking as a reference the French market for motor fuel retailing as a whole,
which has been cited by the notifying parties as one of the most competitive in Europe.

(540) As shown in recitals 518 to 520 above, it appears that France has by far the highest price differen-
tial. The comparison with figures of different countries can be sometimes misleading due to the
different competitive conditions existing in each national market. In some countries such as Austria
and Netherlands, for instance, overall pre-tax off-motorway prices are extremely high and this can in
part explain a lower differential with motorway prices. Also, with the exception of France, in all
those countries motorways are free of charge. This militates in favour of a more intense competitive
pressure exerted by off-motorways stations on motorway stations. However, the situation in France
can be compared to the United Kingdom since pre-tax pump prices in the latter country are close to
pre-tax prices in France. Nonetheless, the United Kingdom has a differential which is more than five
times smaller than France. Also the situation in Germany can be instructively compared to France
since price differences are not very pronounced.

(541) The chart below shows a comparison between Exxon motorway prices and Exxon network prices in

France, the United Kingdom and Germany.

France

[…]*

UK

[…]*

Germany

[…]*

Exxon pre-tax prices on
motorways — mogas

Exxon
pre-tax
network prices — mogas

average

Exxon pre-tax prices on
motorways — diesel

Exxon
pre-tax
network prices — diesel

average

(542)

It can be noted that the price differentials between these countries are very significant and can
hardly be explained by higher costs in France as opposed to the United Kingdom and Germany.
Even considering that some of the costs listed by the parties for the French motorways are absent in
the United Kingdom and Germany (such as concession rents), the other costs appear to be common
extra costs that a retailer has to bear when running a service station on a motorway irrespective of
the country.

(61) Account should also be taken of the fact that Total has recently acquired Fina which has the poorest performance in

terms of throughput per site.

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Official Journal of the European Union

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(543) A comparison of gross margins and costs borne by Exxon on motorways in France, the United
Kingdom and Germany can be illustrative in this respect. In particular, it is instructive to compare
what the parties name in their submission ‘other wholesale costs’, meaning those costs which cover
all direct (such as land rentals/taxes, advertising, retail personnel) and indirect (such as corporate
overhead, systems) costs specifically associated with running and managing the retail business in
that country. Transportation and delivery costs are not included.

Germany

Motorways — 1998

France

Exxon wholesale costs —
mogas

Exxon wholesale costs —
diesel

Exxon gross margins —
mogas

Exxon gross margins —
diesel

Figures are expressed in USD for metric tonnes.

UK

[…]*

[…]*

[…]*

[…]*

(544) From the table above it appears that those costs that the parties consider as being the cause of the
price surcharge on French motorways are lower in France than in the United Kingdom and
Germany. By contrast, gross margins and prices in France are substantially higher than in the United
Kingdom and Germany.

(545) Nor can it be claimed that the comparison of the above data is misleading due to the different struc-
ture of the Exxon retail network in each country. In this respect, it suffices to say that the Exxon
motorway network in France is exclusively composed of company owned stations, that is to say the
stations where Exxon bears the highest possible costs.

(546)

In their response to the statement of objections, the parties note that the costs data cited above as
representative of motorway stations include in fact motorway and off-motorway stations. In this
regard,
it should be noted that the information upon which the Commission has relied was
submitted by the parties in response to a request of information unequivocally requiring the cost
data relating to motorway stations. The Commission has thus assumed that the parties regard these
data as somehow representative of the costs of their motorway stations as well.

(547)

In any event, even basing the assessment on those data that the parties do not contest, it appears
that the margins generated on French motorway stations are inexplicably high. In this respect, as
has been noted above, pre-tax pump prices on French motorways are on average between […]* and
[…]* % higher than overall French pre-tax pump prices. The parties contend that these differences
derive from the higher costs borne by a retailer when running a motorway station. In particular,
they claim:

(i) that all French ‘concession’ motorway service stations (which constitute […]* % of Exxon
stations) must pay volume-related rents of approximately […]* centimes/litre to the motorway
concessionaire;

(ii) that motorway service stations incur higher investment costs to provide additional facilities
required by the concessionaire: these, typically, include additional fuel storage tankage, addi-
tional washing, parking facilities etc., and the resulting extra cost amounts to […]* centimes/
litre;

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(iii) that motorway stations are required to be open every day for 24 hours. The additional costs are

about […]* centimes/litre;

(iv) that the use of fleet cards is higher on motorways, resulting in additional costs of about […]*

centimes/litre.

All these costs allegedly account for a large part of these differentials — […]* % for motor gasoline
and […]* % for diesel.

(548) However, even accepting the generous estimates made by the parties, there would still remain an
unexplained significant differential of something in the range of 20 to 30 %. In short, on the basis
of the calculation provided by the parties, there would still be a margin of up to 10 centimes/litre
which is not explained by any extra costs.

(549)

In the light of the above it appears that overall margins and ultimately, profits made by the motor
fuel retailers on French motorways are higher than those generated on off-motorway stations in
France. These returns are also higher than those generated in the motorway stations of the other
Member States considered above.

Price trends

(550) A comparison of the price trends over the last four years between motorway and off-motorway

pump prices in France is also quite illustrative.

Pump prices

1995

1996

1997

1998

Taxes
IN

Taxes
OUT

Taxes
IN

Taxes
OUT

Taxes
IN

Taxes
OUT

Taxes
IN

Taxes
OUT

(USD/t)

Motorways

Mogas

1 630

378

1 653

380

1 500

364

1 465

327

Diesel

1 007

331

1 066

355

984

339

934

286

Retail, excl. mw.

Mogas

1 568

326

1 598

334

1 426

302

1 384

260

Diesel

949

282

1 006

305

909

277

848

215

Price delta
MW vs non-MW

Mogas

62

52

55

46

75

62

80

67

Diesel

59

49

60

50

75

62

87

72

(551) From the table above it appears that in absolute terms pre-tax prices have gone down on both
motorways and off-motorway stations owing to a crude oil price decrease. However, in relative
terms it appears that pre-tax pump prices have followed different trends, with off-motorway prices
decreasing much more dramatically. In this respect,
it is striking that the differentials between
motorway and off-motorway prices have increased by something in the range of 30 to 40 %.

(552)

In essence, the table above shows that, first, the market for motor fuel retailing on toll motorways
in France is unrelated to price trends prevailing in the neighbouring market of off-motorway
stations; secondly, the players on the toll motorway market seem to have reached a supracompeti-
tive equilibrium which is not disturbed by the intense competitive game involving the various
players on the off-motorway market.

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(553) Finally, with respect to the degree of price competition existing between the various retailers on this
market, it is worth noting that price differences are very small. In general terms, pump prices track
each other closely and variations between different retailers' prices are insignificant. This lack of
price competition is again the indication that each retailer is satisfied with his returns and that the
market has reached a supracompetitive equilibrium.

Entry barriers — expansion — potential competition

Entry barriers

(554)

It is acknowledged by the industry that a number of factors make entry on the toll motorway motor
fuel retailing market more difficult than in the retail service station market as a whole. This is the
case with France as well.

(555) First, building a new site on a motorway requires some investment. The parties estimate that the
cost of building a new site on a motorway can be from five to 10 times higher than the costs
relating to an ordinary site. According to the parties a double-sided site can cost up to USD […]*
and a single site can cost USD […]* while an off-motorway site generally costs around USD […]*.
The extra costs result essentially from the requirement to provide additional facilities such as fuels
storage tankage, additional washing, parking facilities etc.

(556) Secondly, the process for obtaining approval for a new site can take a very long time. Overall, a
period from one to two years is required in France to complete the construction of a site on a
motorway, counting also the time for obtaining the requisite permission and finalising the tendering
procedures.

(557) Thirdly, the construction of new service stations is heavily regulated and carefully controlled by the
highway authorities in France. Inter alia, the spacing between service stations on motorways is also
regulated. This clearly restricts the opportunities for developing new sites.

(558) Fourthly, the market is already quite saturated in terms of existing sites and this further reduces the

possibility of creating new outlets.

(559) As a matter of fact, the scarcity of new sites together with the other factors cited above has tradi-
tionally prevented the entry by newcomers on the toll motorways market in France. It is quite
instructive that over the last 10 years, only three motorway service stations have been awarded by
tender to companies which, prior to 1989, were not represented on the French motorways. One
station has been awarded to Leclerc (a French hypermarket company) and two stations have been
awarded to Dyneff (a large independent reseller).

(560) The parties claim that there is an element of contestability in the market due to the fact that conces-
sions for exploiting sites are of limited duration and are periodically re-assigned by the highway
authorities. Motorways in France are owned by either the central government, by local governments,
or by wholly or partly privately owned companies. The latter are awarded the rights to build and
operate motorways under ‘concessions’ from the national/local governments. They in turn award
concessions for retail service stations to motor fuels retailers. In the case of the ‘concession’ motor-
ways, their duration tends to be between 15 and 30 years, although those awarded directly by the
local or national governments are generally for 30 years.

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(561) Against this background, it should be noted that this system, while theoretically designed to create
some form of competition for the reallocation of an existing site, has never functioned properly. As
a matter of fact, the parties admit that they have no knowledge of a new bidder acquiring existing
motorway service stations at the end of an initial concession period. This is because the industry
practice is for the existing supplier to obtain an extension of the initial concession, usually in
conjunction with an agreed investment in or modernisation of the service station, before the initial
concession period expires.

Potential competition

(562)

It should also be noted that no real threat of potential competition exists on the toll motorways
market in France. In this respect, the major source of competition in off-motorways motor fuel
retailing in France has come from supermarkets and hypermarkets (they account for more than
50 % of the total sales in France). These players have in particular developed fuel retailing as an
ancillary activity complementary to their core business. The expansion of their sales is essentially
based on the possibility to keep prices low by achieving cost efficiencies. This in turn is made
possible thanks to the logistic synergies existing between their core activities and the activity of
motor fuel retailing. In particular, the hypermarket format places a conveniently located motor fuel
forecourt on the car park to take advantage of the large number of customers coming to shop at the
superstore. This provides the operator with high throughputs at low operating costs. However, all
these factors cannot be easily recreated on motorways. As a matter of fact, to date, with one small
exception (Leclerc has one station with lower than average prices), none of the supermarket chains
is present on French motorways. Most of the supermarket and hypermarket chains active in motor
fuel retailing have indicated in their responses to the Commission enquiry that they do not intend to
enter the toll motorways market precisely for the reasons stated above. Also, they point to the fact
it is all the more difficult to enter the toll motorways market without a sufficiently large number of
stations.

THE POST-MERGER ENVIRONMENT: THE IMPACT OF THE OPERATION ON COMPETITION

(563) As indicated above, the pre-merger situation shows already a deficit of competition which can be
explained by a number of factors. The market is very concentrated with five operators (TotalFina,
Elf, Shell, Esso and BP/Mobil) accounting for almost 90 % of the sales. There is no presence of any
aggressive competitor as in the off-motorway market. The market is well isolated from any competi-
tive threat by high entry barriers. Also, independent retailers and in particular hypermarkets which
theoretically would be ideal candidates to enter this market, have shown no interest or have not
been in a position to do so.

(564) The impact of the present operation is to be assessed against the above described background,
having also regard to the features identified in the section devoted to the structural characteristic of
retail motor fuel markets in general. First, the operation causes a further increase in market concen-
tration. In essence, the operation results in the elimination of one mid-size competitor from the
market.

(565) More importantly, the operation will change the structure of the market as it will result in the
constitution of a new force constituted by the couple Exxon/Mobil BP/Mobil, holding together a
market position roughly comparable to the competitor number two. In sum, the operation has a
significant adverse effect by rebalancing the internal oligopoly equilibrium. Instead of five players,
three of which hold relatively low market shares, the new landscape will be characterised by the
presence of two big players, namely Total/Fina with [30 to 40]* % and Elf with [20 to 30]*, plus a
comparable third force constituted by Exxon and BP/Mobil, holding together [20 to 30]* % and a
smaller player, Shell, at [10 to 20]* %.

(566) The competitive relationship between the members of the oligopoly will be changed in that the
scope for retaliation will be increased. With higher and more balanced market shares of the partici-
pants, the consequences of competitive actions in terms of retaliation are potentially more wide-
spread and serious than with the current supply structure.

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(567)

In the pre-merger scenario, the three mid-size players could still represent disturbing factors in the
oligopoly equilibrium. In particular, they could legitimately aspire to expand their market shares in
the light of their good cost-efficiency scores. Also, these three players represent the only multina-
tional super majors, thus being in a position to constitute a constant competitive threat to any
national leader. After the merger, the market structure will be such that no competitive move will
ever be conceivable without triggering a strong and widespread reaction. Due to the low growth of
fuel demand, any attempt from one of the various players to increase its sales will inevitably have to
occur to the detriment of the other players. In addition, given the homogeneity of the product, the
only possible competitive strategy aimed at gaining market shares consists of reducing prices.
However, any price cut will inevitably trigger a retaliation from the other players which will feel
directly targeted. Given in addition that three players out of five have a very capillary presence on
the territory, and that they are equally cost-efficient, competition on price will be avoided at all
costs. Shell, which is the only ‘small’ member of the oligopoly left, and could have different incen-
tives, would however be running very serious risks if it were to compete vigorously, since it has a
smaller market coverage than the bigger retailers, and therefore it is easier to target. In essence, the
merger will render the interaction between the few dominant players easier to implement and
monitor, while further exacerbating the poor economic performance of the market.

(568)

In the light of the above, it appears that the operation will result in the strengthening of a collective
dominant position held by TotalFina, Elf, Shell, Esso and BP/Mobil as a result of which effective
competition would be significantly impeded in the common market.

GERMANY

GENERAL OVERVIEW

Refining

(569) There are currently 17 fuel refineries in Germany, on the coast or inland. The main refiners are
Exxon, Shell, BP/Mobil and DEA who own approximately 42 % of total capacity. These three compa-
nies are vertically integrated in the sense that they are also active at the stage of motor fuels whole-
saling and retailing. Most other refiners (such as Conoco, Elf, Total, Agip, OMV) also are vertically
integrated oil companies. Non integrated refiners such as Ruhr Oel, Wintershall, Beta, Holborn
account for 43 % of the total German production. These refineries have a total capacity of 2 186
KBD. Consumption in the whole of Germany (diesel/Mogas/Mofuel) reached a total of 622 million
bbl in 1996. According to Eurostat, Germany has net imports of around 21 % of its production
capacity, although this figure does not include the recent built Leuna refinery. It is important to
note that the inland refineries are unable to sell their excess production on the cargo market and
have therefore to market it in Germany.

Infrastructure

(570) Refineries and storage capacity are strategically located close to the major consumption areas and
regional storage capacity provides product supply in the more remote parts of Germany. The river
Rhine connects the Western located refineries (Gelsenkirchen VEBA, Wesseling DEA, Godorf Shell,
Karlsruhe Esso/DEA/VEBA/Conoco) and indirectly via the Mittellandkanal the refinery of Wintershall.
The southern refineries (Ingolstadt Esso, Vohburg BP/Mobil/AGIP/RuhrOel) are accessible via the
Danube river. Three refineries are connected to the port of Hamburg (Heide DEA, Hamburg
Holborn and Hamburg Shell). Inland refineries which are not connected to a port or river mainly
serve the region in which they are situated or important storage concentration as it is the case for
Leuna (Elf) for the Dresden area, Burghausen (OMV) for Munich and Austria (via pipe connected to
the Danube) and Schwedt (DEA/Ruhroel/AGIP/Total/Elf) for the Berlin area. The regions with high
consumption levels (Hamburg, Hanover, Cologne, Frankfurt, Stuttgart, Munich, Berlin, Dresden and
so forth) are supplied by ex-refinery sales from nearby refineries.

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(571) Pipelines (both product pipelines and the NATO jet pipeline) cover the western and southern parts
of Germany while the eastern part of Germany is served by important storage capacity connected
by both pipelines and the river Elbe. Pipelines connect all major storage locations with the refineries,
although a distinction should be made between proprietary product pipelines and the NATO pipe-
line system which is running at full capacity and whose primary function is to transport jet fuel to
military airports.

(572) Most of Germany can be supplied from the cargo market by barge traffic on the Rhine, Danube and
Elbe (which connects Hamburg with eastern Germany). Due to the varying water levels, barges are
restricted to a maximum of 1 000 tonnes. Barge transportation on the Rhine can be affected by
both high and low water levels. While rising water levels have virtually no impact on freight rates as
long as traffic has not been discontinued (which is very rare), low water levels do have an impact on
freight rates, because loads must be reduced in order to ensure clearance through shallow water.
During these periods, freight rates go up, although the impact on rates also depends on the actual
demand situation upstream. In periods of low demand (particularly summer, when demand for gas
oil is low), low water levels may have little effect on freight rates. In periods of high demand, low
water levels may substantially affect freight rates. The duration of low water levels on the Rhine typi-
cally ranges from one week per year to one month per year.

Wholesaling

(573) From the market investigation it appears that access to the wholesale market is relatively easy for
retailers. Typically sales prices charged to independent resellers are based on the OMR (the Oil
Market Report is a local equivalent to Platt's) quotation with an agreed differential to cover factors
such as location differentials and any service provided. OMR quotations are the price that a reseller
would have to pay if he wanted to buy motor fuels from storage facilities close to the Rhine. They
parallel Platt's quotations but are higher by approximately 10 % to 15 %. According to the parties,
barge freight from the ARA (Antwerp-Rotterdam-Amsterdam) area to the Karlsruhe area should
account for approximately half the difference between the Platt's and OMR quotes. The other half of
the difference represents all other costs that a company transporting product into Germany and
selling it to customers there would incur, including handling costs (such as costs of loading and
offloading barges), terminaling/storage costs, local port charges (if any), insurance, costs for order
and sales staff, etc., and any margin for the company selling the product.

(574) The parties have estimated that 55 % of storage capacity in Germany is in the hands of independent
companies. This has been confirmed to the Commission by independent storage suppliers such as
Petroplus, Oiltanking and Van Ommeren and by direct customers such as Mabanaft (trader), AVIA
and Baywa (wholesalers). These independent companies offer their services to all kinds of clients,
even to majors.

(575)

In Germany, traditionally more than 70 % of petroleum products are sourced from inland refineries
direct. Imports are generally directed to independent resellers, but they can also stem from intra-
group trading. Currently, most competitors to the parties only buy limited volumes in order to safe-
guard independence from the majors controlling the refineries. Non-integrated competitors to the
parties have indicated that in the past years, more than 90 % of the purchased product was supplied
by in-land refineries or purchased from majors who obtain the product via exchanges or affiliates
purchase. The non-integrated competitors purchase from both inland refineries and the cargo
market (ARA). Sourcing depends on the conditions offered; as the price differential between cargo
and inland refineries changes all the time, sometimes prices on the cargo market are lower than
inland. For instance, it has been explained to the Commission that at the moment the inland refi-
neries offer a more attractive price than the cargo plus transport and storage. It has appeared that
unless cargo prices are significantly lower, it is more interesting to buy ex-inland refinery.

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(576) As to the vertically integrated retailers, they obtain motor fuels from three sources: own production,
exchange agreements with other refiners or through purchases from third parties […]*. BP/Mobil
purchases […]* % of its needs from third parties. Exxon has exchange agreements for motor fuels
with […]*. This is partly due to the fact that Exxon mainly operates refineries in southern Germany.

(577) A number of actors, such as Avia, Mabanaft and Petroplus (wholesalers and traders), are present at
the wholesaling level, which ensures that non-integrated retailers can obtain supplies of motor fuels.
It is to be noted however that the aforementioned wholesalers have used supplies via traders only in
a limited way as most wholesalers have also (limited) trader activities or have sufficient combined
buying power to order vessels/barges on the cargo market.

Retailing

(578) Four categories of retailers can be distinguished in Germany: A-brands, B-brands, independents and
supermarkets. A-brands include vertically integrated oil companies such as Exxon, BP/Mobil, DEA
and Shell but also Aral, where, as explained above, Mobil has a 28 % stake (with the other main
shareholders being Veba (56 %) and Wintershall (15 %)), and which benefits from captive supplies
from its shareholders Mobil (through BP), Veba and Wintershall. B-brands include smaller integrated
companies such as Elf, TotalFina or Jet/Conoco.

(579) From 1994 to 1997, the number of service stations has fallen by 7 %. During the same period the

volume of motor fuels sold in service stations remained stable at 50 million cubic metres.

(580) About 60 % of the service stations are branded. Sometimes the oil company owns the property and
the building/investments on it. Sometimes the oil company owns only the building and investments
whilst the property belongs to the retailer. The majors operating in the German market have
initiated an ‘agency contract system’. This is specific to Germany, where personnel costs are said not
to allow COCO structures. The agency system (‘Agentursystem’) can either include the whole busi-
ness of the station or can also exclude certain parts such as the shop or car wash.

(581) A distinction can be made between dealer-owned stations and company-owned stations. There are
only a few ‘test stations’ of company operated stations. As far as dealer-owned stations are
concerned, oil companies still have a very strong position. Agents depend on the oil company,
which sets the price. For instance, the dealer-operated service stations bearing the Esso brand in
Germany are all under agency contract. Under such contracts, Exxon owns the fuels stored on the
station premises and sets the retail price. The agent system allows better and more secure margins
[…]* (62).

(582) The dealer is remunerated through a commission based on sales volumes and unrelated to pump
price. The agent receives only a margin on every sale, of typically about 2,5 to 3 pfennig per litre
for dealer operated and 5 pfennig per litre for dealer-owned stations. The commission is higher for
dealer-owned stations because the dealer has then to bear more costs than in a company-owned
station.

(583) As far as company-owned dealer-operated (agents) stations are concerned, the contracts have a long
duration (normally about 10 years, but can be extended twice for a period of five years), which
makes it difficult for competitors to enter. The length of Exxon's dealer supply contract varies
between […]*. It amounts to […]* in average.

(584) Convenience stores are a major element for the profitability of service stations in Germany, as they
subsidise the fuel price. They are run by subsidiaries of the oil companies or by companies like
‘Lekkerland’. The oil company receives a rent in return, although for some companies the ‘agency
system’ also applies to the shop.

(62) [...]*.

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(585) Owing to the severely regulated opening hours of shops and supermarkets, the convenience store
has become an important retail facility in Germany (4 % of food and beverages sales in Germany).
The convenience store attracts customers and aims at enhancing the service and quality image of
the fuel retailer. The rent received from the shop business generates important profits offsetting
lower demand for fuel ([…]*). The importance of a convenience shop is expected to increase further.
It is considered by the majors to be a powerful differentiation from white pumps and B-brands.

(586)

[…]*. Majors therefore invest heavily in service offering, based on the significant 70 % brand loyalty
of the German customer, as a strategy to maintain profitability and market shares differentiating A-
brands from ‘price–cutters’. […]*.

Western Germany and eastern Germany

(587) Given the differences in terms of supplies, welfare and even market players between the eastern and
the western parts of Germany, it could be argued that both form two separate relevant geographic
markets. Indeed, there are some differences in prices, and market shares are not similar.

(588) However, this assertion was not confirmed by the Commission's investigation for the following
reasons. First, the price difference between both regions is limited and in some cases inferior to
price differences within western Germany itself. Typically prices are slightly lower in the eastern
part of Germany. This is in fact due to massive entry into this market in the early 1990s, when
traditional western Germany retailers tried to duplicate their market share in the new Länder. This
has resulted in excess capacity and therefore pressure on prices. Secondly, the manifest market
shares differences between western Germany and eastern Germany have a historical basis. After
German reunification, the monopolistic position of Minol was suspended when Elf in 1992, having
a market share of less than 10 % in western Germany, acquired Minol and therefore market leader-
ship. Up to now, Elf has kept this position of market leader although its market share has been
reduced to 24 % (63) by competitors. Minol had a deteriorated network, and competitors have gained
market share with new service stations at strategic locations. As the deteriorated Minol network is
likely to be further rationalised, it is to be expected that the eastern German market is going to
evolve slowly to the market shares ventilation in the west. Thirdly, there is no difference in legisla-
tion, fiscal provisions or environmental obligations. Fourthly, there is no natural barrier between the
eastern and the western parts of Germany. This means that a uniform price increase in the western
part would be defeated through marginal competition at the limit between the eastern part and the
western part, through a sort of ripple effect.

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION

Market structure

(589) Overall, the majors (ARAL, Shell, Esso, BP, DEA or ‘A-brands’) have more than 65 % of the market.
Hyper/super markets are at around [0 to 10]* %, White pumps [0 to 10]* % and the most important
B-brand JET-Conoco around [0 to 10]* %. According to the parties' 1997 figures, Aral is market
leader with [20 to 30]* %, Shell has [10 to 20]* %, Exxon [10 to 20]* %, DEA [0 to 10]* %, BP/
Mobil [0 to 10]* %, Elf [0 to 10]* %, TotalFina [0 to 10]* %, Agip [0 to 10]* % and KPI less than [0
to 10]* %. The price-cutters accounted for [10 to 20]* % (with Hypermarkets [0 to 10]* %, JET
Conoco [0 to 10]* % and white pumps [0 to 10]* %). The smaller B-brands (such as Avia, Tamoil
…) accounted for around [0 to 10]* %.

(63) On the basis of the market shares of the main eastern German competitors 1998 provided by the parties.

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(590) There has been little variation in market shares of A-brands or even B-brands from 1994 to 1998 as

can be seen from the following table.

Aral

Shell

Esso

DEA

BP

Conoco

Elf/Minol

Agip

Fina

Total

Others

1994

1995

1996

1997

1998

[20-30]*

[20-30]*

[20-30]*

[20-30]*

[20-30]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[10-20]*

[10-20]*

[0-10]*

[0-10]*

[0-10]*

Hyper and white pumps

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

Competitive dynamics — costs and prices

(591) According to the notifying parties, pump prices vary only marginally in Germany. The price differ-
ences are explained by higher operating costs in rural areas and transport costs to a minor extent
for remote areas. The market investigation has revealed that the German market is typified by a
situation whereby all A-brands charge prices at a similar level whereas the remainder of the compe-
tition prices at 1 pfennig below A-brand prices. Supermarkets offer prices at 3 pfennig below A-
brands. This price structure does not seem to vary over time.

(592) Aral is the market leader. Price changes seem to be initiated by A-brands according to variable
patterns and are followed by the rest of the competition. The majors have most impact on prices.
All vertically integrated oil companies (Aral, Shell, Esso, BP and DEA) show similar company struc-
tures. Compared with their competitors they have very good access to the purchase and supply
markets. Only the five aforementioned companies have a condensed retail network for the whole
relevant geographical market. Multiple links exist between these five companies (materialised in JVs
for refineries, exchanges, storage and airport fuel supply). This leads to identical or at least compar-
able purchase costs between A-brands.

(593) Despite their lower price, B-brands and supermarkets tend to follow price trends. It results from the
Commission's market investigation that price changes are mainly initiated by the majors and it
happens very rarely that one of the majors does not follow. Price wars occasionally occur for a
limited period in time, for instance when a supermarket opens a new fuel retail outlet. Competitors
have indicated that if the majors would raise the fuel prices about 5 to 10 %, the other companies
would rather follow, in order to take advantage of higher margins. The fuel retail industry has
understood that not much market share can be gained by competing with the majors in lower
prices. In addition, competitors have indicated that due to the low margins and high investment
costs (for meeting environmental requirements) they could not sustain a price war.

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(594) According to competitors, B-brands are able to offer lower prices because they operate often more
efficiently and have a different cost structure than the majors as their overhead costs are most of the
time slightly lower (no marketing and advertising costs, smaller shops, less site investment, less
personnel) and as they offer more limited service. B-brands sell at a price 1 pfennig less than the
majors. However they are usually of very limited size when compared to the A-brands. Companies
such as Elf, Agip, Fina, Total and OMV can claim, individually, at most 3 % of market share.

(595)

[…]*.

(596) Whereas the majors did not react when Conoco entered the market in the late 1980s, the market
investigation reveals that today when a new competitor tries to offer price differences of 1 pfennig
and more, there is a localised price war in the neighbourhood. It was explained to the Commission
that when two years ago, Conoco tested unmanned service stations at a price of 2 pfennig lower
than the majors' price, the majors reacted, and as Conoco needs their acceptance and supplies, it
stopped the price war and raised prices.

(597)

[…]*. That reduces the potential volume shift from price-cutters to a maximum of two-thirds of
their existing volume.

(598) Although some of the small/independent companies offer cheaper pump prices (1 %), this is not
sufficient to permit the conclusion that there would be competition on prices. Independent compa-
nies are only active in certain regions. They typically have lower throughputs (1 600 against 3 000
in average for the industry) and therefore higher fixed costs per unit of product sold. They compen-
sate these lower throughputs through lower service to remain competitive. Even if throughputs are
increased, these independent companies are not in a position to exercise competition on prices as
their variable costs are distinctly higher than those of the majors. In a graph representing overall
costs as a function of throughput (64), Exxon has shown that costs remain fairly stable for traditional
service stations, as German service stations can be qualified. It is the Bundeskartellamt's assessment
that the independents do not and cannot exercise competitive pressure upon the five A-brands
companies. This point was confirmed by the Commission's market investigation. The independent
retailers seem to have too low margins to start competing on the basis of prices against the majors.
Indeed, since most of the time their presence is geographically focused, they would suffer more
from a price competition than the A-brands would.

(599) The majors compete with the supermarkets and offer low prices during the week, price reductions

on Fridays and higher prices on Sundays, when the supermarkets are closed.

(600)

In Germany, hyper- and supermarkets do not have such an important competitive impact on the
market as in France, but exert in certain areas a certain price control on the majors. Supermarkets
have a rather small market share, at just below [0 to 10]* %. […]*. Hypermarkets are not a signifi-
cant competitive threat to the majors for the following reasons:

— hypermarkets offering fuels are highly fragmented and have no nationwide chain,

— their price is typically 3 % to 4 % lower than that of the majors but they cannot offer the same

service to customers as they have limited opening hours,

— they have no shop offering on the forecourt, and

— they accept only cash payments.

(601) Contrary to what happened in France (where their entry in the market was contemporaneous) super-
markets are not integrated into the supply chain. They have not captured significant throughputs
and do not benefit from any specific cost advantage when compared to A-brands. […]* (65). Only
limited competition is therefore to be expected from the supermarkets.

(64) [...]*.
(65) [...]*.

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(602) The majors concentrate on the big cities, whereas independents are more active in rural areas and
small/medium-sized towns, where there is less competition. The throughput is higher in towns, but
the costs are lower in rural areas, as there are no big investments necessary, personal contact is
more important, etc. The fuel price is normally the same or higher in rural areas.

(603)

In Germany the ‘agency system’ has helped to avoid price wars, as the majors have absolute control
over prices. Majors control the prices, as they are operating with agents, not with independent
dealers. The agent has to accept the prices, and sometimes prices are even changed automatically by
the computer system.

(604) According to third parties, fuel retailers have knowledge of pump price increases before they are put
in practice allowing for sufficient time to change prices at the pump. On the basis of market obser-
vations in southern Germany (66), the conclusion was that there is no significant competition
between the A-brands. Based on (public domain) spot checks in 1990, 1991, 1993, 1997 and 1998
this study has assessed that price increases were initiated only by the five majors (A-brands) and that
companies take the initiative for price increases on the basis of an agreed (although variable) sche-
dule. In a competitive market, competitors would consider waiving the opportunity to increase
prices in order to improve their image in the eyes of the consumer.

Barriers to entry — expansion — potential competition

(605)

In the western part of Germany, access and expansion are very limited. This is due to property
restrictions, numerous planning issues, and specific legislation limiting the opportunities for building
new outlets (local authorities). It should also be noted that most of Germany is already highly popu-
lated. This makes the creation of new outlets more difficult and more costly. Environmental consid-
erations also play an important role in deterring entry and expansion. Environment legislation is
stricter than in most other European countries. The stage II and liquid-tight pavement require signifi-
cant investment, which is expected to trigger further network reduction. The agency system allowing
oil companies to prolong the duration of the dealer operating the service station forms an important
barrier for new entrants. Finally, loyalty systems and branding (as representative of the quality of the
service) are considered important by the German consumer and make entry even more difficult.

(606) Market entry was easier in the eastern part of Germany, as the ailing Minol network had to be
rebuilt and the typically long duration of western German retail contracts (for property and supply)
was not hindering new entrants. As majors wanted to attain the same market shares in eastern
Germany as those in the west, service stations were oversized (3 to 4 times bigger than the stations
in western Germany) and faced low throughputs. At the moment there are too many stations in the
east, with too much capacity, and as a result of this most stations face financial problems; especially
the white stations. Hypermarkets have market shares in the east of 10 to 12 % but are faced with
low throughputs as well and serious competition from supermarkets in former eastern bloc coun-
tries.

(607) Overall, the German market is a saturated market where throughputs are low and demand is
projected to decrease. 600 service stations have been closed down since 1998 and only 150 new
service stations have been opened: this trend is likely to continue in the future.

THE POST-MERGER ENVIRONMENT — IMPACT OF THE OPERATION ON COMPETITION

(608) The impact of the present operation is to be assessed against the above described background,
having also regard to the features identified in the section devoted to the structural characteristic of
retail motor fuel markets in general.

(609) The merger will result in three of the A-brands to have strong links between them. Overall, Aral,
Esso and BP/Mobil will hold together 40 % of the retail market. The two other A-brands, Shell and
DEA, will respectively have 14 % and 10 % of the market.

(66) Study Bayerische Landeskartellbehörde 1998.

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(610) The creation of a link between three of the major competitors in the German motor fuels retail
market will lead to material incentives not to compete against each other for these companies. It is
unlikely that other A-brands such as Shell or DEA would challenge absence of significant competi-
tion on the part of Aral, Esso and BP/Mobil. Indeed, as explained in recitals 591 to 604 above the
German market is characterised by the absence of any real challenger to the A-brands and a quasi-
immediacy of pricing instructions from the majors. In such a competitive landscape, Shell (which
has traditionally focused on quality rather than price) and DEA would rather seek to benefit from
higher margins at stable market shares rather than lower margins for the same market shares.

(611) For the same reasons as indicated above it is unlikely that other non-A-brand competitors would
challenge such a situation. First, they hold altogether less than 35 % of the market, with no one
having more than 5 % market share. They would be more harmed by a price war with the A-brands
than the A-brands themselves (which could cross-subsidise thanks to their greater size). Secondly,
they depend to a certain extent on the A-brand companies for obtaining their supplies of motor
fuels. Thirdly, apart from Jet-Conoco, they bear a higher cost basis than most A-brands.

(612) Therefore, the operation will result in the creation of an oligopolistic dominant position by the A-

brands, namely Exxon, BP/Mobil, Aral, Shell and DEA.

LUXEMBOURG

GENERAL OVERVIEW

Refining

(613) As no refineries are located in Luxembourg, the supply of motor fuel is to be secured through
importation from neighbouring countries, primarily from the ARA regions via secondary means of
transport, essentially rail, barges and trucks. More specifically, a marketer seeking to import products
into Luxembourg has two options: arrange for capacity in one of the terminals located in Luxem-
bourg and purchase barge lots from fuel suppliers in the ARA region, or deliver barge lots to other
terminals in neighbouring countries and truck products into Luxembourg.

Wholesaling

(614) As most retailers operating in Luxembourg are vertically integrated oil companies, the wholesale
activity is very limited. With respect to logistic, no risk of foreclosure exists at the level of terminals
available for storing motor fuel. There are essentially four active terminals in Luxembourg, of which
the one strategically situated at the riverport of Mertert (approximately 56 000 m3), is owned by an
independent terminaling company. Owing to the small size of the country, many depots located in
neighbouring countries represent competitive alternatives and are currently used by some of the
retailers operating in Luxembourg.

Retailing

(615) The market for motor fuel retailing in Luxembourg is characterised by two specific features. First,
motor fuel demand is stimulated by the government policy of low petroleum duties, which results
in pump prices lower than in neighbouring countries. As a result, volume sales are large, relative to
the size of the country. Also, most of these sales concern ‘non-resident’ customers from neigh-
bouring countries. Secondly, motor fuel pump prices are capped by the government, which fixes
maximum pump prices. As it will be seen below, the price regulation has favoured the alignment of
retailers' pump prices on the maximum ceiling fixed by the government.

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L 103/91

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION

Luxembourg as a distinct geographic market

(616) While it can be argued that Luxembourg cannot constitute a distinct geographic market because of
its geographic location, the specific market conditions existing in this country militate in favour of a
separate market. In this respect, it is worth noting that due to a light tax burden, within the Com-
munity Luxembourg has by far the lowest after tax prices (USD 936 per Mt). If compared with its
neighbouring countries, Luxembourg motor fuel price differences vary from a minimum of approxi-
mately 15 % with Germany, up to 40 % with France (see table above).

Market structure

(617) From the supply side the competitive environment is characterised by the presence of a number of
vertically integrated oil companies operating retailing activities. Five players hold each more than
10 % of the market, and two other are above 5 %. None of them has significant advantages in terms
of access to sources of supply since no refineries are located in Luxembourg. However, due to the
small size of the country, and the relative proximity to some important refining regions (ARA),
retailers can procure motor fuel and supply their network with no significant extra cost compared
to the European average. No hypermarket and supermarkets are active in Luxembourg. Independent
retailers have a very marginal position.

(618) The pre-merger situation is as follows. The table below shows an estimate of the market shares (in

volume) of the parties and their competitors over the last five to six years.

Luxembourg

1994

1995

1996

1997

1998

June 1999

Shell

Aral

[20-30]*

[20-30]*

[20-30]*

[20-30]*

[20-30]*

[20-30]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

Exxon

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

Q8

[0-10]*

[0-10]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

Texaco

[10-20]*

[10-20]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

Total

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[10-20]*

[10-20]*

BP/Mobil

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

(619) The market appears to be moderately concentrated. Shell is the market leader with [20 to 30]* %,
followed by Aral at approximately [10 to 20]* %, and then Total which, following the merger with
Fina, has increased its market share up to around [10 to 20]* %. Exxon is a mid-size player with a
share of [10 to 20]* %. BP has a small share of [0 to 10]* %. The pre-merger CR4 is close to 70 %.

(620)

In terms of market shares trends, the market shows a certain evolution at the bottom of the ranking
(probably explained by the small quantities in question) while the position of the leading players
remains quite stable over the time. More specifically, in a period of five years, Total has doubled its
market position (disregarding the merger with Fina) while both BP and Texaco have registered a
decrease of roughly […]* % of their sales. By contrast, the stability of the leading players on the
market, namely Shell, Aral Exxon and Q8, is higher. […]*.

(621)

If, then, a shorter temporal horizon is taken as a reference (three or four years), the static nature of
the market appears all the more accentuated. With the exception of Total, which has recently
merged with Fina, market share variations are absolutely insignificant.

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(622)

It is also worth measuring the market position of the various players by reference to the number of
station sites.

Luxembourg

1994

1995

1996

1997

1998

Shell

Aral

Exxon

Q8

Texaco

Total

Fina

BP/Mobil

55

51

34

56

29

15

21

1

59

52

31

52

23

15

19

3

58

53

30

52

22

15

19

2

52

50

30

48

22

16

18

3

29

34

Total industry

293

272

275

261

(623) Based on 1997 figures, it appears that three operators have a comparable number of sites, namely
Shell, Aral and Q8 with 52, 50 and 48 stations respectively. Total/Fina and Exxon have 34 and 30
sites respectively. BP owns only three sites. In terms of evolution over the time, again the stability is
quite pronounced. Among the leading players, the most important variation concerns Q8 which
registers the highest decrease, with a reduction of eight stations in five years. It is followed by Exxon
which has reduced of five stations its total numbers over a period of five years.

(624)

It is also striking that the overall number of sites is extremely high given the size of the country. As
it will be seen below, such a concentration of stations in such a small territory seems to hint that
further expansion in terms of new sites seems to be unlikely.

(625) Overall, from the above considerations it appears that the last years the market for motor fuel
retailing in Luxembourg has remained quite static with seven main players (Shell, Aral, Exxon, Q8,
Texaco, TotalFina and BP/Mobil) and no dramatic changes have been recorded. The demand has
remained quite flat over five years. The competitors have more or less maintained their position.

Competitive dynamics — costs and prices

Costs

(626) A major factor in the profitability of a retail network is the throughput. The higher the throughput,
the lower the sites' average operating costs. In order thus to make a costs comparison of the players
on the market, the chart below shows the average throughput per site of the various players in the
last five years.

Average
throughput per
site — m3

Shell

Aral

Exxon

Q8

Texaco

Total

1994

1995

1996

1997

1998

4 394

3 915

3 470

1 929

4 976

2 990

4 318

4 210

4 370

2 174

5 695

4 486

4 051

3 741

4 732

2 150

4 895

5 875

4 849

4 197

5 057

2 542

4 988

6 609

6 795

BP/Mobil

10 272

30 502

27 741

14 486

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(627) Taking as a reference the year 1997, for which complete data are available, it should be noted that
BP has by far the highest throughput. However this is due to the fact that it owns just three very big
sites. As to the other retailers, Total has the highest throughput with 6 609 m3 per station (however
this throughput refers to the situation before the merger with Fina), followed by Exxon with
5 057 m3 (6 795 m3 in 1998), then Texaco and Shell with a comparable average throughput of
4 900 m3. Q8 has the lowest average with 2 542 m3 per site.

(628) However, in general terms it can be said that the average throughput of the industry is very high in

Luxembourg when compared to the average of other countries.

Average
throughput
comparison

Austria

Germany

UK

Netherlands

Luxembourg

1 422

2 932

2 577

2 502

4 372

(629) An average throughput of more than 3 000/3 500 m3 per site is viewed by the industry as allowing
a retailer to reach a minimum efficient scale so to cover his fixed costs. In this respect, an internal
study conducted by the parties shows that an ordinary service station achieves efficient scale
precisely if it generates a throughput of around […]* m3 and realizes a gross margin of […]* cents
per litre. On this basis, it appears that none of the leading operators has over the others a significant
advantage in terms of operating costs per site.

Prices

(630)

In order to fully appreciate the competitive environment existing in motor fuel retailing in Luxem-
bourg, it is worth comparing pre-tax price trends in the countries affected by the operation.

Product: Retail motor gasoline — pump price

Average price per metric tonne (USD)

Region

1996

1997

1998

Tax incl.

Tax excl.

Tax incl.

Tax excl.

Tax incl.

Tax excl.

Austria

1 438

491

1 288

457

1 193

390

Belgium

1 500

398

1 389

370

1 312

313

France

1 524

285

1 384

278

1 391

266

Germany

1 400

354

1 222

334

1 174

279

Luxembourg

1 148

401

1 028

383

936

321

Netherlands

1 579

428

1 447

406

1 405

347

United Kingdom

1 271

270

1 397

300

1 487

271

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Product: Retail diesel — pump price

Average price per metric tonne (USD)

Region

1996

1997

1998

Tax incl.

Tax excl.

Tax incl.

Tax excl.

Tax incl.

Tax excl.

Austria

1 014

407

900

369

820

314

Belgium

981

363

860

324

784

264

France

937

255

856

239

854

220

Germany

955

334

822

294

762

234

Luxembourg

832

333

739

305

659

247

Netherlands

1 003

366

903

329

842

271

United Kingdom

1 044

249

1 194

266

1 278

228

(631) As may be seen from the table above, pre-tax prices in Luxembourg have gone down over the last
three years (from 401 USD per MT in 1996, to 321 USD per MT in 1998), but this is essentially
due to the price decline of crude oil. In general terms, pre-tax prices are in the average band of
Community prices.

(632)

It is also worth comparing gross margins in the countries affected by the operation. Exxon gross
margins are taken as a proxy of the industry average gross margins.

Gross margins — 1998 —
USD per tonne — Mogas

Austria

Germany

UK

Netherlands

France

Luxembourg

[…]*

(633) As it can be seen from this table, while not reaching the peak of the Netherlands and Austria, gross
margins in Luxembourg are nonetheless very high by comparison with the French margins which
have been described by the parties as among the most constrained by competition in Europe. In
percentage terms, Luxembourg margins are around […]* than the French margins. No special extra
costs related to some peculiarity of the Luxembourg territory can explain these differences. The table
below shows a comparison of Exxon transport and delivery costs as well as Exxon ‘other wholesale
costs’ in the abovementioned countries.

1998 — USD per tonne

Austria

Germany

UK

Netherlands

France

Luxembourg

Transport and delivery
costs

Other wholesale costs

[…]*

[…]*

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L 103/95

(634) From the table above it appears that transport and delivery costs are well in the European average.
On the other hand, the ‘other wholesale costs’ are substantially higher in Luxembourg than in
France. However, these differences still do not explain the whole differential existing at the level of
the gross margins between Luxembourg and France. More specifically, even deducting these extra
costs, Luxembourg margins still remain around […]* higher than gross margins in France. Given
that Luxembourg service stations have higher average throughputs (and hence probably lower
average costs) than French service stations, and in view of the product homogeneity of motor fuels,
such high margins would suggest a substantial deficit of competition on the market.

Specific features of the Luxembourg market — price regulation

(635) A specific feature of the market in Luxembourg is the fact that the government sets a maximum
price per grade of motor fuels. More specifically, it is the Ministry of Economic Affairs which oper-
ates a system of maximum wholesale and retail pump prices. In concept, the maximum price
formula is based on four main components: (i) cargo market quotations; (ii) a base (wholesale)
margin for the supplying oil company; (iii) an additional compensation for various costs (rail trans-
port costs, compulsory storage costs, and environmental investments); and (iv) a dealer margin.

(636) Most price changes take place as a result of changes in cargo market prices, and do not result in any
change in the marginal components within the formula. The official (wholesale) margin, based on
the prevailing actual maximum prices and daily cargo market prices,
is calculated daily by the
Ministry (and the industry). These calculations include excise taxes and VAT. If there has been a rise
in cargo market prices since the prevailing maximum prices were established, the actual margins
available to the industry will fall below the defined base margins, whereas if cargo market prices
have fallen, the converse is true and actual margins will be above the base margin levels. Foreign
exchange rate fluctuations will also cause changes in actual versus base margins, since the maximum
prices are determined in local currency. It is these variances that trigger changes in the maximum
prices. The Ministry works on the basis that changes to the maximum prices are justified if the
differential between the maximum and actual (calculated) margins for a particular product exceeds
LUF 0,25 per litre for 10 consecutive days or exceeds LUF 0,4 per litre for more than two consecu-
tive days. However, changes to the maximum prices are always subject to government approval,
which means that they do not immediately follow such periods of price deviation. The industry —
and the Ministry — track the amounts of under- and over-recovery (caused by cargo market and
exchange rate fluctuation) versus the base margins. Under-recovery is typically compensated by a
deliberate delay in the reduction of maximum prices when cargo market prices fall, and over-
recovery is offset by delays in implementing maximum price increases when cargo market prices
rise.

(637) Also, an adjustment in the price formula can occur at the request of the industry in order to cover
increases in costs. In that case, an application for price-margin increases is to be made by the local
petroleum industry association. However, price changes arising from or including an increase in
margin are rare compared to those reflecting cargo market and exchange rate changes. In this
respect, it is worth noting that over the past 12 months up to June 1999, there have been 12
maximum-price changes for motor gasoline and 11 maximum-price changes for diesel. The last
margin changes took place in August 1998.

(638) While it is undisputed that the government intervention in fixing maximum price is a distorting
factor in the proper functioning of the market, on the other hand it does not prevent retailers from
competing against each other by pricing below the government price ceiling. However, as a matter
of fact, most competitors apply the maximum sale price determined by the government, with very
minor discounts granted in some rare cases.

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(639)

In essence, the retailers align their prices on the government price and hardly deviate from that
price. From the investigation conducted by the Commission it appears that among all fuel retailers,
few operators are currently selling motor fuel at a discount price: some white pump operators are
currently pricing at between 0,1 and 0,4 F/litre below the maximum prices, and some branded
stations, namely Total and Exxon, are currently pricing at 0,1 F/litre below the maxima.

(640)

In short, at the moment, the competitive game seems not to be properly functioning. There is in
practice very little competition between the seven main motor fuel retailers which systematically
adapt their own pump prices to the government maximum price.

Entry barriers — expansion — potential competition

(641) Beside the entry barriers common to the sector, the major impediment for a newcomer to enter the
Luxembourg market for motor fuel retailing is the saturation of the market in terms of number of
station sites. This greatly reduces the possibility of creating new outlets.

(642) As to the possible entry on the Luxembourg market of aggressive competitors, it should be noted
that there are no hypermarkets forecourts in Luxembourg. More importantly, the barriers to their
possible future entry appear insurmountable. First, both the national and local governments of
Luxembourg have very stringent permitting laws and regulations. Secondly, the access to commer-
cial property is limited because of the small size of the country. Thirdly, available commercial prop-
erties are very expensive. Fourthly, Luxembourg is too small in size to sustain a significant growth
of supermarkets. Finally, the demand for motor fuel in Luxembourg is constituted by the transit
traffic of foreigners attracted by low prices. It is clear that this demand cannot be captured by hyper-
markets selling motor fuel.

THE POST-MERGER ENVIRONMENT– THE IMPACT OF THE OPERATION ON COMPETITION

(643) The impact of the present operation needs to be assessed against the background described above,
regard being had to the features identified in the section devoted to the structural characteristic of
retail motor fuel markets in general.

(644)

In the current situation, and despite the presence of seven main players, the performance of the
market for motor fuel retailing in Luxembourg in terms of price competition is very poor. Because
of the presence of a price cap fixed by the government, most motor fuel retailers align their pump
prices on that ceiling and avoid competing against each other. The margins secured through the
government formula are generous and allow also the most inefficient retailers to stay on the market
without suffering the competition. As a matter of fact, very few players on the market deviate from
the government price which functions like a cartel benchmark. Indeed, pump prices hardly vary by
virtue of the initiative of one or the other player, but only further to the adjustments decided by the
government.

(645) However, while it is undisputed that the competitive dynamics are distorted by the existence of the
government regulation fixing the maximum possible pump price, it is a fact that competition could
well function below the price cap. Instead, motor fuel retailers prefer avoiding any price competi-
tion. In sum, to date the market seems to be characterised by a substantial deficit of competition.

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(646) While as a direct result of the operation the combined entity will jointly control a small-size player
(Exxon [10 to 20]* % and BP/Mobil [0 to 10]* %), account should however be taken of the link
existing between Mobil and Aral, which is the competitor number two in Luxembourg with [10 to
20]* % of the market.

(647) Based on this approach, the operation will then substantially increase the degree of concentration of
the market, since the trio constituted by Exxon/Mobil, BP/Mobil and Aral will account for roughly
[30 to 40]* % of the market.

(648) More importantly, the operation will change the structure of the oligopoly as it will result in the
creation of a new aggregation of players having a considerable market power. As a consequence, the
market will be characterised by the presence of a leading aggregation of players, namely Exxon-BP/
Mobil-Aral, a second force, Shell, plus a number of ‘followers’. In this respect, the operation will
result in the existing oligopoly being significantly tightened so that any possibility of competition
between the various players on the market will become even more remote. After the merger, the
market structure will be such that no competitive move will be ever conceivable without triggering
a strong and widespread reaction. For instance, if the government were to raise or even eliminate its
current price ceiling, the operation would make it even more unlikely for a market participant to
adopt a more competitive stance, as such action would be even more likely to result in a strong and
widespread reaction. Similarly, any potential entrant would face stronger and more widespread
hostility from the current market players.

(649)

In the light of the above, it appears that the operation will result in the creation or the strengthening
of a collective dominant position held by Shell, Aral, Exxon, Q8, Texaco, TotalFina and BP/Mobil as
a result of which effective competition would be significantly impeded in a substantial part of the
common market.

NETHERLANDS

GENERAL OVERVIEW

(650) The Netherlands is within the EU one of the countries mostly affected by the operation as far as
motor fuels retailing is concerned. Two categories of players are present, the integrated oil majors
(Shell, Exxon, BP/Mobil, Texaco, TotalFina and Q8) and non-integrated independent, branded or
unbranded retailers. The retail market is characterised by a high degree of concentration, with the
oil majors accounting for more than [80 to 90]* % of the volumes traded, the remaining being
shared among the independent operators. As opposed to other national markets, notably the United
Kingdom and France, there are currently no supermarkets active in fuels retailing in the Netherlands.
The wholesale supply of fuels is organised locally, with both integrated and non-integrated retailers
supplying their retail networks from one of the five local refineries (Shell, Exxon, Total, BP-Texaco
and Q8). The number of service stations has been decreasing over the recent years (3 980 service
stations in 1997, making an average throughput of 2 502 m3, which is one of the lowest among
the relevant markets examined). The pump prices are among the highest. The planning and permis-
sions policy of the government is one of the most restrictive among the relevant markets considered,
making prospects for expansion of the retail network look poor. Due to the topography of the
country (i.e., soft absorbent soil), the environmental legislation is one of the most requiring in the
EU, having as a consequence an increase in operating costs.

Refining

(651) The major oil companies (Shell, Exxon, BP/Mobil, Texaco, TotalFina and Q8) are the main sources
of supply of motor fuels. They operate the five refineries in the Netherlands, as can be seen in the
following table. There is a sixth refinery in Amsterdam, owned by Smith & Hollander, which,
however, does not produce motor fuels, but mainly asphalt products.

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Refining capacity in the Netherlands (1997)

Refinery

Owned by

Beneficial ownership

Refining capacity
000s bcd

Europoort-Pernis

NL Refining Co

Texaco (35 %) BP/Mobil
(65 %)

Pernis

Shell

Shell (100 %)

Rotterdam

Esso Nederland BV

Exxon (100 %)

Rotterdam

Kuwait Petroleum

Q8 (100 %)

Vlissingen

Total Raffinaderij

Total (55 %) Dow (45 %)

Roland Berger & Partners GmbH, 1997.

399

374

180

76

148

Wholesaling

(652) The Netherlands is a net exporter of refined petroleum products. Motor fuels intended to supply the
retail network are locally sourced from one of the above refineries. The major oil companies are
therefore the main wholesale suppliers of fuels. They trade their products either through their own
marketing organisations or through independent operators, who then resell to the retail market.

Retailing

(653) At the retail level, there are two categories of operators, that is, all of the above integrated major oil
companies, on the one hand, and a number of non-integrated, independent retailers, on the other
hand. As mentioned in the preceding paragraph, independent retailers source practically all of their
motor fuels from one or various of the above refiners.

(654) Hypermarkets are not an active force in fuel retailing. This is mainly due to the stringent environ-
mental policy imposed by the government on service stations and to the fact that, in general, super-
markets in the Netherlands do not have large forecourts to accommodate service stations, as the
case may be in France or in the United Kingdom. Reportedly, supermarkets used to be active in
fuels retailing in the Netherlands, until 15 years ago. They were facing, however, increasing environ-
mental cost and burden, and decided to leave the market (Exxon, for instance, bought 15 stations
from Miro, a supermarket chain, and closed them down three years later). Under the Dutch permis-
sions policy, once a service station has closed, its owner loses his licence. Accordingly, those who
exited the market in the past years are unlikely, under the current governmental attribution system,
to re-enter it.

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION

Market structure

(655) The characteristics of the market are conducive to an oligopolistic structure among the integrated
majors. Despite the asymmetry of market positions,
the stability of market shares and the
outstanding shared characteristics of the majors (vertical integration, similar refining, wholesaling
and retailing cost structures, similar return on capital expenditure), reflect a market that is func-
tioning at margin and price levels independent of the competitive dynamics of the ARA area.

7.4.2004

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(656) Shell

is the leading player and national

its predominance in the Dutch
market is due to historical reasons associated with the discovery,
jointly with Exxon, of the
Groningen natural gas field. The two companies were encouraged by the government to reinvest in
the Netherlands the revenues from the gas discovered. Shell reinvested those revenues in the down-
stream sector, building refining capacity and an extensive distribution network (67). Shell's market
share in the retail market in 1998 was [30 to 40]* %.

‘champion’. Reportedly,

(657) Besides Shell, the next larger player is BP/Mobil which accounts for [10 to 20]* % of the retail
market. It is followed by Texaco, Exxon and TotalFina with market shares in the range of [10 to
20]* % and by Q8 with a smaller presence at retail level. Those companies account for some [80 to
90]* % of the market, leaving thus the remaining part to a number of independent retailers and
white pumps, whose basic characteristic, differentiating them from the majors, is their absence of
vertical integration, and their consequent supply dependence on the majors.

Retail market shares 1998

Shell

BP/Mobil

Exxon

Texaco

TotalFina

Q8

Indies

[30-40]*

[10-20]*

[10-20]*

[10-20]*

[0-10]*

[0-10]*

[10-20]*

(%)

Parties’ data.

(658) The stability of market shares over the last years reflects a lack of intense competition and an
absence of market entries. Overall, no noticeable fluctuations were recorded in the relative competi-
tive positions of the various competitors. The following table shows the movement of market shares
at the retail level over the last five years.

Movement of retail market shares

1994

1995

1996

1997

1998

[20-30]*

[30-40]*

[30-40]*

[30-40]*

[30-40]*

(%)

[0-10]*

[10-20]*

[10-20]*

0,00

0,00

[0-10]*

[0-10]*

[0-10]*

[10-20]*

[10-20]*

Shell

Mobil

BP

Texaco

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

Esso

Total

Fina

Q8

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

[0-10]*

Independents

[10-20]*

[10-20]*

[10-20]*

[10-20]*

[10-20]*

Parties’ data.

(659) The above market positions are also reflected in the distribution of outlets across Netherlands terri-
tory. The retail market is dominated by the major refiners, accounting for more than 75 % of the
existing service stations. Although the number of outlets has decreased over the last years, as a
result of environmental rationalisation and restrictive planning policies, the majors have been able
to further develop their network to the detriment of independent retailers.

(67) [...]*.

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Number of service stations in the Netherlands

End-94

End-95

End-96

End-97

770

375

300

555

395

185

170

200

2 950

185

1 010

4 145

8 846

2 949

770

470

300

551

395

180

170

200

750

450

300

555

390

190

172

190

745

0

750

557

390

185

185

190

3 036

2 997

3 002

185

829

4 050

9 097

3 237

190

813

4 000

9 443

3 373

190

788

3 980

9 957

3 078

Shell

Mobil

BP

Texaco

Esso

Total

Fina

Q8

Total refiners

Avia (independent)

Other independents

Total of service stations

Total volume (K cubic metres)

Industry average volume (Cubic
metres)

Parties’ data.

Competitive dynamics — costs and prices

Costs

(660) Furthermore, not only do the major refiners drive the largest retail volumes of fuels, but also they
do so at the most cost effective way, by realising the largest volume per site ratios. The following
table shows the average throughputs realised by the majors and the independents in the Nether-
lands.

Average throughput (m3)

Shell

Mobil

BP

Texaco

Esso

Total

Fina

Q8

Independents

Industry average

1994

3 395

2 256

2 574

1 922

2 424

2 262

2 261

1 636

1 221

2 134

1995

3 629

2 026

2 519

2 024

2 348

2 582

2 161

1 559

1 389

2 246

1996

3 884

2 233

2 595

2 149

2 463

2 546

2 286

1 641

1 401

2 361

1997

4 218

2 426

2 311

2 776

2 728

2 308

1 537

1 433

2 502

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(661) As of 1997, the average throughput of the majors was almost twice as large as the average
throughput of the independents. As a result of the concentration, the differential will
increase
further. This difference in throughput is explained by two main reasons: the larger size of the
outlets operated under the majors' brands (and almost exclusively the large outlets located along
motorways); and the prime location of the majority of their outlets. According to a report commis-
sioned by the Netherlands Government, the major oil companies have been able, thanks to their
financial surface, to build and operate larger outlets located at prime locations. Moreover, they have
been able, historically, to establish an extensive network of high-throughput outlets along the Dutch
motorways. Until 1994, concessions were assigned to the major oil companies in accordance to
their existing market shares. As this permission policy proved to be unjustifiably restrictive, it was
abandoned and replaced by a policy whereby new concessions were given to the highest bidder for
an unlimited period of time.

(662) A higher throughput reduces the cost basis of the retailer. In this sense, it goes without saying that
the majors may expect to have better profit margins than independent retailers. Even though their
absolute gross margins may be similar, their relative costs are different, with the majors being able
to spread them across a larger turnover basis. This situation favours the creation of economies of
scale in the operation of the majors' retail network; their profit margins increase as their turnover
rises. The Netherlands Government report and the market investigation indicated that, within the
current competitive environment, whereby no new massive concessions are expected to be attrib-
uted, economies of scale may be a prerequisite for a player to remain viable in the market. The
shrinking network of the independents may be, to a large degree, explained by the absence of
economies of scale of smaller networks and outlets.

Prices

(663) Prices in the Netherlands are high compared to the fuel economics of the ARA range. Although ex-
refinery prices are aligned to Platt's levels, wholesale and retail margins and prices appear to be
disproportionately higher. This has resulted in higher pump prices in comparison to neighbouring
markets within the same supply environment. For instance, the last five years, pump prices were up
to 40 % higher than in France which has been described by the parties as among the most
constrained by competition in Europe. The following table shows that the 1998 wholesale and
pump prices are higher in the Netherlands than in other neighbouring markets aligned to the Platt's
ARA quotations.

Netherlands

France

United Kingdom

Germany

Pump prices

Wholesale prices

1

1

0,7

0,84

0,72

0,88

0,75

0,9

(664) This difference may not be attributable to any higher excise duties and VAT applicable in the Neth-
erlands (taxes are more or less the same or even slightly lower in the Netherlands), but mainly to the
substantially higher gross distribution margins, which more than doubled the French ones over the
same period. The table below indicates the variation of the gross margin (wholesale price vs retail
price, tax excluded) in four neighbouring geographic markets aligned to the Platt's ARA quotations.

Average gross margin

Netherlands

France

UK

Germany

[…]*

Diesel

Mogas

Motor fuels

Extrapolated from parties’ data Annex 7.7.

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(665) Nor can these substantial differences be attributed to higher costs. The major components of distri-
bution costs are terminaling and transportation. In the Netherlands, the sources of supply are
numerous and well located; the five local refineries supply practically all of the retail market. The
distances to be travelled are relatively small, making direct distribution from the source of supply to
sales points a matter of several hours. Storage and other logistic costs are therefore substantially
reduced, whereas transportation costs are similar to the other benchmark markets (barge: 1 % of
Mogas non-retail price; rail: 2 %; pipeline: 1 % and truck: 3 %).

(666)

In their response to the statement of objections, the parties contend that the higher distribution
margins in the Netherlands are largely attributable to high retail margins which accrue to service
stations operators rather than the supplying oil companies. In addition, in the Netherlands fuel retai-
lers bear also additional extra costs due to the loyalty schemes and the strict environmental regula-
tions.

(667) While it is undisputed that dealer margins in the Netherlands are among the highest in Europe, as
noted above, it is a fact that also wholesale prices and margins are inexplicably high in the Nether-
lands,
in particular given the structural characteristics of the region. The table below shows a
comparison between Exxon gross margins less dealer margins in the Netherlands and France.

Wholesale margins 1998
(USD per tonne)

Mogas — Gross
margins

distribution

Netherlands

France

[…]*

Dealer margins

Remainder

Diesel — Gross
margins

distribution

Dealer margins

Remainder

(668)

It appears that Dutch wholesale margins remain in the range of […]* higher than French margins.
These differentials can hardly be explained by the other extra costs claimed by the parties (fidelity
schemes and environmental regulations), which, incidentally, should be mostly covered by the dealer
owning the site.

(669)

In sum, the higher price environment in the Netherlands shows a deficit of competition. The core of
the Dutch retail market may appear to be unrelated to price trends prevailing in the neighbouring
markets. Prices are structurally higher across the territory, except for some frontier areas in direct
competition with a neighbouring market. This is the case of the area along the Netherlands-German
frontier, where lower German prices have influenced the pricing of the Dutch outlets. It is quite
characteristic that in order to prevent a deterioration of the margins in this area, the Netherlands
government decided to establish a compensation system to sustain independent retailers.

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Barriers to entry — expansion — potential competition

Entry barrier

(670) The major barriers to entry and/or expansion in the Dutch retail market are linked to the stringent
environmental policy and the consequent restrictive concessions policy of the government. Part of
the reduction in the number of service stations was due, according to the Netherlands Government
Report, to incentives to close given by the government to service stations that did not comply with
the requiring environmental
legislation (soil contamination prevention). Operating licences are
issued by city and provincial authorities. In general, such authorities do not make available new
locations for service stations, considering that the market is already saturated. When they do so,
they impose serious requirements in terms of safety and environmental protection. In doing so, they
appear to be more keen on giving new permissions to the oil majors rather than to independents or
to white pumps. Reportedly, an independent applicant may have to wait up to four years for a new
licence, as opposed to oil majors which can obtain a licence much quicker, in particular when side-
infrastructure work is part of the package bid. Moreover, given that tenders for new licences, or for
the replacement of old ones, are attributed to the highest bidder, the oil majors are often in the best
position to expand their network.

Potential competition

(671) The competitive potential of the independent retailers is substantially reduced. Currently, the market
appears to be functioning at a supracompetitive price equilibrium, with both the integrated and the
non-integrated retailers being winners. Major oil companies are active at both levels of the supply
chain, that is, as fuels wholesale suppliers and retailers. Independents are only active as retailers and
obtain almost all of their fuels requirements from the local majors, in most cases through exclusive
yearly renewable supply agreements. The revenues of the integrated oil majors may be realised at
various stages of the supply chain, whereas those of retailers only at retail level; gross wholesale
margins accrue to the oil majors, in contrast to retail margins, accruing to both the majors and the
independents.

(672)

It is clear that the integrated oil majors have a tremendous financial advantage over the indepen-
dents. They have a higher degree of flexibility in case of price competition. Reportedly, the oil
majors may offer loss compensation schemes to their retail network, in case of a local price war.
Their financial availability and the fact that they hold the sources of supply, has made it possible to
the larger oil majors, in particular Shell, to profile themselves as price leaders. The market investiga-
tion has shown that when retail prices increase, independent retailers follow the price rise, consid-
ering it more attractive to increase their profit margin through higher prices, than to sell more
volume at a lower margin. Since most outlets are already functioning at peak throughput capacity,
any increase in throughput would involve an expansion of the filling stations or of the retail
network. This is made difficult by (i) the high incremental cost linked to an expansion of filling
stations and (ii) the fact that the possibilities for an extension of the retail network are limited, for
the reasons stated in recitals 670 to 671.

(673) The likelihood of a price war initiated by independents is substantially reduced for a series of
reasons. The independents might be able to increase the volume traded, however this can only be
done up to a certain ceiling. If they decide to engage in a price war, they may put in jeopardy their
future supply contractual arrangements with the oil majors. A price war from their side could be of
limited duration, as the oil majors will be able to match the lower prices, without this affecting their
financial situation. In the longer run, independents will have to turn to other sources of supply,
such as the cargo market. However, the investigation has shown that, in general, independent retai-
lers are reluctant to do so. Indeed, cargo market prices are not necessarily more competitive than
prices at the local refineries. This is more so, considering that in order to achieve better prices at the
In the Netherlands, the average
cargo market, the volumes purchased need to be substantial.
throughput of independent retailers is in general lower than in other neighbouring countries, where

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larger independents and supermarkets obtain supplies from the cargo market (such as in France or
in Germany). Most independents require not more than 4 000 litres per site per week, whereas the
cargo market prices are attractive when the volumes purchased are above 10 000 litres. This would
compel independents to team up so as to pull joint purchases together; additionally, handling and
storage costs would consequently eliminate any possible price advantages. Moreover, independent
retailers have stated that the quality of the products may not be guaranteed when purchases are
made from the cargo market. In general, they chose to buy products from the local refineries in
order to ensure product quality and to get other advantages from being loyal customers to these refi-
neries. As a result, independent retailers have become price followers for as long as their retail
margins are not squeezed, in which case they might consider exiting the market, usually by selling
their outlets to one of the majors.

(674) The low prospects of potential competition from the independents may be well illustrated in the
following case study, quoted from the Netherlands Government Report. The local authorities of the
city of Almere persuaded a white pump to enter the local market (by facilitating the procedure of
obtaining a concession) in order to break the local oligopoly of the existing service stations. In
return for the concession, the white pump committed itself to offering a retail price 4 % lower than
the immediate competitors.

(675) The white pump was installed in the vicinity of three existing service stations. Another six service
stations were active further away but still within the borders of Almere. All existing service stations
were under the majors' brands.

(676) The first year, the white pump achieved an adequate turnover and so did the three service stations
which had followed the newcomer in reducing prices. The volume of sales in Almere had not
increased during that period and consequently the six service stations which did not follow the price
reductions lost market share. After a year, all nine service stations offered the same price as the
white pump.

(677) After the first year, the white pump increased its pressure and reduced its price by 7 %, 9 % and for
a time even 12 %. At each price decrease, the competition followed swiftly. And also when the
white pump increased its price, every service station went along with it. In other words, the white
pump was transformed from a newcomer into a price-leader.

(678)

In this case, since all service stations offered the same price, attracting extra turnover for the white
pump was only possible through the discounter's goodwill which it had cultivated in this local
market. Despite the fact that the white pump was appreciated for being a price fighter, this goodwill
effect faded away after a certain period of time. When the white pump retailer reduced its price by
12 %, it was barely able to break even. The service stations of the major oil companies, on the other
hand, were able to follow the price-leader swiftly since they received compensation from the oil
companies for the reduced distribution margin. Thus the white pump was not in competition with
the local service stations, but with the oil companies. At that moment, the price of fuel in Almere
had returned to the level at which the white pump was introduced. At that same moment, the white
pump decided to sell the operation to the highest bidding major oil company.

(679)

In the light of the above, it can be concluded that the potential competition from the independent
retailers cannot exert a substantial pressure on the major oil companies.

THE POST-MERGER ENVIRONMENT — IMPACT OF THE OPERATION ON COMPETITION

(680) The impact of the operation is to be assessed against that described background, regard being had
to the features identified in the section devoted to the structural characteristic of retail motor fuel
markets in general.

(681) As a result of the operation, the oligopolistic structure of the market will be further reinforced, in
presence of three competitors, accounting jointly for more than half of the market, a cluster of two
comparable mid-sized players, that is to say Texaco and TotalFina. The rest of the market will
remain scattered among small fringe independent retailing companies.

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(682) The notified operation will thus lead to a further concentration among the oil majors. The current
oligopolistic environment will be further tightened up, thus making interaction among the players
easier to implement and to monitor. In a post-merger scenario, the poor economic performance of
the Dutch retail market will be further exacerbated. The independent retailers have no incentives to
fight on prices, as they can, on the contrary, benefit from price increases by the majors at retail
level. Overall, under such circumstances, the final consumer will be worse off. It can be concluded
that the concentration will lead to the creation or reinforcement of a collective dominant position in
the retail market, held by the major oil companies (Shell, BP/Mobil, Exxon, Texaco and TotalFina).

THE UNITED KINGDOM

GENERAL OVERVIEW

Refining

(683) The United Kingdom is a net exporter of refined petroleum products. Traditionally more than 85 %
of petroleum products are directly sourced from inland refineries. Imports (usually shipped from
continental Europe or Scandinavia) are generally directed to independent resellers, but they can also
result from refiners' intra-group trading.

(684) There are currently 10 major fuels refineries in the United Kingdom. Most of these are located in
the southern half of Britain, and are connected to the main pipelines covering most of England and
Wales. They are also often accessible by ship. It should be noted, however, that Scotland has only
one refinery (BP/Mobil's Grangemouth site), which serves most of the local distribution terminals.

(685) The main refiners in the United Kingdom are BP/Mobil, Exxon and Shell, who own approximately
57 % of total capacity. However, most other refiners (such as Elf, Total/Fina, Texaco and Conoco)
also are vertically integrated oil companies with retail activities in the United Kingdom, and indivi-
dually often account for more than 10 % of total domestic refining capacity.

Wholesaling

(686)

Imported or nationally refined motor fuels are then either sold on the cargo market and exported,
or transported to retailers, end-users or resellers. In some cases, petrol and diesel are collected
directly at the refinery gate or the import storage facilities and distributed by road. However, in
most cases, motor fuels are transported to distribution terminals, which are located throughout the
United Kingdom and are supplied by inland pipeline network, sea or (less often) rail. Motor fuels are
then collected by road tankers and distributed to nearby customers.

(687)

In England and Wales, most motor fuels are transported by one of the six pipelines connecting refi-
neries to distribution terminals. In Scotland, there is no such network, and most products are
shipped from BP/Mobil's Grangemouth refinery.

(688) The non-retail sector in the United Kingdom appears to be competitive at present. This is firstly indi-
cated by the fact that, at present, no company appears to hold more than 20 % of non-retail sales of
motor fuels to third parties. This is also confirmed by the fact that most of the companies which
replied to the Commission enquiry indicated that the non-retail prices of motor fuels generally
reflect the international Platt's index and the transportation costs from the refinery or the import
terminal concerned, and that they had no difficulty in getting supplies.

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(689) The Office of Fair Trading (OFT) reached similar conclusions in its report on competition in the
United Kingdom petrol sector (68). It even found that, because of these competitive conditions, ‘mini
majors’ have tended to return wholesaling losses in almost all of the last five years.

(690) One of the most important factors for such competition appears to be the chronic excess refining
capacity in the United Kingdom, as total refinery output for petroleum products is almost 20 %
higher than the domestic demand, which seems to have levelled off since 1990. Although this gap
is expected to be somewhat bridged after the closure of Shell's Shellhaven facility (the smallest
refinery in the United Kingdom), it will still represent approximately 15 % of total demand.

(691) Another explanation is that a significant number of independent companies own and/or operate
distribution terminals, from which they can import products from the cargo market and supply
products to non-refiner retailers (such as hypermarkets) or unbranded retailers. Their presence
ensures that large end-users customers and non-refiner retailers can readily find supplies at competi-
tive prices.

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION

Market structure

(692) The United Kingdom market is characterised by the presence of a substantial number of competi-
tors: in addition to the three main refiners (Exxon, BP/Mobil and Shell) which still collectively hold
more than 50 % of the market, a number of other oil companies (Total/Fina, Elf, Texaco and
Conoco) are also active in the market, as well as hypermarkets and independent retailers.

(693) The evolution of market shares (in terms of volumes) between 1994 and 1998 can be summarised

as follows:

Company

Exxon

BP/Mobil

Shell

Total/Fina

Texaco

Conoco/Jet

(%)

Hypermar-
kets

Market shares (1994)

[10-20]*

[10-20]*

[10-20]*

[0-10]*

[0-10]*

[0-10]*

[10-20]*

Market shares (1998)

[10-20]*

[10-20]*

[10-20]*

[0-10]*

[0-10]*

[0-10]*

[20-30]*

(694) The retail sector may be broadly divided into four main tiers: (i) the ‘majors’ (Exxon, BP/Mobil and
Shell); (ii) the ‘mini majors’ (Total/Fina, Texaco, Conoco/Jet and Elf); (iii) the hypermarkets (Tesco,
Sainsbury's, Safeway and Asda), and (iv) the independent retailers.

(695) Exxon, BP/Mobil and Shell (‘the majors’) are the three main retailers in the United Kingdom, with
market shares (in terms of volumes) above [10 to 20]* % each (and rising). They have an extensive
geographic coverage, as indicated by their high number of sites (more than 1 800 each).

(696) They achieve relatively low costs through (i) low supply costs (due to direct supplies from in-house
refineries or swaps with other refiners), (ii) high average throughput per site (approximately […]*
m3 and over) and (iii) forecourt shops, which yield additional revenues and profits.

(697) Their market shares (in terms of volumes) have slightly increased since 1994, and currently reach a

total of [50 to 60]* %.

(68) Competition in the supply of petrol in the United Kingdom — A report by the Office of Fair Trading: May 1998.

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(698) Total/Fina, Texaco, Conoco/Jet and Elf also are vertically integrated oil companies with refineries in
the United Kingdom. They do not belong to the same category as the super majors, as they have
substantially lower market shares and more limited presence (fewer than 1 000 sites for all compa-
nies except Texaco).

(699) Although they also obtain supplies directly from in-house refineries or swaps with other refiners,
they would appear to face higher supply costs than the super majors, as they have returned whole-
saling losses in almost all of the last five years. Finally, most of these companies achieve substantially
lower throughputs (approximately 2 000 m3 and less) than the super majors and would therefore
bear higher retail costs.

(700) Finally, unlike the super majors, their collective market shares appear to have declined by more than

23 % since 1994, and currently amount to a total of approximately 20 %.

(701) The hypermarkets (Tesco, Sainsbury's, Safeway and Asda) sell motor fuels from filling stations estab-
lished on the car parks of their premises. They are mainly located in urban or densely populated
areas, and therefore have a limited geographic coverage, as is further confirmed by the relatively low
number of filling stations each hypermarket brand operates (below 200 sites).

(702) Hypermarkets get most of their supplies from refiners (and, for some of them, mainly BP/Mobil).
However, they usually procure large volumes of motor fuels and therefore also source from traders
or importers, which can represent up to approximately 35 to 40 % of their supplies.

(703) Hypermarkets' filling stations generally achieve much larger throughputs (typically 10 000 m3) than
sites owned by other retailers. This gave them substantial cost advantages over all other retailers
before the super majors reduced the number of filling stations they operated in order to reach
higher throughputs.

(704) Hypermarkets have gained considerable market shares over the last 10 years. They currently amount
to a total of [20 to 30]* %, and Tesco has become the fourth largest fuels retailer in the United
Kingdom. According to the OFT (69), this dramatic growth was primarily underpinned by their
sustained and substantial price advantage (between 2,5 and 4 pence per litre) over their competitors.
It has also obviously been fuelled by the strong expansion (over 10 % per annum between 1994 and
1997) of the number of filling stations established. However, as will be further explained below,
there are indications that, due to capacity constraints, barriers to expansion and rising costs, the
hypermarkets' market shares should not increase substantially in the incoming years.

(705)

Independent filling stations usually are ‘historical’ sites which were set up a long time ago. They
usually do not sell fuels only, but also other products (such as heating oil, groceries etc.).

(706) Although they apparently find supplies easily, independent retailers are not vertically integrated and
therefore usually bear higher supply costs. The results of the Commission enquiry suggest that their
retail costs are also higher than those of other retailers, mainly because of their low throughputs
(typically 500 m3). A number of such sites are located in rural areas, where they can charge higher
(by up to 3 to 4 pence per litre) prices in exchange for additional service or convenience. For
instance, most of these sites also operate village shops, post offices etc.

(707) Their aggregate market shares are now below 6 % and keep declining.

(69) See footnote 68.

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Competitive dynamics — costs and prices

A historical perspective

(708) There are indications that, prior to 1995, the motor fuels retail sector was substantially less than

competitive: […]*.

(709)

In late 1994 or early 1995, the majors apparently realised that the growth of the hypermarkets was
a serious threat to their business, and could potentially lead to the same market structure as in
France, where hypermarkets hold approximately 50 % of market shares and prices before tax are
low. Some of them, and especially Exxon, decided to try to raise the hypermarkets' costs and lower
their own costs by drawing volumes away from the hypermarkets and back to the majors. In par-
ticular, Exxon engaged in both an intense price war with the majors (known as the Pricewatch
campaign) and drastic cost reduction schemes.

(710) This caused the prices to drop considerably and to reach such levels that all retailers apparently
reported losses in the first half of 1996. Price rises were then attempted, which only began to
deliver results if they were supported by Exxon. They have appeared to rise since that period, and
even to exceed the levels historically priced by the hypermarkets for the same cargo market prices.

(711) Finally, during the same period, the majors […]* tried to bridge their cost differentials with hyper-

markets […]*.

(712) Up to 1995, the market did not appear to be fully competitive. This is indicated by the fact that, in
early 1994, pre-tax petrol retail prices were 20 % higher than in France, before dropping by more
than 30 % within two years […]*.

(713)

In that context, hypermarkets were apparently not taken very seriously, and, as the OFT indicates:
‘up to 1995, the supermarkets were left largely unchallenged to operate at prices significantly lower
than those being offered in the rest of the market. (…) Oil company attempts to respond to the
supermarket threat through (price support schemes) to those sites most badly affected were unsyste-
matic, typically at a local level, and without major publicity’.

(714)

[…]*

(715)

In late 1994, the hypermarkets' shares of volumes reached approximately 17 %. As the OFT indi-
cates ‘the continuous loss of volume to the rapidly expanding supermarket network prompted the
major oil companies into a more severe reaction than had been seen hitherto’.

(716)

[…]*. In that context, Exxon feared that ‘Esso retail's market position and profitability (would) erode
substantially over the next 5 to 10 years’.

(717) This resulted in a strong reaction with two different arms. The first of these arms was a severe price
competition, which was expected to draw volume back to Exxon and away from the hypermarkets
and hence bridge some of the gap between the costs of Exxon and those of the hypermarkets. It
also aimed to prevent further entry or expansion by the hypermarkets. The second of these arms
was a drastic cost reduction scheme.

The Pricewatch campaign

(718) The first retailer to move was BP who, in late 1994, announced that it would be pricing nationally
in response to the supermarkets. It was soon to be followed by Exxon who, in autumn 1995, tried
out its ‘Pricewatch’ campaign in Scotland and north-east England, and launched it nationally in
January 1996. Shell also declared that it would match Exxon's offer in all Pricewatch areas.

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(719) The Pricewatch campaign consisted in matching the hypermarkets' pricing levels and communi-
cating on this scheme, so as to draw volume back to Exxon's sites and away from the hypermarkets'
filling stations. The other majors followed the same approach, even though to a lesser extent.

(720)

In the first half of 1996, the effects of such price competition appear to have been devastating on
the retailers' margins. […]*. Consequently, gross margins dropped and even became 50 % lower
than in France. At such levels, no motor fuels retailing operation appeared to break even.

‘Price restorations’

(721) These losses appear to have prompted attempts by either hypermarkets, BP or Shell to lead price
increases. Most of these early attempts failed, […]*. This movement was continued in 1997, when
retail prices reached the levels which would be traditionally charged by hypermarkets given the
cargo market prices.

(722) However, and contrary to the pre-Pricewatch situation, this movement even continued in 1998,
when hypermarkets apparently accepted that retail prices should rise above the levels which would
have traditionally been charged before Pricewatch.

Cost movements

(723)

In 1994 to 1995, the cost differential between the hypermarkets and the majors was apparently in
the order of GBP 0,02 to 0,03 per litre in the favour of hypermarkets. In this context, any price
competition from the majors would probably have failed without an additional cost-oriented
scheme.

(724) Consequently, and in addition to the price competition between the majors (and especially Exxon)
and the hypermarkets, the 1995 to 1998 period was also characterised by substantial cost-oriented
actions.

(725) Although such actions covered a number of subjects, the most visible (if not important) scheme
consisted in reducing the average site throughput differential between the hypermarkets and the
majors' filling stations. This appears to have been primarily achieved through two different actions:

— Price competition with the hypermarkets: it aimed to draw volumes back to the majors (and
therefore increase their total volumes) and away from the hypermarkets (and therefore reduce
their total volumes). As a result of Pricewatch, Exxon's volumes appear to have grown by
approximately […]* % in the first half of 1996,

— Elimination of less economic filling stations: between 1994 and 1997, Exxon lost 11 % of its
branded filling stations, BP and Mobil lost 10 % of their combined sites and Shell lost 30 % of its
service stations. It should also be noted that, because most of the sites lost were dealer-owned or
dealer-operated, this campaign also resulted in higher control of the majors over their retail
network.

(726) Consequently, and as a result of other cost-cutting actions, […]*.

(727)

Indeed, all the other competitors appear to have mainly lost ground with the majors and the hyper-
markets in that period: they apparently were not able to follow the pace imposed by the hypermar-
kets and the oil majors, as their market shares of each of these groups of competitors have dropped
by more than 23 % between 1994 and 1998.

Mini-majors and independent retailers no longer exert competitive pressure

(728) The changes in the United Kingdom motor fuels retail sector have resulted in a new market struc-
ture, where the mini majors and the independent retailers can no longer exert a real competitive
pressure.

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(729) This is clearly indicated by the fact that the mini majors and the independent retailers were not able
to follow the pace imposed by the hypermarkets and the oil majors; this is also suggested by the
fact that they now face much lower average throughputs (less than 2 300) than the oil majors (more
than […]*) or the hypermarkets; and this is finally confirmed by the fact none of these individual
competitors currently has a market share over 6 %, and that […]*.

(730) This is also supported by the OFT report, which states that ‘independent retailers' profit margins (…)
are likely, in most cases, to be lower than those of other sites in comparable areas and may be
unsustainably low for many such retailers’.

Hypermarkets will become price followers

(731) There are also indications that hypermarkets will no longer seek or be able to lead price competitive
actions, and will become followers to the majors instead. In particular, hypermarkets indicated that,
although they will continue to set their prices so as to match the lowest price displayed at any of
their main competitors' sites, they will now tend to move away from a policy of actively seeking to
post lower pump prices than key oil company competitor outlets.

(732)

[…]*. It is also confirmed by the fact that, although gross margins approached historical levels in
1997, they are expected to increase in the next few years.

(733) A first explanation for this evolution is that hypermarkets will have very little scope for aggressive
competitive action, as they no longer have real cost advantages over the majors. […]*. In addition,
the results of the investigation carried out by the Commission suggest that the costs of the hyper-
markets should rise in the future, as new sites will have lower throughputs and hence will face
higher costs than the existing ones.

(734) The Commission enquiry shows that another explanation is that, after Pricewatch, hypermarkets
have learnt that any aggressive pricing will be followed by the majors, even if that entails severe
losses in the retail sector. In such a case, there would be no incentive for price reductions, as they
would not result in higher market shares but lower profits.

(735) The fact that hypermarkets probably have nothing to gain from aggressive pricing is further
confirmed by the fact that they cannot significantly expand their sales volumes. The results of the
Commission enquiry indicate that it would be very difficult for them to expand sales volumes
through their existing outlets or to obtain planning permissions for new sites, and that, although
hypermarkets plan to open additional filling stations, these stations will have lower throughputs
(and hence profitability). Hypermarkets have also indicated that they did not anticipate any signifi-
cant growth in their market shares.

(736) These conclusions would be supported by the OFT report, which states that ‘supermarket petrol
sites appear to be close to the limit of their growth. (…) Further growth in volumes can only come
from greater market share and even this is capacity constrained. As petrol sales reach their limit, the
incentive to sell at low margins (…) will be reduced’.

(737) Finally, some hypermarkets have recently entered into joint ventures with the majors for the provi-
sion and operation of hypermarket-branded shops on major-branded filling stations. Examples of
such ventures are BP/Safeway and Exxon/Tesco. Such collaboration is presently limited to the major-
branded sites concerned and has no impact on either the operation or the supply of the hypermar-
kets' own filling stations. However,
it will obviously create long-term relationships between the
hypermarkets and the majors, which could eventually extend to the hypermarkets' fuels retail busi-
ness, and would in any case probably reduce the incentive for hypermarkets to compete with the
majors.

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(738) Consequently, although hypermarkets have traditionally acted as price leaders in the motor fuels
retail sector, their market shares and capacities are levelling off and they appear to be becoming
price followers to the majors. This is further confirmed by the results of the Commission enquiry,
where hypermarkets have indicated that, in the case of movement in the wholesale prices, they
would generally look at the majors' reaction before deciding on their own movement.

The majors become the clear market leaders

(739) On the contrary, the majors appear to have been strengthened rather than weakened by the fierce
price competition of 1995 to 1996. This is firstly clearly indicated by the fact that their combined
market shares have increased by approximately […]* % between 1995 and 1998.

(740) Furthermore, although current gross margins are much lower than those which existed in early
1995 (before aggressive competition with the hypermarkets started), some of the majors' current
profits appear to be even higher than in early 1995.

(741)

In addition to increased profits, the majors have also obtained a better grasp on the market, as most
of the damage of the price war era has been borne by the mini-majors and the independent retailers.
Hypermarkets no longer appear to be in a position where they can substantially threaten Exxon, BP/
Mobil and Shell, and a substantial number of dealer-operated filling stations (where prices are less
easily controlled) has been eliminated.

(742)

In the light of the above, it appears that the majors are now becoming the clear market leaders of
the motor fuels retail sector in the United Kingdom, and that any significant competition could
therefore only arise from rivalry between the members of this league, with the other competitors
having lost any substantial capacity or incentive to fight against Exxon, BP/Mobil and Shell.

(743) The parties respond that ex-tax pump prices and gross distribution margins in the United Kingdom
remain among the lowest in Europe, that this indicates intense competition, and that the broad
historical trend of declining margins in response to intense competition is likely to continue.
However, although ex-tax pump prices and gross distribution margins in the United Kingdom may
be relatively low, so, it would appear, are costs. For instance, Exxon's costs appear to have dropped
by […]* % between 1994 and 1997. By contrast, and in contradiction with the parties' objections,
[…]*. Such figures do not appear to support any of the parties' assertions.

(744) The parties also submit that the documents filed with the Commission demonstrate that any possible
price increase by the majors would not be followed by hypermarkets, and that the hypermarkets'
policy to be unbeatable on price in their catchment areas is not likely to change following the noti-
fied transaction. This would indicate that the majors cannot exercise any market power. However, as
explained above, hypermarkets may continue posting the lowest prices in their catchment area, but
also follow price rises. […]*. It is also confirmed by the fact that hypermarkets have indicated that
they would now tend to move away from a policy of actively seeking to post lower pump prices
than key oil company competitor outlets, and that, in the case of a price rise, they would generally
look at the majors' reaction before deciding on their own movement. It is, finally, consistent with
the fact that hypermarkets find it difficult both to expand sales at existing outlets and to open
competitive service stations. In that context, the fact that some hypermarkets have indicated that
they would not completely follow a price rise by 5 %, is probably due (as their replies suggest) to
the fact that a 5 % price rise is very unusual in the market for retail fuels.

(745)

In addition, the new market structure appears to be to provide strong incentives for oligopolistic
behaviour, which appear to be even more potent than they have been before the rise of the hyper-
markets.

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(746) The fact that the market structure is conducive to oligopolistic behaviour is clearly indicated by the
general characteristics of the motor fuels sector in Europe (that is, product homogeneity, transpar-
ency, absence of technological evolution, demand rigidity, absence of countervailing buying power,
high entry barriers, and so on) and those of the relationships between Exxon, BP/Mobil and Shell
(vertical integration, multi-market contacts and such like).

(747) But, in addition to these general features, the structure of the United Kingdom market as it has
resulted from its recent evolution even increases such incentives, to a degree arguably unseen for
many years (if ever).

(748) Firstly, the United Kingdom market for retail sales of motor fuels appears to have been particularly
stagnant in the last few years, as the volumes sold in the United Kingdom appear to have grown by
less than 2 % from 1994 to 1998.

(749) Secondly, there is clearly a symmetry between Exxon, BP/Mobil and Shell's market shares, which, in
1998, ranged between [10 to 20]* % (for Shell) and [10 to 20]* % (for Exxon). Although it can be
argued that there has been no stability in these market shares in the last four years, what is more
important is that (i) all of these market shares have grown (thereby reflecting the increase in the
majors' influence on the motor fuels sector), and (ii) the symmetry in the market shares of the
majors has increased in the last few years, as the difference between the highest and the lowest of
these market shares has been reduced by 37 % since 1994.

(750) Thirdly, there also appears to be a strong correlation between the cost structure of these companies,
[…]*. The parties disagree with this point, and submit that the operating cost differences between
the various participants in that market are much wider than this. […]*. The parties also submit that,
even within Exxon, there are cost differences dependent on service station format and offering.
However, first, it should be noted that the national strategy of the market players (and, at least, of
Exxon) is defined on the basis of the average break-even requirements, and that, therefore, it is the
average cost structure of the market players which should be taken into account when discussing
the symmetry of their cost structure. Secondly, the fact that the costs may vary to a large extent
even within a given competitor further confirms that a difference of approximately GBP 0,01 per
litre between the average costs of several competitors is indicative of a symmetry of costs between
these competitors.

(751) Fourthly, Exxon, BP/Mobil and Shell appear to have symmetric incentives, as all three majors
achieve a national coverage of the United Kingdom market and have the same degree of vertical
integration. They also share ownership in some storage facilities and pipelines.

(752) Finally and perhaps most importantly, the majors now have a considerable market power over the
United Kingdom motor fuels retail sector. This significantly enhances the benefits that the majors
can derive from any coordinated behaviour and therefore also substantially increases any incentive
for them to act accordingly.

(753) Consequently, although it can be concluded, as the parties submit and the OFT reported in 1998,
that the motor fuels retail sector in the United Kingdom is still competitive, it appears that the
majors have seized control of this market again, that any significant competition could therefore
only arise from rivalry between the members of this league, and that such a rivalry has become
more unlikely due to the above described developments.

(754) The parties respond that competition in the United Kingdom retail motor fuels industry is intense,
on the grounds that the United Kingdom competition authorities' reviews of that market concluded
that it was highly competitive. However, as explained above, the market appears to have evolved
significantly in the last few years, with the fierce price competition of the mid-1990s giving way to
a control by the majors. And, although the latest report by the OFT indicates that the market is
operating competitively, it also concludes that ‘the market will require monitoring to ensure that
competition between the major players does not become muted should it become more concen-
trated’.

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Entry barriers — expansion — potential competition

(755) Exxon, BP/Mobil and Shell would not appear to be challenged by the prospect of possible market
growth or entry, as the volumes sold in the United Kingdom appear to have been relatively stagnant
since 1994 (they have grown by less than 2 % in three years) and as market entry appears to be
very unlikely.

(756)

In particular, the OFT report states that ‘entry into retailing is currently unattractive given the low
margins available on fuels sales and the costs of complying with environmental legislation. In order
to earn sufficient returns, entry has to be on a fairly large scale and it can be difficult to obtain plan-
ning permission for greenfield sites. It might be argued that new entry could occur in the future by
the reopening of the large numbers of sites which have been closed in recent years. However, these
will tend to be the smaller sites and, because of environmental regulations, sites have to be comple-
tely closed and tanks filled with concrete. Such sites will often be put to an alternative use. This
makes reopening an old site almost as difficult as building a new one’.

(757) And, although the parties submit that new entry into retail fuels marketing in common, they can
only cite the examples of the hypermarkets (which are not really new entrants) and of the ‘Save’
network (which has a very limited market share and lost 15 % of its filling stations in 1997).

THE POST-MERGER ENVIRONMENT — THE IMPACT OF THE OPERATION ON COMPETITION

(758) The impact of the present operation is to be assessed against the above described background,
having also regard to the features identified in the section devoted to the structural characteristic of
retail motor fuel markets in general.

(759) As explained above, the United Kingdom market for the retail sales of motor fuels is now clearly led
by the majors, with the other competitors having lost any capacity or incentive to engage in
substantial competition against Exxon, BP/Mobil and Shell. The structure of the market is signifi-
cantly conducive to oligopolistic behaviour between the three majors, who have similar features and
comparable market shares.

(760) Third parties have indicated that there has been competitive pricing between Exxon and BP, and
that it is this dynamic which may be assumed to influence United Kingdom market pricing in the
future. […]*. Given the majors' new and strong incentives for oligopolistic behaviour, it is unlikely
that this rivalry could continue to the same extent in the future.

(761) As explained above, the notified concentration will create a structural link between Exxon and BP/
Mobil, which will result in Exxon being able to exert a significant influence in the BP/Mobil venture
and, more generally, will create new incentives for a cooperation between these two companies.
Given the additional presence of strong market-related incentives for such a cooperation, it is very
likely that, following the merger, any real competition Exxon and BP/Mobil will be eliminated.

(762) There is also strong evidence that Shell would not seek to challenge the competitive position of
Exxon and BP/Mobil. It is very likely that Shell will instead join Exxon and BP/Mobil to form an
oligopoly.

(763)

It would appear that, even prior to the merger, Shell has not traditionally been a very aggressive
price competitor. […]*. Moreover, Shell appears to have been one of the main participants in the
price restoration movement, […]*.

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(764)

Instead, third parties have indicated that Shell's policy seems to be to seek a premium quality brand
position which applies not just to fuels. This would appear to have led Shell to price its products
above the market.

(765) There is also no indication that Shell would seek or be able to change this strategy following the
merger. […]*. Secondly, unlike Exxon and BP/Mobil, Shell is not engaged in joint ventures with
hypermarkets and therefore cannot propose similar offerings. Lastly, Shell's current strategy appears
to be relatively successful, as its market share of motor fuels retail volumes has increased by 13 %
between 1994 and 1998 (although, as indicated above, such growth should be limited in the
future).

(766) Furthermore, Shell is already engaged in a number of partnerships with BP/Mobil and Exxon: Shell
jointly owns a number of distribution terminals in the United Kingdom with either BP/Mobil or
Exxon, and Shell and BP/Mobil both participate in the ownership of two of the main pipeline
networks covering England and Wales. Shell's links with BP are also expected to increase after the
closure of Shell's Shellhaven refinery, when Shell will probably source a substantial part of its
refined fuels from BP/Mobil's Coryton refinery.

(767) Finally, Shell would be all the less likely to move to a more competitive posture as the incentives for
oligopolistic described above are now stronger than they probably have ever been for years.

(768)

In the light of the above, it can be concluded that, after the operation, the majors will be engaged in
an oligopoly on the United Kingdom motor fuels sector.

Unique competitive position in the wholesale sector

(769) Exxon, BP/Mobil and Shell are active in non-retail sales of motor gasoline and diesel to third parties.
According to the figures in the possession of the Commission, their current combined shares in that
sector would be in the order of [30 to 40]* %.

(770) Furthermore, these market figures underestimate the majors' actual market power. In that respect, it
should be noted that, even after the closure of the Shellhaven refinery, the majors will collectively
represent approximately [50 to 60]* % of the total United Kingdom refining capacity; they will also
own together approximately [40 to 50]* % of the distribution terminals in the United Kingdom, and
they will participate (together with non-majors) in the joint ownership of an additional [0 to 10]* %
of distribution terminals; and finally, Exxon's Fawley and BP/Mobil's Coryton sites will be the only
two refineries in the south and south-east of England.

(771) Exxon, BP/Mobil and Shell will therefore have a unique competitive position. Firstly, as refiners,
these companies will have the opportunity to engage in swaps arrangements with other refiners,
and therefore to obtain nationwide supplies at better conditions than those for non-refiners. And
secondly, they will have significant competitive advantages over other refiners, because they will
reach unequalled volumes of sales and will gain unequalled geographic coverage of the United
Kingdom territory. For instance, the majors' refining capacity will be more than five times as high as
that of their nearest competitors (Texaco and Conoco), and the number of distribution terminals
which they own or share will be considerably higher than that of their next competitor.

(772) The majors will depend on swaps with other refiners to a much lesser extent than other refiners will
depend on swaps with them. Therefore, a possible consequence of their cooperation is that they
would have the incentive and the possibility to impose harder conditions on the swap arrangements
they have with other refiners.

(773) Another possible consequence of the post-merger situation is that the majors will be in a better
position to deter local competitive actions (such as entry) by other refiners or other wholesalers, as,
given their more extensive geographic coverage, they could offset the costs resulting from local
competitive actions over larger volumes and territories.

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(774) A third possible consequence of the post-merger situation is that Exxon will influence BP/Mobil (or
even Shell), currently a major supplier to the hypermarkets, to offer higher prices or restricted quan-
tities to these customers. Some hypermarkets have expressed concerns that such behaviour could
raise their costs and therefore undermine their competitiveness in the downstream motor fuels retail
sector.

(775) Given the refining overcapacity and the substantial amount of wholesalers in the United Kingdom,
the operation will probably not create a dominant position in the non-retail sector in this country.
However, the majors will have a unique competitive position in that sector which, as explained
above, will increase their competitors' supply costs.

(776) The parties submit that the fact that companies other than the majors will control approximately
46 % of the United Kingdom refining capacity and 58 % of United Kingdom distribution terminals
demonstrates call into question any conclusion that the majors will be able to exercise market
power or be able to raise other competitors' supply costs following the transaction. As explained
above, it is in the light of these figures and of the Commission enquiries that it may be concluded
that the wholesale sector will remain competitive. However, the parties' arguments apparently fail to
address the facts that the other competitors on the wholesale sector are much smaller than any of
the majors, that they usually have limited geographic coverage, and that they either do not have
access to swaps or depend on swaps from the parties to a much larger extent than the majors
depend on swaps with them. Consequently, they do not call into question the fact that the majors
will be able to address their rivals' supply costs or successfully engage in local competitive actions.

(777) According to the parties, evidence also indicates that

the integrated firms treat refining and
marketing as separate businesses. The parties therefore consider that vertical integration does not
give the majors any advantage versus non-integrated players, and that this is indicated by the
growth in the presence of non-integrated firms, especially hypermarkets or chains such as British
Fuels. However, the fact that refining and marketing are treated as separate businesses does not
preclude the fact that vertical integration may and already does give competitive advantages to inte-
grated firms, as refiners have access to safe supplies and to swaps, and, as far as the majors are
concerned, who also benefit from extensive geographic coverage and distribution infrastructure
(such as pipelines and distribution terminals). Furthermore,
it should be noted that, apart from
hypermarkets (whose size, presence and brand-recognition makes them somewhat exceptional
competitors), non-integrated firms only account for a very small (less than 6 %) and declining frac-
tion of retail sales.

Unchallenged market leadership in retailing

(778) The majors are the three main retailers in the United Kingdom, and even more significantly, the two
main majors. Their combined market shares are approximately [50 to 60]* % — approximately
[…]* times as high as those of their nearest competitor (Tesco, which is engaged in a joint venture
with Exxon).

(779) As was explained in recitals 728 to 738 above, the recent evolution of the motor fuels retail sector
has been characterised by the decline of the traditional competitors of the majors, i.e. the mini
majors and the independent retailers. It has also resulted in the hypermarkets moving from price
leadership and aggressive competitive posture to a position of price followers with limited expecta-
tions of market share growth.

(780) More specifically, the current market dynamics shows that the majors keep gaining market to the
expense of the mini majors and the independent retailers. It can therefore be expected that, because
of this evolution and of the capacity constraints of the hypermarkets, the majors' combined market
would reach even higher levels in the next few years and that these companies would definitely
secure their control over the retail market.

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(781) These conclusions will even be reinforced after the operation since, as was explained in recitals 769
to 777 above, the majors will now have the chance to raise the other retailers' supply costs and
therefore weaken these competitors' positions in the retail sector.

(782) Finally, given the usually limited geographic coverage of the hypermarkets and the independent
retailers, and, by contrast, the majors' extensive national presence, Exxon, BP/Mobil and Shell could
collectively engage in selective competitive actions in some areas, and significantly damage competi-
tors while offsetting the costs associated with these actions through limited national price increases.
The parties disagree with the fact that hypermarkets have limited geographic coverage, on the
grounds that […]* % of Exxon service stations and […]* % of BP/Mobil service stations are within
five kilometres of a hypermarket. However, it should be noted that only a fraction of hypermarkets
are equipped with service stations: according to some hypermarkets, only 35 % to 50 % of their
outlets are equipped with an adjacent service station. It follows that, even though a parties' site may
be close to a hypermarket, it may not face any competition from this hypermarket. Furthermore,
the figures provided by the parties refer to hypermarkets as a whole. Their figures may therefore be
misleading, insofar as, although hypermarkets as a whole may reach national coverage, each hyper-
market chain individually has a much more limited presence.

(783) Consequently, after the operation, the majors' market positions could not be successfully challenged

by non-major competitors.

(784)

In the light of the above, the notified concentration will create a oligopolistic dominant position by
Exxon, BP/Mobil and Shell on the market for the retail sales of motor fuels in the United Kingdom,
as a result of which effective competition would be impeded in that Member State which is a signifi-
cant part of the EEA.

F. AVIATION LUBRICANTS

(785) Aviation lubricants (also referred to as ester-based turbine lubricants or aviation synthetic turbine
oils) are used in the lubrication of either turbofan engines (commercial and military aircraft) or aero-
derivative applications (those which were developed on the basis of aircraft engine technology, such
as some marine turbine engines and some turbo-lubricated power generators and other industrial
accessories). As it will be seen in the paragraphs on product market definition, commercial aircraft
lubricants, military aircraft lubricants and lubricants for aero-derivative applications constitute three
distinct product markets.

(786) Their production process follows more or less the typical stages of regular lubricants manufacture,
that is, the blending of synthetic base stocks with additives, although ingredients are different than
those used in the manufacture of regular lubricants.

(787) As it is the case for automotive lubricants, the manufacturing process and the finished lubricant
requires, prior to commercialisation and use in airborne equipment, approvals from relevant organi-
sations, in that instance of the relevant military authorities and OEMs. However, in contrast with
automotive lubricants and due to the higher safety standards that aviation lubricants have to comply
with, the approval process for aviation lubricants is more stringent and lengthy.

(788) There are three main categories of buyers of aviation lubricants, that is, commercial airlines, the

militaries, and various industrial customers.

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MARKET DEFINITION

Relevant product market

Aviation and regular lubricants are not part of the same market

(789) The parties advance the argument that aviation lubricants are part of the same market as regular
(automotive and industrial) lubricants, examined above. Although the two categories of lubricants
are not substitutable from the demand side, the parties claim that they are substitutable from the
supply side and accordingly, regular lubricants manufacturers which are not active in aviation lubri-
cants can, readily and in good time, switch their production process to that of aviation lubricants.
Three points support their view: first, the raw materials required for the blending of aviation lubri-
cants (i.e., polyol ester base stock and additives) are largely available; secondly, the blending equip-
ment is the same for both categories of lubricants; thirdly, there is an overall blending overcapacity,
which makes the reassignment of blending facilities economically possible. Therefore, supply-side
substitution with other automotive lubricants would be possible by cleaning the blending equipment
used previously for automotive lubricants and converting it, within a relatively short period of time,
into equipment dedicated to the manufacture of aviation lubricants.

(790) The market investigation concluded that regular (automotive or industrial) lubricants and aviation
lubricants constitute two separate product markets. From the demand side, there is clearly no substi-
tution between the two; the higher safety requirements of aviation lubricants and the different
operational environments of automobile and aircraft engines eliminate any possible demand-side
substitution with regular automotive lubricants. The parties do not deny this statement. From the
supply side, the arguments of the parties are not conducive to the existence of one single market, as
they only rely on purely logistic aspects of supply substitution. Even assuming that the substitution
of blending equipment could be possible technically (although other manufacturers questioned have
expressed reservations as to such a possibility) and that a blender of regular lubricants could start
blending aviation lubricants, full market entry cannot, however, be achieved easily and readily, as it
is characterised by significant barriers which will be discussed in the following paragraphs. Addition-
ally, not only are not regular lubricants substitutable to aviation lubricants, but as it will result from
the following paragraphs, there exist even narrower product markets for aviation lubricants used in
commercial aircraft engines, military aircraft engines, and aero-derivative applications.

Commercial, military and aero-derivative applications

(791) The existence of three narrower markets for aviation lubricants is evidenced by the lack of demand
and supply-side substitution among the three categories mentioned above. The lack of demand
substitution among the various categories of aviation lubricants is a result of a continuum of quality
characteristics which limit the intended use of the three respective products. Aviation lubricants
used in commercial aircraft engines have to fulfil higher quality and safety requirements than those
used in military aircraft engines (military engines are overhauled very frequently and time between
overhauls is between 200 to 1 000 hours compared to 20 000 hours for commercial engines). The
lack of supply-side substitution is a result of the different specification requirements and amount of
time necessary for market entry in each of the narrower aviation lubricants markets. In order to
achieve full market entry in the market for commercial aircraft lubricants, the potential supplier will
need to observe some typical steps required prior to the commercialisation of the product. The
typical procedure, outlined below, could take up to six years for lubricants used in military aircraft
engines and up to 12 years for lubricants used in commercial aircraft engines.

(792)

In order to have a marketable product to satisfy the needs of the majority of airlines operating
mixed fleets of aircraft, a supplier has to make extensive research in view of the product formula-
tion. The cumulative time required for this first step may vary from three months for incumbent
manufacturers to four years for new entrants. At this stage, a supplier may not chose to engage in
any military and/or commercial accreditation process, but
to manufacture and commercialise
products intended for industrial applications (meaning turbine engines used for oil drilling, gas
pumping, electrical generation or marine turbine engines). Subsequently, for a supplier to start

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selling products intended for military or commercial aircraft, the respective military and OEM
approvals are necessary. First, a supplier needs to obtain the approvals of governmental military
agencies (e.g., US Navy, UK MoD, French DGA and so on). This process entails laboratory testing
(glassware and rig) and engine bench testing. It may take up to two years and is usually a prerequi-
site for the application for OEM testing, or otherwise required prior to granting full approval from
OEM. Again, a supplier may not choose to proceed with OEM approval as this is only required for
products intended for commercial airlines' use. In such a case, a supplier may focus on lubricants
intended for military customers. According to the parties, the military market is bid driven, not
brand loyal and more selective.

(793) The following step for full market entry in the commercial aircraft lubricants market is OEM
approval. It consists of full accreditation in the majority of aircraft engines and accessories in use by
commercial airlines. This usually comprises seven major engine manufacturers (such as General Elec-
tric, Rolls Royce, Pratt & Whitney, Allied Signal, Snecma, International Aero Engines, CFM Interna-
tional); 20 major engine models; four major accessory manufacturers; and four major accessories
(APU, CSD, IDG and ATS) (70). The process comprises laboratory testing (glassware and rig), engine
bench testing by model and a lengthy in-flight service evaluation by model. According to parties'
estimates, the cumulative time required from the start of the formulation to full approval and
commercialisation of commercial aircraft lubricants can take up to 12 years. However, the parties
claim that there is downward trend in the time needed for obtaining commercial OEM approvals.
Some engine manufacturers would not require flight evaluation for some of their engines. For
instance, Pratt & Whitney have revised their program and require evaluation only in one engine
thus reducing the time and cost required to go from military to commercial approval to […]* years
and USD […]*. The parties explain that the average time period required for commercial OEM
approval would now range from […]* to […]* years and cost from USD […]* to […]*. In any case,
this still amounts to a considerable barrier to entry.

(794) From a technical viewpoint, commercial aircraft lubricants could be used in military applications,
however the reverse is not true. This is due to the additional testing required for civil aviation
approval. Moreover, lubricants used in aero-derivative applications are required to pass very limited
approval processes. From a technical viewpoint, both commercial and military lubricants could be
used in those applications, however the reverse would be technically unfeasible. An illustration of
the above one-way substitution is that most airlines use the same product for all their aero-applica-
tions (both flying and ground equipment) and for this reason they only buy the higher quality lubri-
cants for commercial aircraft engines which have obtained OEM approvals (71). Therefore, both
supply and demand substitutability can be said to operate in one direction. This is furthermore illu-
strated by the reduced number of suppliers to commercial airlines (Exxon, Mobil and to a lesser
degree Shell and Castrol) and the larger supplier base to the militaries (the above majors plus a
number of smaller specialised manufacturers, such as NYCO, Henkel, Hatco, etc.).

(795) On the basis of the above evidence, it is fair to conclude that the aviation lubricants sector is consti-
tuted by three distinct product markets, divided according to their intended use. The operation will
materially affect the market for commercial aircraft lubricants.

Relevant geographic market

(796) The parties suggest that the geographic market is worldwide, stating that most manufacturers supply
their worldwide network from one or a few plants; that aviation lubricants travel easily and at low
cost; that prices are similar in the different regions of the world; and that there are no trade barriers.
The market investigation has confirmed the above definition for all types of aviation lubricants.
Therefore, the geographic market is considered to be the world.

(70) Auxiliary power units, constant speed drivers, integrated drive generators and air turbine starters.
(71) Anecdotal evidence is that, in order to reduce possible safety risks, airlines use one and the same OEM-approved
lubricant for stationary and airborne applications to ensure that a non-approved aero-derivative lubricant cannot be
mistakenly used in an aircraft engine.

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COMPETITIVE ASSESSMENT

(797) Exxon and Mobil account for [60 to 70]* % of the worldwide production and sales of ester-based
turbine lubricants (Exxon: [30 to 40]* %; Mobil: [20 to 30]* %). The other main suppliers are Shell
([0 to 10]* %), Castrol ([0 to 10]* %), NYCO ([0 to 10]* %) and others ([20 to 30]* %).

(798)

In the market for commercial aircraft engines lubricants, the combined market share of the merging
parties is significantly higher. According to parties' estimates, their combined market share at the
end of 1997 was [80 to 90]* % (Exxon: [40 to 50]* %; Mobil: [40 to 50]* %, Shell: [0 to 10]* %;
others: [0 to 10]* %). Airlines and competitors questioned during the market investigation, indicated
that the combined entity would wind up with more than [0 to 90]* % of the market and that, at
present, Shell and Castrol would be the only available alternative suppliers, with [0 to 10]* % and [0
to 10]* %, respectively (it is worth noting that Shell has no customers in any US airline and sells
marginally to EU commercial carriers).

(799) Exxon and Mobil appear to have nearly insurmountable market leadership which according to some
competitors is due to historical market conditions. The aviation lubricants industry has suffered
from poor profitability and a high cost base as a result of the continuous need for research and
development triggered by technological advances in aircraft manufacturing. As a consequence, many
suppliers withdrew from the market. All the questioned parties have indicated the high level of
commitment that the commercial aircraft engines market commands. The merging companies have
been committed there from the beginning of the development of the jet turbine technology and
have evolved into the supplier of choice of all the main airlines. According to the parties, their
larger share in that market is due to their decades-long dedication in it, whereas other aviation lubri-
cants suppliers have focused on the other two markets (Castrol in the industrial and the military,
Shell in the military and other aviation products, Hatco in ester-based stocks sales, rebranding and
military sales). The parties claim that they do not hold any insurmountable technological leadership
because the technology required to compete would be mature. This is probably true but does not
change the fact that there are high barriers to entry in the market due to approbation procedures
which make unlikely entries even if prices were to be raised.

(800)

In fact, the remaining manufacturers of aviation lubricants tend to be specialised lubricants and
chemicals manufacturers that concentrate mainly on aero-derivative and some of them on military
applications. Hatco (US), is a major supplier of ester base stock and is mainly a supplier to military
and aero-derivative applications which has certain commercial co-approvals with Shell; NYCO (FR),
is an independent supplier with a range mainly of military aviation products and certain engine
manufacturers' approvals; Anderol (US), is mainly a supplier for aero-derivative applications, with
some reduced activity in military aviation applications; Henkel (US), is a supplier of ester and has a
specialised activity directed towards aero-derivative and military applications and no approvals in
commercial aviation lubricants. Other manufacturers of ester-based turbine lubricants and the
product markets that they serve include the following: Arpol Petroleum (US-rebranded-military); BP
Marine Ltd (British-rebranded-industrial); Caltex (US-rebranded-industrial); Delta Petroleum (US-
rebranded-military, industrial); Hexagon (US-rebranded-military, industrial); Petron International (US-
rebranded-military); Total (French-rebranded-military); Velsicol (US-rebranded-military, industrial).

(801)

It is made clear that Exxon and Mobil are the leading suppliers of own aviation lubricant products
destined to commercial aircraft engines, and have the largest manufacturing capacity for aviation
lubricants. Actual competition in the market for commercial aircraft lubricants is reduced to the two
merging suppliers (their respective price increases over the last five years were of […]* % and
[…]* %). Any remaining bargaining advantage for customers will therefore be removed through the
elimination of competition between those two.

(802) The parties claim that, were the combined entity to raise the prices above competitive levels, estab-
lished suppliers would expand their sales and potential competitors would enter the market. The
investigation has shown that the demand for commercial aircraft engines lubricants is inelastic as a
consequence of the low cost of aviation lubricants in the total cost of aviation products of commer-
cial airlines and the accrued priority of such customers to ensure the highest level of flight safety,

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which increases switching costs and prevents them from shopping around. For instance, the parties
have explained that customers have an incentive to continue purchasing from their current supplier
as they would incur costs to change jet oil brands, including notifying and filing forms with their
local government's aviation authority (including the Federal Aviation Authority if they fly in the US),
changing all copies of their operating and maintenance manuals and issuing notices to all airports
into which they fly. Moreover, according to the parties, airlines make lubricants purchasing deci-
sions based on technical and historical performance evaluations which are not, therefore, strongly
related to price.

(803) With a combined market share of [0 to 90]* %, the merged entity would be indeed in a position to
behave independently from its competitors and customers. The parties argue that despite the low
price elasticity of demand, new market entry will be triggered more likely by existing competitors
such as Castrol, Hatco and Shell who could expand their production of aero-derivative and military
engine lubricants to commercial engine lubricants. In addition, they claim that these new entries
would be sponsored by airlines in response to higher prices. The market investigation has shown
that market entry may not be necessarily encouraged under the prospected demand growth (1 to
2 % over the next five years), and may be substantially hampered by the high incremental entry
cost, pertaining to the approval requirements and the concern to ensure profitability through
driving sales volumes. In addition to this, the parties have stated that for a supplier of commercial
aircraft engines lubricants to compete in this market in a viable and optimal way, a minimum
market share of 20 % may be required. In fact, existing suppliers are reduced and share a smaller
customer base, whereas there have been no new entrants in the market for lubricants for commer-
cial aircraft engines during the past 20 years.

the investigation has shown that the concentration trend will

(804) The parties argue that their airlines customer base has significant buyer power and point out that
the concentration trend in the airlines industry is increasing the countervailing power of airlines.
However, besides the fact that aviation lubricants do not constitute a significant cost area for
airlines,
lead strategic alliances
between airlines to a focus on cost and seat sales and, unless their engineering departments
combine, such power may never become relevant for lubricants suppliers. Moreover, the parties
suggest that a supracompetitive price increase would have adverse effects on various other aviation
products which the same airline customers may purchase from the same supplier. However, airlines
questioned view aviation lubricants as a stand-alone product and consider that, if there are no avail-
able lubricant substitutes at sight, the existence of other aviation products cannot influence ongoing
commercial relations in commercial aircraft engine lubricants.

(805) The operation will bring together, and will eliminate competition between, the main currently
competing suppliers, and lead to the creation of a dominant position held by the merged entity on
the market for aviation lubricants used in commercial aircraft engines.

G. AVIATION FUELS

PRODUCT MARKET

(806) Aviation (or jet) fuel is a kerosene-type fuel used for the powering of jet aircraft engines. Although
similar to domestic kerosene (used for heating purposes, in particular in the United Kingdom), it
meets strict performance specifications. According to the previous decisions (BP/Mobil, Shell/Gulf
Oil), aviation fuels constitute a separate product market from other motion fuels (such as motor
gasoline, automotive diesel and marine fuels). The notifying parties also support this view.

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GEOGRAPHIC MARKET

(807) The parties state that aviation fuels is a worldwide market, or at least, wider than the EEA. To
support this view, they refer to the fact that aviation fuels are sold on a bidding basis for global
supply contracts with the various airlines, which require suppliers to deliver product at airports
around the world. Moreover, pricing is Platt's-related thus making aviation fuels prices in the cargo
markets around the world to track one another closely.

(808) The Commission does not consider that these facts are conducive to one single worldwide market.
One distinction needs to be made between manufacturing of aviation fuels, which may be of world-
wide relevance, and actual supply of aviation fuels to specific locations, whereby infrastructure logis-
tics may limit the geographic scope of competition.

(809) Although ex-works and cargo market prices may be aligned, this is due to the commodity character
of the product, and it reflects a general price alignment among refined petroleum products. Given
the uniform pricing of raw materials (crude oil) and the, more or less, uniform cost structure of the
refining processes and transportation costs around the world, it may be expected, as it is the case
for other refined petroleum products, that aviation fuels indicate a uniform worldwide price.
However, when it comes to the supply of aviation fuels to specific airports, the worldwide character
of this market fades away. Although airlines launch global tenders, they do not necessarily select
one and the same supplier for all their worldwide requirements; on the contrary, they select the
most attractive bidder on an airport-specific basis depending on the relative strengths and advan-
tages of suppliers in a given location. Moreover, prices charged to load the product into-plane, may
differ from one contract to another. The competitive environments may vary from one airport, or
location, to another. This is mainly due to the distribution infrastructure for the supply of aviation
fuels to the various airports, which is in general dedicated to a specific airport. Therefore, suppliers
need not only produce aviation fuels to be able to win contracts with airlines; they also need to
have access to the specific distribution and loading infrastructure that will enable them to effectively
market their product at the final stage of the supply chain, that is, into the aircraft.

(810) Competitors questioned during the market investigation also contested the worldwide scope of this
market. They indicated that airport-specific markets may exist, even in those cases where several
airports are located in the same area (for instance, the London airports, Heathrow, Gatwick and
London City). In that sense, from the demand side, if price of jet fuel increased at one airport, an
airline would not be able to switch to another airport in order to benefit from the cheaper jet fuel,
mainly as a result of the constraints on slot availability. From the supply side, an oil company's
ability to switch from supplying one airport rather than another, is dependent on access to the logis-
tics infrastructure. Supply-side substitutability is therefore also limited.

(811) The parties admit that access to airport supply infrastructure is important. However, they state that
there is strong competition among a variety of suppliers, with many of the same suppliers appearing
at different airports, or others having formed joint ventures in the areas of airport storage and into-
plane activities.

(812) Although this statement is not incorrect, the investigation has shown, however, that at least in one
European airport — Gatwick in London — the existing distribution infrastructure may severely limit
access of new suppliers to this airport, while it may materially affect access conditions for existing
suppliers, as a result of the merger. Gatwick is supplied through a network of dedicated pipelines,
one of them belonging to Exxon and the other to a consortium between Shell, Mobil, BP and
Texaco. In that sense, the offer and demand of aviation fuels in Gatwick cannot be grouped with
that of another airport, not even closely located airports, such as Heathrow or London City. Airlines
operating from Gatwick could therefore not profit from a price variation occurring in another

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airport in order to switch their demand to that airport. Supplying companies would not be able to
switch from supplying Gatwick rather than another airport, since this is dependent on access to the
logistics infrastructure. In this sense, the demand and supply conditions for Gatwick seem to consti-
tute a closed system, which makes substitution between airports unfeasible, since demand and
supply can only be matched locally. Under these circumstances, it may be concluded that the supply
of aviation fuels to Gatwick airport constitutes a distinct geographic market.

(813) Gatwick airport constitutes a substantial part of the common market. In terms of air traffic, Gatwick
ranks as the fifth airport in the EEA. Moreover, in terms of consumption of aviation fuels, Gatwick
represents 25 % of the total consumption of aviation fuels in the United Kingdom (Heathrow
accounting for 55 %, the remaining United Kingdom airports for 20 % altogether) and 6 % of total
EEA sales of aviation fuels (72).

Supply process and infrastructure

(814) According to the parties, airlines are the primary aviation fuels customers. They buy fuel into-plane,
meaning that suppliers need access to logistics infrastructure to transport the product from their
refinery or import terminal to the airport and into the aircraft. Such infrastructure may be owned
by the major oil companies or by third parties, including the State. Most airports are supplied by
pipeline, usually direct from several refineries. Rail and barge may also be used for refinery-to-
airport transportation, although such alternatives may be more costly. At the airport, jet fuel must
be stored and allowed to settle for a minimum of two days. From the airport storage, jet fuel is
transported to the aircraft stands either through a hydrant pipeline system, or by special trucks. This
last step is also called ‘into-plane operation’. In the areas of airport storage and into-plane activities,
the suppliers have formed joint ventures to reduce cost and achieve efficiencies. However, this may
not be true of moving the fuels ex-refinery or ex-import terminal to the airport, where proprietary
or fully utilised pipeline networks may severely constrain access and therefore successful market
entry and/or expansion. This is particularly the case at Gatwick airport.

Aviation fuels supplies to Gatwick airport

(815) As a result of the merger, the combined entity will share [40 to 50]* % of jet fuels supplied to
Gatwick. This market share will be combined with a high percentage ownership of the most compe-
titively advantaged means of supply (industry-owned pipelines, such as West London pipeline, the
Walton Gatwick pipeline and the existing Exxon system, directly linking its Fawley refinery to
Gatwick). According to competitors, all other means of supply are either constrained by limits on
capacity or severely disadvantaged from a competitive point of view. Furthermore, Exxon will
control a substantial part of jet-fuel refining capacity for south-eastern England, since it owns the
Fawley refinery and will acquire joint control of the Coryton refinery, presently belonging to BP/
Mobil. It has to be noted that the only other available refinery in this area, Shell Haven, is due to
close at the end of this year, which means that the combined entity will have the totality of refining
capacity in south-eastern England (Mobil is entitled to […]* % of the jet fuel offtake from Coryton
for inland distribution — note that aviation as well as marine fuels are not part of the existing BP/
Mobil joint venture). The parties combined share of jet fuel supplies to Heathrow and City Airport
are respectively [30 to 40]* % and [40 to 50]* %. In addition, the parties would not own a high
percentage of the relevant infrastructure that is used to supply these airports.

(72) In its decision of 6 July 1994 (Case IV/M.460 - Holdercim/Cedest) (OJ C 211, 2.8.1994), the Commission had stated
that markets representing ‘less than one per cent of the Community consumption of the product’ constitute an
insubstantial part of the common market.

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(816) Following the merger, the combined entity will control a substantial share of total pipeline logistics
serving Gatwick and an even more considerable share of industry-owned pipelines (see attached
supply charts, submitted by the parties and competitors). Exxon owns a pipeline linking its Fawley
refinery to Gatwick. No third party is given access to this pipeline (apart from British Airways
which has been given limited throughput rights for own-supply). The only alternative direct route to
Gatwick is the UKOP pipeline, via the Walton and West London pipelines. This route is reported to
lack sufficient capacity at present. The ownership in these pipelines is shown in the following table:

Industry-owned pipelines to Gatwick airport

Shell

Mobil

TotalFina

Texaco

BP

Chevron

(%)

[…]*

UKOP

West London

Walton

(817) Other alternative means of access are not competitive. Transport by rail would cost an additional
GBP 5 per tonne. The GPSS (an open access government-owned pipeline) has no direct access to
Gatwick, but needs to go through the Walton pipeline ([…]* % Mobil). This alternative is not viable,
first because it would cost GBP 5 extra per tonne, and secondly because the GPSS-Walton line is
full. An alternative access, via the GPSS route from the north Thames estuary via Aldermaston, is in
practice excluded, as at certain key points the flow operates in the wrong direction for supply to
Gatwick. Even assuming that access may be granted to the Walton pipeline, which has direct access
to Gatwick, one has to pass through the West London pipeline ([…]* % Mobil), which is, reportedly,
of limited capacity.

(818) Given that the cost of accessing the airports via industry-owned pipelines is approximately GBP
[…]* per tonne, there appears to be a significant competitive disadvantage for suppliers which need
to rely on these alternative routes. As a result, the combined entity will effectively have a logistical
advantage over all other competitors for any extra supply capacity. This competitive disadvantage is
even more severe for those players who do not share existing pipelines. This may act as a serious
deterrent to market entry, given that it is the logistical cost that determines the margin and therefore
the price that can be charged to an airline (the cost of the product being largely based on Platt's and
that the other main costs are access and into-plane costs, the latter being the same for all players
that have managed to get access to the airport).

(819)

In their response to the statement of objections, the parties contend that besides the two main pipe-
line routes for the supply of jet fuel to Gatwick airport, there are at least three alternative routes,
namely various parts of the government-owned GPSS pipelines. However, it should be noted that all
these alternatives routes are indirectly connected to Gatwick via the Walton pipeline. In so far as
they do not secure direct access to Gatwick Airport, they cannot be regarded as an alternative to the
two main pipeline routes.

(820) The parties also note that while the main pipeline routes to Gatwick are all either full or close to
capacity, expansion of the dedicated jet fuel pipelines is relatively easy should the owners so decide.
However, it is a fact that as a result of the merger Exxon/Mobil will control solely one pipeline route
while holding a significant interest in the only alternative route to Gatwick. The combined entity is
therefore in a position to be able to restrict the access to this infrastructure, as well as limit its
expansion. In sum, the control by the merged entity of most of the essential infrastructure, access to
which is necessary to supply jet fuel to Gatwick Airport, can result in a foreclosure of the other jet
fuel suppliers to the market of supply of jet fuel to Gatwick Airport.

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(821)

In terms then of sources of supply, it is worth noting that after the closure of Shell Haven, Exxon's
Fawley and Mobil's Coryton refineries will become by far the most competitive sources of jet fuels
supply to Gatwick. […]*. Other United Kingdom refineries with inland distribution access to the
south-east of England have no excess jet fuels capacity (the United Kingdom was a net importer of
1,6 million tonnes of jet fuels in 1998). Furthermore, other than Fawley and Coryton, the principal
source of supply is the cargo market. The cargo market may result in a significant price disadvan-
tage, as currently, the cif/fob cost differential is around GBP […]* per tonne. In addition, there is
currently no competitive access to Gatwick from the principal import terminals, since access will
become dependent on industry-owned pipelines and/or on GPSS pipelines or rail, the latter two
being non-competitive or impractical, as seen above.

(822) The parties contest the fact that they would control the most competitive sources of supply for the
market in question. In this respect, they point to the presence of a number of competitors supplying
Gatwick Airport from refineries located outside the south-east of England. In this respect, while it is
undisputed that other operators supply jet fuel to Gatwick from production facilities not located in
proximity of the airport, there still remains the fact that as a result of the merger the combined
entity will be in a position to supply the jet fuel market from the best located refineries. In other
words, the proximity of Exxon and Mobil refineries to Gatwick Airport constitutes a significant
competitive advantage.

Creation of a dominant position in jet fuels supplies to Gatwick airport

(823) Exxon currently enjoys significant shares in the supply of jet fuels to Gatwick. As a result of the
merger, this position will be further enhanced. The combined entity will be the supplier of [40 to
50]* % of jet fuels to Gatwick. The parties agree with this estimate. In addition to its own pipeline,
Exxon will acquire Mobil's capacity shares in the three industry-owned pipelines ([…]* % of UKOP,
[…]* % of West London and […]* % of Walton Gatwick). Moreover, the combined entity will have
the only competitive refining capacity in the region.

(824) Furthermore, according to competitors, Exxon has up to 1,1 million tonnes spare capacity on its
own pipelines. It could use this extra capacity to capture any incremental growth in demand at
Gatwick, which is anticipated to double over the next 10 years. Other suppliers have no spare
refining or pipeline capacity to exploit any further market growth.

(825) A competitor and one major airline customer operating in the United Kingdom airports, including
Gatwick, have complained about the supracompetitive position that the combined entity will
acquire with respect to jet fuels supply to Gatwick. On the basis of the elements explained in the
preceding paragraphs, it is the Commission's view that the operation will result in the creation of a
dominant position in the market for the supply of aviation fuels to Gatwick airport, in the United
Kingdom.

IV. COMMITMENTS AND ASSESSMENT

(826) On 3 September 1999, the parties offered certain commitments to remove the competition concerns
which the Commission had identified in its statement of objections of July 26, 1999. On 20
September 1999, the parties submitted amended commitments taking into account certain adjust-
ments required by the Commission in view of, in particular, the results of the market test. The
commitments will be summarised and assessed in the following points, following the order of the
relevant markets on which the Commission stated objections as followed above in the assessment
part of this decision.

(827) The full text of the commitments is attached to this Decision and forms an integral part of it.

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A. NATURAL GAS

DUTCH WHOLESALE TRANSMISSION MARKET

(828) Within […]* from the date of the Commission's decision approving the concentration (‘the effective
date’), the parties will reach a binding agreement on the sale of Mobil Europe Gas Inc. (‘MEGAS’) to
a purchaser to be approved by the Commission. MEGAS shall be sold as a viable going concern,
including its contracted supply and sales portfolio, and all associated transport and other service
agreements. The parties shall also nominate an independent and experienced trustee to oversee the
ongoing management of MEGAS pending completion of the sale.

(829) MEGAS is the Mobil entity that sells natural gas in competition with Gasunie on the Dutch market.
This company shall be sold with its contracted supply portfolio. It can be noted that Mobil's
upstream production affiliate in the Netherlands has concluded depletion contracts for all of its
concessions with Gasunie, MEGAS or Mobil's German affiliate. The rights and obligations of MEGAS
under these contracts will be passed on to the purchaser so that the purchaser will have access to
Dutch gas in the same proportion as that to which MEGAS would have had access to if it remained
within the Mobil group. Therefore, the purchaser will be in the same unique position with regard to
the TPA contracts with Gasunie as Mobil before (see recital 218). As the purchaser has to be a
viable existing or potential competitor with the ability to maintain and develop MEGAS as an active
competitive force, the Commission will take into account the possibility for the purchaser to have
access to natural gas from other sources than the Netherlands and to bring this gas to the Dutch
market. If these conditions (that are to be checked by the Commission) are fulfilled, the status quo
ante to the transaction will be re-established so that the transaction will, subject to fulfilment of the
commitment, not lead to the strengthening of Gasunie's dominant position in the Dutch wholesale
transmission market.

GERMAN LONG-DISTANCE WHOLESALE TRANSMISSION MARKET(S)

Divestiture of Exxon's 25 % interest in Thyssengas

(830) Within […]* from the effective date, the parties will reach a binding agreement on the sale of
Exxon's 25 % equity interest in Thyssengas GmbH to a third party approved by the Commission.
Within 10 days from the effective date, the parties will nominate an independent and experienced
trustee to represent Exxon's interest and exercise Exxon's 25 % voting rights in Thyssengas.

(831) The Commission considers that, overall, the divestiture of Exxon's equity interest in Thyssengas
compensates for the strengthening of the dominant positions that would otherwise have occurred as
a consequence of the merger. This strengthening relates to Mobil's activity on the long-distance
market with a current market share of around 1,5 % and Mobil's equity interest of 7,4 % in Ruhrgas.
It is noted in this respect that Thyssengas has a market share of around 7,3 % on the long-distance
market and is a member of the defined German oligopoly.

(832) Once the parties are no longer involved in Thyssengas, the Commission considers that this company
has more incentives to challenge the other oligopoly members and, in this way, ‘replaces’ the poten-
tial of Mobil. This was contested by a third party, which argued that Exxon's withdrawal from Thys-
sengas will not move Thyssengas out of the oligopoly group and turn it into a competitor, compen-
sating for the elimination of Mobil. This third party explained that this was due to the remaining
equity links between Thyssengas and the other oligopoly members via RWE-DEA (50 % share-
holding in Thyssengas) and Shell (25 % shareholding in Thyssengas).

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(833) For the following reasons, the Commission is satisfied that the proposed withdrawal from Thys-
sengas will restore competition up to its pre-merger level. First of all, Mobil was also linked to
Ruhrgas and operated closely together with BEB for its German production. Secondly, RWE-DEA's
shareholding and influence in Thyssengas are clearly more important than its 3,5 % shareholding in
Ruhrgas (where it is a member of the Bergemann pool) and its obligation to supply 60 % of its
German gas production to Ruhrgas (this supply volume accounts for less than 1 % of German
natural gas consumption). RWE-DEA has therefore all the incentives to develop and strengthen
Thyssengas. With regard to Shell, it is noted that as a consequence of Exxon merging with Mobil
and Exxon divesting from Thyssengas, the interests between Exxon and Shell will, for the first time
in more than 30 years, no longer be parallel on the German natural gas markets. It is difficult to
assess the impact thereof on the competitive behaviour of the different ventures (competitive inter-
action between BEB-Thyssengas, BEB-Ruhrgas, Thyssengas-Ruhrgas and so forth), but it can be
concluded that this brings back an element of instability into the operation of the oligopoly.

(834)

In assessing the suitability of the purchaser of Exxon's equity interest in Thyssengas, the Commission
will duly take into account the incentives for the competitive behaviour of Thyssengas attributable
to the identity of the purchaser.

Voting rights in Erdgas Münster

(835) The parties shall use their reasonable best efforts to obtain the agreement of the other shareholders
in EGM to reallocating a certain percentage of the voting rights currently held by Mobil to such
shareholders (pro rata to their current voting rights) so that BEB and Mobil (or Exxon Mobil)
combined will hold less than 50 % of the voting rights in EGM. The commitment contains a reallo-
cation for both legal entities within EGM.

(836) As part of the market test of the proposed commitments, the other EGM shareholders have indicated
to the Commission that they do not oppose the reallocation along the lines of the details of the
commitment. On this basis and in view of the fact that the agreement with the shareholders will be
subject to Commission approval, the Commission is confident that the parties will not obtain the
control of the corporate governance structures of EGM

(837) Therefore EGM's incentives to compete will return to their pre-merger level. The Commission
considers that EGM maintains the possibility to develop into a potential competitor on the long-
distance wholesale transmission market in a future liberalised environment.

UNDERGROUND STORAGE FACILITIES SERVICING THE SOUTH OF GERMANY

(838) For a period of 10 years following the effective date […]*, the parties will offer to enter into a
binding agreement with third parties for the sale of all Mobil's rights to one or more of the depleted
reservoirs suitable for conversion into storage facilities servicing the south of Germany until it has
sold a combined estimated working gas volume, after conversion, of approximately 600 MCM.

(839)

If the parties and a potential purchaser fail to agree on a fair market price within six months from
that purchaser's written expression of interest in a particular reservoir, the parties will, at the poten-
tial purchaser's request, acquire a fair market valuation from three independent experts approved by
the Commission. The parties agree that they will be bound by the value assessment of such experts.

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(840) The commitment to sell one or more depleted reservoirs with a total estimated working gas volume
of 600 MCM would represent the possibility to increase the current relevant storage volume by
around […]* %. It is also clear from the market investigation that such a volume would be sufficient
to compete with Ruhrgas in the relevant market. No respondent to the Commission's market test
has objected to the proposed remedies as a means to remove the competition concerns. Therefore,
the Commission considers that the commitment ensures that the barriers to entry for potential
competitors will not be increased as a consequence of the concentration.
It can therefore be
concluded that in those circumstances, Ruhrgas' dominant position in the market will not be
strengthened.

B. BASE OILS

(841) Within […]* from the effective date, the parties have committed themselves to transfer control
(within the meaning of the Merger Regulation) over one or more base oil businesses together
encompassing approximately […]* barrels per day of base oil manufacturing capacity to BP Amoco
and/or one or more third parties to be approved by the Commission, in one of the following ways
or a combination thereof:

(a) transfer (or return) of ownership […]* or equivalent capacity; or

(b) a long-term lease agreement or similar arrangement of […]*, renewable at the lessee's option,
pursuant to which the operational and strategic management of the base oil capacity concerned
is transferred, such that the transferee can unilaterally decide, without informing the parties, on
all operational and strategic matters. Such arrangement is to be subject to approval by the
Commission and the lease agreement will provide that the lessor will not have any access to
competitively sensitive information of the lessee. Where such information is necessary in the
exercise of the normal rights of the lessor, this information will be supplied to an independent
representative subject to confidentiality obligations with the exception of a limited number of
items (such as spills that require action on the part of the lessor), to be identified in the lease
agreement.

(842)

In addition to the base oil manufacturing facilities, the base oil business(es) will include all necessary
personnel, supply contracts, customer lists and contracts related solely to the divested facilities,
access to technology and the provision of technical support to run a base oil business.

(843) During the transition period, the lubricant leg of the BP/Mobil joint venture (which includes the
base oil activities) will be managed entirely independently from the rest of the Exxon-Mobil group
with no passing of information and no reporting to persons outside of the joint venture. Certain
transitional measures with regard to the BP/Mobil JV that are explained in section C below are also
clearly relevant for the base oils remedy. If the base oils business were not purchased by BP Amoco,
the parties have undertaken to keep it separate from their activities by appointing a hold separate
trustee.

(844) The undertakings also provide that the parties should help the purchaser in order to enable him to
obtain the necessary quality accreditations. In addition, the parties have committed to transfer
supply contracts solely related to the divested businesses to the purchaser. These contracts amount
to more than […]* % of the sales. Finally, Mobil will continue (at the option of the purchaser) to
source what it currently uses from the divested refineries for a period of […]*. This represents
around […]* % of the production of these refineries.

(845) The resulting limitation of overlap from the concentration will depend on the outcome of the
ongoing negotiations between BP Amoco and Mobil on the dissolution of the lubricant leg of their
joint venture. However, the commitments ensure that, whatever the outcome of the negotiations on
the dissolution of the lubricant leg of the BP/Mobil JV, Exxon Mobil's share of the merchant market
would stand at no more than around [less than 40]* %. On this basis, the modified transaction
would not result in the creation of a dominant position held by Exxon Mobil on the base oils
market.

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(846) When, instead of a sale of the manufacturing plants, control has to be changed by means of a long-
term lease arrangement, the Commission also needs to approve such an agreement. In this respect,
the Commission considers that the outline of such an agreement as described in the commitments is
a sufficient starting basis for the Commission to assess whether the agreement would lead to a
change of control and allow the lessee to operate the business as an active competitive force.

(847) Third parties explained that a lease arrangement would be workable in principle if the term of the
lease was sufficiently long. They also explained that any purchaser of the divested businesses should
have some lubricant-blending activities in order to be a viable competitor. The Commission believes
that a 15 years period renewable at the option of the purchaser should ensure enough duration for
the purchaser to operate the business as a long term undertaking. As to the importance of having a
lubricant activity for the purchaser, the Commission will verify the suitability of a purchaser or
lessee at the time the parties will submit a proposal to the Commission and the integration of the
base oils business within its other activities shall be taken into account.

C. MOTOR FUEL RETAILING

(848)

In response to the Commission's conclusion that the concentration will create or strengthen oligopo-
listic dominance over Austria, French toll motorways, Germany, Luxembourg, the Netherlands and
the United Kingdom, the parties have undertaken to dispose of Mobil's share in Aral and to termi-
nate Mobil's participation in the fuels part of the BP/Mobil joint venture.

ARAL

(849) Mobil's rights in Aral are held by Mobil Marketing und Raffinerie GmbH (MMRG), a wholly owned

subsidiary of Mobil. […]*.

(850) The parties commit to withdraw completely from Aral within […]* from the effective date. […]*

(851)

[…]*

(852) This undertaking entirely removes the incentives for Exxon or BP/Mobil and Aral to coordinate their

competitive behaviour and therefore eliminate the objections raised by the Commission.

BP/MOBIL JOINT VENTURE

(853) The parties undertake to withdraw entirely, within […]* from the effective date, from the joint
venture fuels activities. This should be achieved through one of the two following alternative reme-
dies: (i) sale of Mobil's interest in the joint venture to BP Amoco (or, should BP Amoco not wish to
buy this share and accept a third party, to a suitable third party), or (ii) dissolution of the BP/Mobil
joint venture, with essentially all of the fuel assets being acquired by BP Amoco or a suitable third
party.

(854) During the interim period, the parties have undertaken (i) to appoint independent representatives at
the joint venture committee, who will vote in the best interest of the joint venture and will not
exchange any fuels, base oil or lubricants information with Mobil or Exxon-Mobil and (ii) to elimi-
nate access by personnel of the JV lubricants business (operated by Mobil) to information relating to
the fuels business.

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(855) The Commission considers that this offers the best protection possible during the interim period.
The Commission recognises that the implementation of these transitional measures depends to some
extent on the other partner in the joint venture, BP Amoco. However, as an operator of the fuels
business, BP Amoco will have an incentive to make sure that no information can be transmitted to
Exxon Mobil. Nevertheless, BP Amoco has objected to the appointment of independent representa-
tives at the joint venture committee, arguing that this amounts to an assignment of Mobil's rights
which is prohibited by contract. It seems, however, that the fact that the parties commit themselves
vis-à-vis the Commission to appoint certain independent representatives, to be approved by the
Commission, might not preclude the parties from nominating these representatives as Mobil repre-
sentatives pursuant to the JV agreement. It is also not sure that BP Amoco and Mobil will find ways
to agree on how to isolate the information systems relating to the fuel businesses from the lubricant
businesses. However, the parties have committed to cut unilaterally such links if they could not
agree with BP Amoco within a short time. The parties have also committed to appoint an indepen-
dent observer, whose task will be to monitor their compliance with the offered remedies.

(856) BP Amoco has argued that the time period for Mobil's withdrawal from the BP/Mobil joint venture
should not be longer than […]*. This is based on two reasons. First, Mobil would not have to look
joint venture.
for a buyer since only BP Amoco could purchase their interest in the BP/Mobil
Secondly, the interim period would be harmful to competition because of the possibility of Exxon-
Mobil's benefiting from information relating to BP/Mobil fuel-retailing activities.

(857) However, the Commission considers that the duration of the interim period is reasonable. In deter-
mining the right time period, the Commission had to balance on the one hand the need for a quick
resolution of its competition concerns together with the possible harm the continued presence of
Mobil within the JV might do to one of the main competitors to Exxon against, on the other hand,
the need for the parties to get a proper consideration in the face of a monopolist buyer. Indeed, BP
Amoco could be inclined to dictate the terms of the sale should the interim period be too short.
This interim period should not be used by the parties to unduly prolong Mobil's participation in the
JV. That is why the commitments also provide for (i) an obligation on Mobil to accept an expert
resolution of any issues linked to the valuation of Mobil's interest should BP Amoco so desire and
(ii) an obligation on the parties to negotiate in good faith with BP Amoco. The reports of the inde-
pendent observer will inform the Commission on all these issues, thereby enabling the Commission
to order under certain circumstances a shorter time limit for the divestiture of Mobil's stake or the
dissolution of the joint venture.

CONCLUSION

(858) The commitments concerning fuels would eliminate all of the overlap between Exxon's and Mobil's
fuels business in all of the markets where the Commission concluded that an oligopolistic domi-
nance might be created or strengthened, and possibly in the whole of the fuels sector in Europe.
Consequently, such dominant positions will not be created or strengthened.

D. AVIATION LUBRICANTS

(859) Within […]* from the effective date, the parties will divest themselves of Exxon's worldwide aviation
lubricants business with commercial airlines to a purchaser approved by the Commission. The busi-
ness comprises product R & D, marketing and sales, blending and packaging facilities, product
quality management and technical support and the associated marketing and sales, product quality
management and technical support personnel. A trustee will ensure that, during the interim period,
the Exxon and Mobil businesses are kept separate.

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(860) The market test conducted by the Commission confirmed that the divestiture of Exxon's aviation
lubricant activities would be preferable to that of Mobil's aviation lubricants business (as initially
proposed by the parties). Indeed, Mobil's activities are integrated within the Mobil group. Mobil
produces its own ester base stock and also produces five proprietary additives. It did not appear to
be possible to offer Mobil's blending facility as it was part of a wider complex. Respondents to the
Commission's market test therefore indicated their doubts as to the capacity of a purchaser of
Mobil's aviation lubricant business to operate as a viable competitive force able to constrain Exxon
Mobil's actions. When informed about the Commission's doubts as to the adequacy of the divestiture
of Mobil's aviation lubricant business, the parties offered to shed Exxon's business. Contrary to
Mobil's aviation lubricant business, Exxon's aviation lubricants business is not closely intertwined
with other Exxon businesses (supply of raw materials to a large extent from third parties, separate
blending facility).

(861) On this basis, the Commission considers that no dominant position will be created on this market

and that its competition concerns expressed in the statement of objections are eliminated.

E. AVIATION FUELS

(862) The parties have undertaken to sell, within […]* from the effective date, aviation fuel pipeline capa-
city from the Coryton refinery to Gatwick airport equivalent to Mobil's 1998 sales volumes at
Gatwick. This undertaking should remove the bottleneck control that the parties would have gained
through their merger on the supply of jet fuels to Gatwick Airport. Therefore, no dominant position
will be created on the market for the supply of aviation fuels to Gatwick airport,

HAS ADOPTED THIS DECISION:

Article 1

On condition that the commitments summarised in recitals 826 to 862, and laid out in detail in the
Annex, are fully complied with, the concentration notified on 3 May 1999 consisting of the merger
between Exxon Corporation and Mobil Corporation is declared compatible with the common market and
the functioning of the EEA Agreement.

Article 2

This Decision is addressed to:

1. Exxon Corporation

5959 Las Calinas Boulevard
Irving
Texas
USA

2. Mobil Corporation
3225 Gallows Road
Fairfax
Virginia
USA

Done at Brussels, 29 September 1999.

For the Commission

Mario MONTI

Member of the Commission

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ANNEX

The full original text of the conditions and obligations referred to in Article 1 may be consulted on the following
Commission website:

http://europa.eu.int/comm/competition/index_en.html

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CONTENTS

I. THE PARTIES AND THE OPERATION . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . ..

II. COMMUNITY DIMENSION . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . ..

III. COMPETITIVE ASSESSMENT . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . ..

A. EXPLORATION, DEVELOPMENT AND PRODUCTION PROCESS . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

RELEVANT PRODUCT MARKETS . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

RELEVANT GEOGRAPHIC MARKETS . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

MARKET PLAYERS . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

POSITION OF THE PARTIES IN THE MARKET .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Exploration . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Production and sales .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

EFFECTS OF THE MERGER ON COMPETITION . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

B. GAS-TO-LIQUIDS TECHNOLOGY .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

C. NATURAL GAS . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

INTRODUCTION .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Description of the ‘gas column’ . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Contractual framework . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Brief overview of the gas column in the Netherlands and Germany . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

WHOLESALE TRANSMISSION MARKETS . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Relevant product market . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

(a) Wholesale transmission versus local distribution market . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

(b) Long-distance versus short-distance wholesale transmission market:

long-distance wholesale is a
distinct product market where entry depends on the goodwill of the incumbents or on a very high
sunk cost investment . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Conclusion . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Low calorific value and high calorific value gas . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Demand-side substitutability: switch of the gas column from LCV compatible to HCV compatible . . . . . .. .

Conclusion with regard to demand-side substitutability . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Relevant geographic market .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

(a) Netherlands . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

(b) German long-distance wholesale transmission market(s) . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Position of the market participants .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

(a) The Dutch wholesale transmission market . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

(b) The German long-distance wholesale transmission market(s) . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Competitive assessment . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

(a) Dutch wholesale transmission market . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

(b) Long-distance wholesale transmission market(s) in Germany . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Uncompetitive German gas market .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Single dominance in old demarcated region . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Oligopolistic dominance . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Result of the merger .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

UNDERGROUND STORAGE . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Relevant product market . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Relevant geographic market .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Underground storage facilities servicing the south of Germany . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

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7.4.2004

EN

Official Journal of the European Union

L 103/133

D. BASE OILS, ADDITIVES AND LUBRICANTS . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

INTRODUCTION .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

DESCRIPTION AND FUNCTIONING OF THE MARKET . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Base oils are the end product of crude oil refining . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Characteristics . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Classification .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Crude feedstocks . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Additives . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Lubricants . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Automotive lubricants and industrial lubricants . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Development of lubricants . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Quality requirements for industry and marine lubricants . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Standard-setting and accreditation systems for automotive lubricants . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

MARKET DEFINITION . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Product markets . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Base oils . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Additives .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Lubricants . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Relevant geographic markets . . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Base oils . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Additives .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Lubricants . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

COMPETITIVE ASSESSMENT . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Base oils . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Current market structure . . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Barriers to entry and exit

. . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Privileged role of Exxon, BP/Mobil and Shell with limited constraints exercised by smaller base oil
producers . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Effects of the merger on competition in the base oil market . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Conclusion . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Additives . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Lubricants . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

E. REFINING AND MARKETING OF FUELS (DOWNSTREAM OIL) . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

GENERAL OVERVIEW . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

The supply chain . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Refining . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Refined products sales and marketing . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Transportation of refined products . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Logistics . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

The competitive environment . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

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35

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51

54

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L 103/134

EN

Official Journal of the European Union

7.4.2004

Product market

. . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Retail sales of motor fuels . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Motor fuel retailing in toll motorways . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Non-retail sales . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Geographic market . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Motor fuel retailing . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Motor fuel retailing on toll motorways . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Non-retail sales of refined products (fuels) . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Competitive assessment . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

The assessment of the BP/Mobil joint venture . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Mobil’s interest in Aral

. .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Motor fuel retailing . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

AUSTRIA . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

GENERAL OVERVIEW . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Refining . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Infrastructure .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Wholesaling . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Retailing . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Market structure . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Competitive dynamics — costs and prices . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Costs . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Prices . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Entry barriers — expansion — potential competition . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

THE POST-MERGER ENVIRONMENT — IMPACT OF THE OPERATION ON COMPETITION . . . . . . .. . . . . . . . .

FRANCE — MOTORWAYS . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

GENERAL OVERVIEW . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Toll motorway station as a distinct product market . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Market structure . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Competitive dynamics — costs and prices . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Costs . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Prices . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Price trends . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Entry barriers — expansion — potential competition . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Entry barriers . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Potential competition . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

THE POST-MERGER ENVIRONMENT: THE IMPACT OF THE OPERATION ON COMPETITION . . . .. . . . . . . . .

58

58

58

58

58

58

59

59

59

59

62

62

69

69

69

69

69

70

70

70

71

71

72

72

72

73

73

73

75

75

77

77

78

80

81

81

82

82

7.4.2004

EN

Official Journal of the European Union

L 103/135

GERMANY . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

GENERAL OVERVIEW . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Refining . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Infrastructure .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Wholesaling . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Retailing . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Western Germany and eastern Germany . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Market structure . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Competitive dynamics — costs and prices . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Barriers to entry — expansion — potential competition . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

THE POST-MERGER ENVIRONMENT — IMPACT OF THE OPERATION ON COMPETITION . . . . . . .. . . . . . . . .

LUXEMBOURG .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

GENERAL OVERVIEW . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Refining . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Wholesaling . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Retailing . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Luxembourg as a distinct geographic market . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Market structure . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Competitive dynamics — Costs and prices . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Costs . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Prices . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Specific features of the Luxembourg market — price regulation . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . .

Entry barriers — expansion — potential competition . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

THE POST-MERGER ENVIRONMENT — THE IMPACT OF THE OPERATION ON COMPETITION .. . . . . . . . .

NETHERLANDS . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

GENERAL OVERVIEW . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Refining . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Wholesaling . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

Retailing . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .

Market structure . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. .

83

83

83

83

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85

86

86

86

87

89

89

90

90

90

90

90

91

91

91

92

92

93

95

96

96

97

97

97

98

98

98

98

Competitive dynamics — costs and prices . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 100

Costs . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . 100

Prices . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . 101

Barriers to entry — expansion — potential competition . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 103

Entry barrier . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . 103

Potential competition . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . 103

THE POST-MERGER ENVIRONMENT — IMPACT OF THE OPERATION ON COMPETITION . . . . . . .. . . . . . . . . 104

L 103/136

EN

Official Journal of the European Union

7.4.2004

THE UNITED KINGDOM . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 105

GENERAL OVERVIEW . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 105

Refining . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 105

Wholesaling . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 105

THE PRE-MERGER ENVIRONMENT — CURRENT STATUS OF COMPETITION . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 106

Market structure . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 106

Competitive dynamics — costs and prices . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 108

A historical perspective .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . 108

Entry barriers — expansion — potential competition . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 113

THE POST MERGER ENVIRONMENT — THE IMPACT OF THE OPERATION ON COMPETITION .. . . . . . . . . 113

Unique competitive position in the wholesale sector . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 114

Unchallenged market leadership in retailing . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 115

F. AVIATION LUBRICANTS . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 116

MARKET DEFINITION . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 117

Relevant product market . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 117

Aviation and regular lubricants are not part of the same market . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . 117

Commercial, military and aero-derivative applications .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . 117

Relevant geographic market .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 118

COMPETITIVE ASSESSMENT . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 119

G. AVIATION FUELS . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 120

PRODUCT MARKET . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 120

GEOGRAPHIC MARKET .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 121

Supply process and infrastructure . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 122

Aviation fuels supplies to Gatwick airport . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 122

Creation of a dominant position in jet fuels supplies to Gatwick airport . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 124

IV. COMMITMENTS AND ASSESSMENT . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. 124

A. NATURAL GAS . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 125

DUTCH WHOLESALE TRANSMISSION MARKET . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 125

GERMAN LONG-DISTANCE WHOLESALE TRANSMISSION MARKET(S) . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 125

Divestiture of Exxon’s 25 % interest in Thyssengas .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 125

Voting rights in Erdgas Münster . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 126

UNDERGROUND STORAGE FACILITIES SERVICING THE SOUTH OF GERMANY . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 126

B. BASE OILS . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 127

C. MOTOR FUEL RETAILING . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 128

ARAL . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 128

BP/MOBIL JOINT VENTURE . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 128

CONCLUSION . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . 129

D. AVIATION LUBRICANTS . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 129

E. AVIATION FUELS . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . 130