COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 57/LM/Oct03
In the large merger between:
Sasol Oil (Pty) Ltd
and
Exel Petroleum (Pty) Ltd
_______________________________________________________________________
Reasons
_______________________________________________________________________
Introduction
The Tribunal approved the proposed transaction between Sasol Oil (Pty) Ltd and Exel
Petroleum (Pty) Ltd on 10 December 2003. The reasons for this decision follow.
The transaction
Sasol Oil (Pty) Ltd (“Sasol Oil”), which is primarily a producer of petroleum products,
acquired the former Powerlib Group’s 36% shareholding in Exel Petroleum (Pty) Ltd
(“Exel”), a retailer of petroleum products. Sasol, through its wholly owned subsidiary
Naledi Industry Company (Pty) Ltd, already holds a 22,5% interest in Exel’s holding
company Naledi Petroleum Holdings (Pty) Ltd (“NPH”).
Sasol Oil was also granted a call option on the shares sold by the Sizanani Trust,
consisting of:
• 8% NPH shares from Autoworkers Pension Fund;
• 5% NPH shares from Autoworkers Provident Fund;
• 3,5% NPH shares from South African Black Women’s Investment Holdings (Pty)
Ltd;
• 9,5% NPH shares from Nozweni (Pty) Ltd
Sinzanani Trust agreed to transfer its NPH shares to Sasol Oil after the termination of the
main supply agreements. This is subject to a restriction whereby Sasol Oil must use any
dividends received in respect of the shares for the furtherance of historically
disadvantaged businesses.
On completion of the transaction NPH will become a wholly owned subsidiary of Sasol
Oil.
Parties
Sasol Oil is a wholly owned subsidiary of Sasol Limited, the ultimate holding company
of the Sasol Group, which is listed on the JSE Securities Exchange. Sasol Oil is
responsible for Sasol’s crude refining activities and for the marketing of all liquid and
gaseous fuels (excluding pipeline gas) together with lubricants manufactured by Sasol.
Exel is the wholly owned subsidiary of NPH, which has no other business interests. Exel
is a fuel marketing company, which was established by historically disadvantaged South
African investors with the assistance of Sasol in 1997 to foster the empowerment of
historically disadvantaged persons in the petroleum industry.
Rationale for the transaction
The oil companies, BP, Shell, Caltex, Engen, Total, Exel, Tepco and Afric Oil are
currently parties to Main Supply Agreements (“MSA’s”) and Blue Pump Agreements
(“BPA’s”).
The salient features of the MSA are that the oil companies would purchase Sasol’s
production of petroleum products up to certain maximum volumes from defined
permitted sources of supply and Sasol may not market petroleum products except for
certain exceptions set out in the preamble of the MSA.
The BPA’s are directly linked to the MSA’S. In terms of these agreements between Sasol
and the oil companies, Sasol may market petrol only through roster sites (i.e. service
stations untied to any oil company in terms of the socalled Government sponsored
“rationalisation plan”) and through Sasol Blue Pump sales at service stations of the other
“rationalisation plan”) and through Sasol Blue Pump sales at service stations of the other
oil companies in the Blue Pump Area.
These agreements will terminate on 31 December 2003. This means that the commercial
restriction on Sasol marketing its own petroleum products will fall away. Sasol as
producer of liquid fuels needs to integrate downstream into the retail market to compete
with its main vertically integrated rivals. From Exel’s perspective it needs to vertically
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integrate upstream to gain access to the upstream petroleum market in order to compete
effectively with its rivals.
Sasol is also a signatory to the Charter for the Empowerment of historically
disadvantaged businesses in the liquid petroleum industry, which requires that at least
25% of ownership and control of all facets of the industry must be owned by historically
disadvantaged South Africans. In order for Sasol to comply with the Charter
requirements it is necessary to integrate Exel into the larger Sasol Oil thereby fulfilling its
commitments.
According to Exel this transaction would contribute to a more significant and sustainable
growth in black economic empowerment. However, should Sasol enter the retail market
as a competitor of Exel it would have a negative impact on Exel’s sustainability in the
market.
The fuel industry in South Africa
The liquid fuel industry is highly regulated with price control and import control being
the cornerstones of the regulatory dispensation. The petrol price is regulated whilst a
maximum wholesale price is set for diesel and a maximum retail price is set for
unpackaged illuminating paraffin. This does not seem likely to change in the near
future.1
Competition Analysis
The petroleum supply chain can be divided into upstream and downstream activities. The
upstream activities consist of oil exploration, extraction and transportation. The
downstream activities consist of refining, marketing and distribution.
This is a horizontal as well as vertical merger. Sasol is involved in the refining of
petroleum products in the upstream market as well as in the marketing and distribution of
liquid fuels while Exel is active in the downstream market, in the marketing and
distribution of the petroleum products and does not have any refining capacity.
The upstream market
The upstream market
Sasol is involved in the production and refining of petroleum products such as diesel,
petrol, base oils, fuel oil, bitumen, liquid petroleum gas (“LPG”), aviation gasoline and
kerosene.
1 In fact, during the hearing the parties pointed out that the industry was being reregulated rather than de
regulated.
3
In South Africa there are four crude oil refineries, Calref owned by Caltex, Enref owned
by Engen, Sapref a joint venture between Shell and BP and PetroSA owned by
Government, and two synthetic fuel refineries, Synfuels owned by Sasol and Natref a
joint venture between Sasol and Total.
Of these only Synfuels and Natref are located inland. Calref and PetroSA are located in
Cape Town, supplying the Western and Eastern Cape, while Enref and Sapref are located
in Durban, supplying the KwaZulu Natal regions. According to the parties this situation
allows for logistical optimization between the refineries, as the base products are
“swopped” between companies in order to provide product to customers in each
surrounding area. 2 The respective oil companies then add their own additives at a later
stage in the supply chain.
Table 1 shows the percentage market shares per petroleum product (refinery production
volumes) of each of the oil companies:
Product Calref
%
Enref
%
PetroSA
%
Natref3
%
Sapref4
%
Synfuels
%
Natref &
Sasol
combined5
%
Petrol 12.5 14 8.4 13.30 18.30 33.40 41.86
Diesel 14.58 18.60 5.52 16.30 28.90 16.10 26.53
Kerosene 15.63 17.33 4.27 27.94 22.72 12.18 30.05
LPG 11.75 10.65 15.04 4.72 23.71 34.14 37.00
Fuel Oils 18.70 34.10 0.90 2.60 40.40 3.30 5.00
Aviation
Fuels 0 26.70 0 0 73.30 0 0
Base Oils 0 46.90 0 0 53.10 0 0
Bitumen 3.8 31.80 0 13.40 14.30 36.70 45.31
From the above table it is clear that Sasol is dominant in the markets for the production of
petrol, kerosene, bitumen and LPG, a position, which also raised competition concerns
from its competitors. These mainly concerned foreclosure by raising rival’s costs.
Sasol is the major inland supplier of refined fuel to most of its rivals via the MSA. When
2 These agreements are known as product exchange agreements.
2 These agreements are known as product exchange agreements.
3 This market share should be distributed between Total and Sasol and is not the exclusive market share
attributable to Sasol Oil.
4 The Sapref refinery is split between Shell and BP on a 50:50 basis.
5These combined values are the combined production volumes of the Natref refinery and Sasol’s Synfuels
refinery.
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the agreement is terminated in January 2004 Sasol, the dominant manufacturer of refined
petroleum inland, would also become a downstream competitor. It will then become
vertically integrated. Sasol’s competitors, who are also vertically integrated, are however
dependent on Sasol to furnish them with some product inland because they are not able to
meet their own needs fully via the pipeline from their coastal refineries. In light of this
they are concerned that Sasol, being in a dominant position inland, would post the merger
raise their input costs by raising its prices.
The merging parties did not agree with the concerns raised, claiming that it would not be
in Sasol’s interest to “selfdeal” 6 or to raise input costs because of the presence of its
vertically integrated rivals, which could reciprocate at any time by withholding
hospitality and exchange facilities. They explained that since “swopping” arrangements
existed between the refineries, it would not be in Sasol’s favour to foreclose product
inland to its competitors because they could retaliate by refusing Sasol product in the
coastal areas where it does not have refineries. Moreover, Exel is a very small player in
the downstream retail product markets as can be seen from the analysis of the
downstream market. In fact, its market shares are below 10% in all the markets while
Sasol’s downstream market shares are 4.5% in petrol, 0.8% in diesel. The merged entity
would, according to Sasol, only take up 1415% of Sasol’s total production the rest would
be sold inland to its rivals.
It is thus highly unlikely that Sasol, who intends growing its downstream coastal market
share, would compromise its vulnerable coastal position in any way.
We therefore find that competition will not be substantially lessened or prevented in the
upstream market for the refining of petroleum products.
Downstream market
upstream market for the refining of petroleum products.
Downstream market
The downstream market entails the marketing and distribution of liquid fuels to the
commercial and wholesale segment and the retail segment of the market. The geographic
market for the retail segment is regional while for the commercial and wholesale segment
it is national.
Both merging parties sell petrol, diesel and fuel oils to the commercial segments, which
include customers such as parastatals, commercial/passenger transport, agriculture,
manufacturing, construction, mining, local communities and resellers. Both parties also
sell petrol and diesel to the retail segment.
Commercial segment
Table 2 shows the merged entity’s three largest competitors in each province, expressed
6 Confining its purchases of upstream product to its downstream division only.
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as a percentage market share, in the commercial petrol market :
Afric
Oil
BP Caltex Engen Shell TSA Merged
Entity
Western Cape 17.3 23.7 15.4 23.2 14.9
Eastern Cape 20.5 18.6 34.6 7.1
Northern Cape 36.6 19.5 21.6 4.5
Free State 38.6 19.1 28.0 6.9
KZN 15.0 31.8 32.7 3.3
North West
Province
22.7 28.5 19.6 7.9
Gauteng 20.4 22.4 23.7 15.9
Mpumalanga 18.9 18.5 36.0 7.2
Limpopo 14.5 14.4 44.3 10.2
In none of the provinces will the merged entity be the largest player. The market shares
indicate that Engen, Total and BP are the largest players in most of the provinces.
Table 3 shows the percentage market share of the three largest competitors of the merged
entity in each province in the commercial diesel market :
Afric
Oil
BP Caltex Engen Shell TSA Merged
Entity
Western Cape 25.2 19.4 19.0 5.5
Eastern Cape 28.7 21.0 16.7 7.2
Northern Cape 21.1 16.5 26.8 5.6
Free State 27.1 32.0 18.1 3.8
KZN 29.4 22.3 17.4 2.2
North West
Province
15.3 15.1 27.8 16.5
Gauteng 13.8 22.4 22.2 8.1
Mpumalanga 14.4 28.2 24.8 12.0
Limpopo 19.5 20.6 23.3 7.5
In only one of the provinces, North West Province, will the merged entity be one of the
top four competitors. The merged entity will be the second largest player with a market
share of 16.5% and the largest player, Engen, will hold a market share of 27.8% and the
third largest player, BP, 15.3%. The change in the HHI post the merger will only result in
an increase of 3.28 points, thus far below the 50 points said to have an adverse
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competitive effect in a concentrated market. It is thus clear that the merger would not
result in a significant change in concentration in this market.
In the commercial market for fuel oils the parties have submitted that their combined
market share is 54%. However, this constitutes only inland market sales and does not
reflect coastal or include bunker fuel oil sales that are made to ships in coastal regions.
The market shares may therefore be diluted further since Engen, Shell and BP have huge
production volumes in this market.
Retail segment
The merged parties sell petrol and diesel to the retail market segment. The market shares
for the retail market segment at the national market level are provided in table 4:
Product
s
Afric
Oil
BP Caltex Engen Shell TSA Merged
entity
Petrol 16.2 17.8 27.6 18.3 12.9 7.2
Diesel 17.4 14.8 27.8 20.8 15.0 4.2
The merged entity would have an insignificant market share at the national level. In the
narrower geographic markets, i.e. magisterial districts, the Commission found that Exel
had a stronger presence in certain local markets but that the merger would not result in a
significant change in concentration levels. The reason for this is that Sasol Oil’s presence
in the retail markets is limited to its blue pump agreements and a few service stations
around the country.
We therefore agree with the Commission that the merger would not prevent or lessen
competition substantially in any of the relevant markets.
Public interest issues
The parties envisage that the merger will lead to a few adjustments in respect of senior
managers. However, they foresee no retrenchments arising from the integration process
itself.
____________ 3 February 2004
D Lewis Date
Concurring: N Manoim, P Maponya
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