IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA
CASE NO: 101/LM/Dec04
In the large merger between:
SASOL LIMITED Primary Acquiring Firms
ENGEN LIMITED
PETRONAS INTERNATIONAL CORPORATION LIMITED
And
SASOL OIL (PTY) LTD Primary Target Firms
ENGEN LTD
With the following parties intervening:
BP SOUTHERN AFRICA (PTY) LTD First Intervening Party
SHELL SOUTHERN AFRICA ENERGY (PTY) LTD and
SHELL SOUTHERN AFRICA MARKETING (PTY) LTD Second Intervening Party
CHEVRON SOUTH AFRICA (PTY) LIMITED Third Intervening Party
TOTAL SOUTH AFRICA (PTY) LTD Fourth Intervening Party
MASANA PETROLEUM SOLUTIONS (PTY) LTD Fifth Intervening Party
REASONS FOR DECISION
IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA ....................................... 1
SASOL LIMITED Primary Acquiring Firms ..................................... 1
ENGEN LIMITED 1
SASOL OIL (PTY) LTD Primary Target Firms 1
IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA 7
SASOL LIMITED Primary Acquiring Firms 7
ENGEN LIMITED 7
SASOL OIL (PTY) LTD Primary Target Firms 7
Order 7
The Transaction 8
3.The current ownership structure of the various parties is depicted in the
diagram below: 8
6.The post merger ownership structure is depicted in the diagram below: 9
The Merging Parties 12
Sasol Limited ................................................................................................................. 12
PICL 16
Engen 16
Empowerment parties 17
The Intervening parties .........................................................................................17
BP.................................................................................................................................. 18
Caltex 18
Shell 18
TOTAL18
Masana 18
Department of Minerals and Energy ....................................................................19
The Hearings 20
Refining And Marketing White Fuels In South Africa – The Background
22
Introduction.................................................................................................................... 22
The development of white fuel production capacity 23
Public Regulation 31
61.The regulated prices are based upon import parity. .................................. 31
The Development of Logistics Capacity ......................................................................... 36
The Components Supply Agreement 46
The Components Supply Agreement 46
Summary and Conclusion 54
2
Rationale For The Transaction .............................................................................57
The counter factual – independent entry by Sasol into the retail market
65
The Relevant Markets 71
The relevant product markets and market shares .......................................................... 71
Downstream Sales of Petroleum Products in South Africa 2004 .............. 74
The relevant geographic market and market shares ...................................................... 75
Province .................................................................................................................. 82
Uhambo 82
Uhambo 83
Uhambo 83
The Competition Analysis 85
Introduction.................................................................................................................... 85
Foreclosure – profitability and credibility 93
Market share ........................................................................................................... 99
Diesel retail sales 99
Prioritisation of transport 99
Rates of growth in the demand for white fuel products ................................................ 106
Logistics – pipeline, rail and road .....................................................................110
Introduction.................................................................................................................. 110
Diesel and the Crude Oil Pipeline 117
Rail and Road Logistics 140
(d) Driver capacity ............................................................................................... 150
Road and Rail Logistics – conclusions ......................................................................... 160
The expansion of capacity in the DJP – the limits to foreclosure .................. 161
Expanding the DJP ...................................................................................................... 163
Debottlenecking the northern DJP 169
Strategic Responses to Foreclosure – prioritisation and retaliation .............173
Prioritisation................................................................................................................. 174
Retaliation 182
Owned ................................................................................................................... 182
Foreclosure – summary and conclusions 185
A Substantial Lessening of Competition – our findings 190
A substantial lessening of competition in the downstream market ............................... 191
A substantial lessening of competition in the upstream market 198
Cartelisation and the fuel markets 203
3
Efficiencies...........................................................................................................205
Public Interest 211
Remedies 212
A brief summary and conclusion 223
APPENDIX A 231
Competition Commission’s Conditions 231
The following conditions shall apply until a new petroleum products pipeline
from Durban to Johannesburg to Tshwane has been constructed and makes
available to OOCs a transportation infrastructure capable of carrying their
shortfall volumes: 231
1. Subject to 3 below, the merged entity shall, on written request by any
OOC, and on terms that are commercially, financially and technically
reasonable, supply such OOC with such shortfall volumes or part thereof as
may be requested. 231
2. Without derogating from 1 above, the selling price to be charged by the
merged entity for any such supply shall not— 231
3. In the event of the merged entity being unable to supply the full volumes
of refined petroleum products requested by the OOCs as contemplated in 1
above, as well as the volumes required by itself and its subsidiaries and
associated entities, the merged entity shall reduce its supply of each
affected product to each such OOC and to itself and its subsidiaries and
associated entities pro rata to the volumes of such product supplied to each
such OOC and to itself and its subsidiary and associated entities during the
preceding three months. 232
4
4. Upon the written request of any OOC aggrieved by any alleged specific
failure or refusal of the merged entity to comply with the above conditions,
the merged entity — in the event that it does not admit the alleged failure or
refusal and remedy the same forthwith — shall, within ten days of the
request, offer to that OOC in writing an expeditious arbitration procedure on
reasonable terms for the determination of the dispute, and for the making of
any consequent award to ensure compliance, which procedure shall be
binding on the merged entity and on that OOC upon acceptance of the offer
of arbitration in writing by the latter. While any dispute remains subject to
arbitration as above, the merged entity shall, if the aggrieved OOC so
requires, and subject to any necessary pro rata adjustment in volumes
provided for in 3 above, continue to supply any refined petroleum products
affected by the dispute on the same terms as such products were supplied to
that OOC immediately before the dispute arose. 232
5. The provisions of 4 above are not intended to affect in any way the powers
and duties of the Competition Commission or the Competition Tribunal, in
terms of the Competition Act and the Rules in force thereunder, in dealing
with any alleged noncompliance by the merged entity with the above
conditions. 232
6. Reports to the Commission: 232
5
IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA
CASE NO: 101/LM/Dec04
In the large merger between:
SASOL LIMITED Primary Acquiring Firms
ENGEN LIMITED
PETRONAS INTERNATIONAL CORPORATION LIMITED
And
SASOL OIL (PTY) LTD Primary Target Firms
ENGEN LTD
With the following parties intervening:
BP SOUTHERN AFRICA (PTY) LTD First Intervening Party
SHELL SOUTHERN AFRICA ENERGY (PTY) LTD and
SHELL SOUTHERN AFRICA MARKETING (PTY) LTD Second Intervening Party
CHEVRON SOUTH AFRICA (PTY) LIMITED Third Intervening Party
TOTAL SOUTH AFRICA (PTY) LTD Fourth Intervening Party
MASANA PETROLEUM SOLUTIONS (PTY) LTD Fifth Intervening Party
REASONS FOR DECISION
Order
1. The proposed joint venture / merger between Sasol Limited, Engen Limited,
Petronas International Corporation Limited and Sasol Oil (Pty) Ltd is prohibited.
The reasons for this decision follow.
The Transaction
2. The parties to the proposed transaction are:
- Sasol Limited (“Sasol Ltd”);
- Sasol Oil (Pty) Ltd (“Sasol Oil” or “Sasol”) 1, also referred to as Sasol Liquid
Fuels Business (“Sasol LFB”), of which 98% is held by Sasol Ltd and 2% is
1 ‘ Sasol’ is sometimes used to refer to either Sasol Ltd or Sasol Oil – the context makes clear which
entity is being referred to. Where we have specifically wanted to distinguish Sasol Ltd or Sasol Oil
or Sasol Synfuels then we have taken care to do so.
6
held by Sizanani Trust;
- Petroliam Nasional Berhad ("Petronas"), a Malaysian state oil company;
- Petronas International Corporation Limited (“PICL”) is whollyowned subsidiary of
Petronas;
- Afric Energy Resources (Pty) Limited ("AER"), a wholly owned subsidiary of
Worldwide African Investment Holdings (Pty) Limited ("Worldwide”);
- Engen Limited (“Engen”) of which 80% is held by PICL and 20% held by
AER;
- Engen Holdings (Pty) Ltd, a wholly owned subsidiary of Engen;
- Engen Management Services (Pty) Ltd, a wholly owned subsidiary of
Engen;
- Engen Petroleum Limited, a wholly owned subsidiary of Engen Management
Services; and
- Leopont 512 Properties (Pty) Ltd which will change its name to
Tshwarisano LFB Investment (Pty) Limited (“Tshwarisano”).
3. The current ownership structure of the various parties is depicted in the
diagram below:
4. The proposed transaction involves the conclusion of a shareforshare exchange
7
agreement which will regulate the formation of a JV to be named Uhambo Oil Limited
(“Uhambo”). Engen will acquire the entire ordinary issued share capital of Sasol Oil. In
consideration for this, Sasol Limited will acquire 37,5% of the entire enlarged issued
share capital of Engen. PICL will retain 37,5% of Engen, AER (PICL’s BEE partner)
will retain 12,5% and Leopont (Tshwarisano) will acquire the remaining 12,5% of
Engen.2
5. According to the merging parties, neither AER nor Tshwarisano will acquire control
over Engen. However, as a direct consequence of the acquisition by Engen of sole
control of Sasol Oil and as consideration there for (and not as a separate transaction),
PICL and Sasol Limited will acquire joint control over Engen. 3
6. The post merger ownership structure is depicted in the diagram below:
7. The transaction will constitute a significant consolidation of the South African
petroleum industry. Uhambo, the joint venture, will comprise the white fuels produced
2 The merging parties stated that if, for any reason, the Competition Tribunal does not rule in favour
of the merger, then Tshwarisano will become a 25% shareholder in Sasol’s liquid fuels business
rather than a 12,5% shareholder in Uhambo.
3 See pages 11 (Para. 2) and 17 (Schedule 1) of the Merger Filing.
8
by Sasol Oil at Secunda, 4 Sasol’s 63,64% share of the Natref refinery in Sasolburg, 5
as well as Enref, Engen’s refinery in Durban. Uhambo’s retail network will comprise
those service stations controlled by Engen and those controlled by Sasol. Premerger
Engen controls what is, by a significant margin, the largest petrol station network in
the country. This will now be supplemented by the Sasol and Exel branded stations. 6
8. Joint ventures are a standard form of operation in the oil industry globally as
well as in South Africa. By way of two important South African examples, the
Natref refinery is controlled by a Sasol/TOTAL joint venture and the Sapref
refinery is controlled by a Shell SA /BPSA joint venture.
9. There have, in recent years, been several acquisitions in the marketing segment of
the fuel supply chain. The target firms in these transactions have generally been
relatively small, blackowned entrants into the industry, while the acquiring firms have
been one or other of the much larger, vertically integrated oil companies. We refer
particularly to Sasol’s acquisition of Exel, 7 Shell’s acquisition of Tepco, 8 and Engen’s
acquisition of Zenex. 9 The pattern of these acquisitions has been for the black
owned target to receive, in compensation, equity in the acquiring company, the
marketing branch of the oil company concerned. This is the mechanism through
which empowerment shareholders have generally been drawn into partnerships with
the major oil interests. 10
4 An exceptionally complex agreement – the Components Supply Agreement (CSA) governs the
point at which Sasol Synfuels (owned by Sasol Ltd, and not part of the JV) ends, and at which
Sasol Oil (and, hence, the JV) begins. Suffice for now to note that the fuel components are
produced and owned by Sasol Synfuels and are then to be sold, on an exclusive basis for 10 years,
to the JV. These components are then blended to produce the suite of white fuels which are the
products at the centre of this transaction. The blending plant at Secunda is part of the JV. The
purpose and implications of the CSA are elaborated more fully below.
5 Natref is owned as to 63,64% by Sasol Oil and 36,36% by Total SA.
6 The precise nature of the relationship between the oil companies and the petrol stations is
complex and varied and will be examined more fully below. We are here referring to those service
stations branded as Engen, Sasol and Exel, the latter a previously independent network of branded
service stations acquired by Sasol in 2003.
7 Approved on the 10 th of December 2003, Tribunal Case No.: 57/LM/Oct03.
8 Tribunal Case No. 66/LM/Oct01.
9 Tribunal Case No. 26/LM/Dec99.
10 We note here that the “Charter for the South African Petroleum and Liquid Fuels Industry on
Empowering Historically Disadvantaged South Africans in the Petroleum and Liquid Fuels Industry”
requires all the South Africanbased fuel companies to place 25% of the ownership in the
Petroleum and Liquid Fuels Industry in the hands of empowerment entities. All the petroleum
companies and the DME signed this empowerment charter in November 2000 .
9
10. The evidence shows that Sasol has long sought a partnership with firms with
significant refining and retailing capacities. It appears that the present transaction
represents at least the third attempt to merge with Engen. Mr Oberholster – the
current Managing Director of Sasol Oil – testified that Sasol had always considered
that Engen represented the best fit with Sasol from a synergy and risk perspective. 11
11. Mr. Eric Reid, a witness at these hearings, provided testimony of a Sasolinitiated
attempt (in the fourth quarter of 2000) at a JV with BP. Mr. Reid, who was the chief
negotiator for BP, testified that Sasol had highlighted a number of benefits for the joint
venture including cost savings and synergies, the prospect that a 20% retail market
share would offer an excellent springboard for further aggressive growth, and the
prospect that the deal would facilitate an increase in wholesale prices. 12
12. On the 12 thof May 2005, the Commission finalised its investigation of the Uhambo
Joint Venture (“JV”). It found that the merger was likely to lead to a substantial
lessening of competition. However it recommended to the Tribunal that the
transaction be approved subject to the imposition of a condition which is intended to
ameliorate the likely threat to competition. The recommended condition – essentially a
behavioural condition requiring the merged entity to supply refined product to its
downstream competitors – is appended to this decision and is discussed further
below. However in its closing argument the Commission indicated that it had revised
its position and decided to recommend prohibition.
The Merging Parties
Sasol Limited
13. Sasol Ltd, which shall acquire 37.5% of the JV, is a public company incorporated
within the Republic of South Africa and listed on the JSE Securities Exchange and on
the New York Stock Exchange. Shareholding in Sasol Ltd is widely spread with no
single dominant shareholder. 13
11 See page 387 of the transcript.
12 Pages 212425 of the transcript. Mr testified that the talks had been called off by BP who
concluded that most of the benefits to be derived from the proposed deal would accrue to Sasol.
13 As at 30 June 2004, Sasol Limited’s shareholders whose shares exceeded 5% in aggregate
were the Public Investment Corporation (13.3%), Sasol Limited’s wholly owned subsidiary: Sasol
10
14. Sasol is an integrated oil and gas group with substantial chemical interests. It
is headquartered in South Africa and operates in numerous countries
throughout the world. Sasol provides liquid fuels in South Africa and is an
international producer of chemicals. Sasol also uses inhouse technology for
the commercial production of synthetic fuels and chemicals from lowgrade
coal and manufactures over 200 fuel and chemical products, which are sold in
more than 90 countries. In addition, Sasol operates coal mines to provide
feedstock for its synthetic fuel and chemical plants, manufactures and markets
synthetic gas and operates, in partnership with TOTAL SA (TOTAL), the only
inland crude oil refinery in South Africa. During 2004 Sasol began to supply
Mozambican natural gas both to customers and to its petrochemical plants in
South Africa. Sasol is also developing two gastoliquids fuel plants in Qatar
and Nigeria in joint ventures with Chevron.
15. Sasol has sole control over Sasol Oil by virtue of its current shareholding of 98%, with
the remaining 2% owned by Sizanani Trust. 14 (“Sizanani”). Sizanani is the BEE entity
of Sasol, holding shares of former Exel Petroleum (Pty) Ltd (“Exel”) shareholders. All
of Sasol’s liquid fuel businesses are housed in Sasol Oil. 15 Sasol Oil owns significant
interests in a number of companies most important for our purposes is its 63.64%
share of Natref (Pty) Ltd. Apart from Sasol Oil and its sole ownership of Sasol
Synfuels (Pty) Ltd, other significant Sasol subsidiaries include Sasol Chemical
Industries Ltd, Sasol Technology (Pty) Ltd, Sasol Investment Company (Pty) Ltd,
Sasol Mining (Pty) Ltd, Sasol Financing (Pty) Ltd and Sasol Holdings (Pty) Ltd. Sasol
also holds a 1% preference share in Leopont, one of the empowerment participants in
also holds a 1% preference share in Leopont, one of the empowerment participants in
this transaction and which will be known as Tshwarisano postmerger.
16. Sasol Oil markets the Sasol group’s liquid fuels, lubricants and tarderived
products manufactured by Sasol Synfuels, Natref and other plants. Products
Investment Company (Pty) Ltd (9.0%), and the Industrial Development Corporation of South Africa
Ltd (7.9%).
14 Sasol Oil is generally referred to as Sasol Liquid Fuels Business or Sasol LFB. The registered
name of the company is Sasol Oil. These names are used interchangeably.
15 See page 585 of Commission’s Record.
11
include petrol, diesel, jet fuel, fuel alcohol, illuminating paraffin, fuel oils, cokes,
creosote and other tarderived products. It oversees Sasol’s joint venture
interests in the Natref oil refinery and the Tosas bituminous products
manufacturer and marketer.
17. Since July 2003 Sasol Synfuels’ main activity has been the manufacture of
fuel components and chemical feed streams. Sasol Synfuels operates the
world’s only coalbased synfuels manufacturing facility which is located at
Secunda. It uses unique Sasol FischerTropsch technology to produce gas
from coal and to convert this feedstock into petrol, diesel, liquefied petroleum
gas, chemical feedstock and industrial pipeline gas. Sasol Synfuels produces
most of South Africa’s chemical building blocks, including ethylene, propylene,
ammonia, phenolics and solvents.
18. Note that on 1 November 2004 Sasol Synfuels and Sasol Oil entered into the
Components Supply Agreement – hereinafter referred to as the “CSA”. 16 In essence,
the CSA governs the arrangement by which Sasol Synfuels will sell a basket of
components produced at the Secunda refinery to Sasol Oil and, postmerger, to
Uhambo. These components are then blended into petroleum products in the pumps
and tanks immediately adjacent to the synfuel facilities. The pumps and tanks are
located on the Secunda refinery premises, but are currently owned by Sasol Oil and
will be incorporated into the Uhambo JV. The pumps and tanks are a prerequisite for
blending the components into petroleum products. Mr Oberholster, a Sasol witness in
these proceedings, conceded in his evidence that it would be extremely difficult for
any of the other oil companies to erect their own pumps and tanks to perform the
same blending function as the pumps and tanks located on the Secunda premises.
same blending function as the pumps and tanks located on the Secunda premises.
Pertinent aspects of this immensely complex agreement are elaborated below. It
suffices now to note that it effectively specifies the boundaries between the assets of
Sasol Oil – and hence to be part of Uhambo – and Sasol Synfuels, whose assets are
not to be incorporated within the JV.
19. Sasol Oil thus includes all of Sasol’s assets in the liquid fuels business,
16 See page 1217 of the Commission’s Record .
12
encapsulating the entire value chain from crude oil procurement for Sasol’s
stake in the Natref refinery and procurement of fuel components from the
Sasol Synfuels refinery at Secunda through to retail marketing of the various
fuel and other products. All of Sasol’s assets in the distribution, marketing and
storage of fuel are also to be part of the Uhambo JV.
20. We should note here – and this is considerably elaborated below – that Sasol
and the other oil companies (OOCs) operating in South Africa have until
recently been party to an agreement dubbed the Main Supply Agreement
(MSA) or the Sasol Supply Agreement (SSA). This agreement was brokered
by government and has existed, in periodically amended form, since Sasol first
started producing fuels in the ‘fifties. In its barest essentials it provides that
the inland marketing arms of the OOCs will, to the extent possible, satisfy their
inland marketing requirements by uplifting Sasol’s inland output in preference
to conveying product from their coastal refineries. The price at which the
product is to be purchased is based on a variant of the import parity price,
currently referred to as the Basic Fuel Price. The quid pro quo for securing
Sasol a market for its refined output, was a narrowly circumscribed limitation
on Sasol’s participation in the retail market. The MSA thus effectively provided
for an allocation of markets between Sasol and the OOCs.
21. In 1998 Sasol gave the OOCs the stipulated five year notice necessary to
terminate the agreement which duly ended in December 2003.
22. We will return to this pivotal agreement throughout this decision. Although it
has not been in operation for over two years now, its consequences continue
to permeate the industry and an understanding of the MSA is essential for an
appreciation of the factors underpinning the transaction before us and its likely
appreciation of the factors underpinning the transaction before us and its likely
impact on competition.
PICL
23. Petroleum Nasional Berhad (Petronas) is the Malaysian national petroleum
company and is wholly owned by the government of Malaysia. It is an
13
integrated international oil and gas company with business interests in 35
countries. The Group is engaged in a wide spectrum of petroleum activities,
including upstream exploration for, and production of, oil and gas, downstream
oil refining, the marketing and distribution of petroleum products, trading, gas
processing and liquefaction, gas transmission pipeline network operations, the
marketing of liquefied natural gas, petrochemical manufacturing and
marketing, shipping, automotive engineering and property investment.
24. Petronas, through its subsidiary, PICL, and Worldwide African Investment Holdings
(Pty) Ltd (“Worldwide”) 17 respectively hold 80% and 20% of Engen. PICL shall
acquire 37,5% of Uhambo.
Engen
25. Engen is a South African company controlled as to 80% by PICL with the remaining
20% held by a BEE firm, Worldwide. 18 Engen owns and controls a number of
subsidiaries including Engen Holdings (Pty) Ltd and Engen Management Services
(Pty) Ltd.
26. Engen’s core business entails refining crude oil, marketing and retailing
primary refined petroleum products and providing consumer convenience
services through its retail network. In South Africa Engen has approximately 1
250 service stations and some 450 Quickshop convenience stores. Engen
owns and manages a 125 000 barrel per day (bbl/d) crude oil refinery (Enref)
and a stateoftheart lubricants blending plant in Durban. Engen is
represented in 13 other countries of subSaharan Africa.
Empowerment parties
27. There are two empowerment parties to the proposed JV, namely, AER (PICL’s BEE
partner in the Engen business) and Tshwarisano (Sasol Limited’s BEE partner). AER
is wholly owned by Worldwide African Investment Holdings, a blackowned and
managed investment holding company founded in 1994. Tshwarisano is a broad
17 Worldwide holds 20% of the share capital of Engen and 55% of the share capital of Afric Oil
(Pty) Ltd through its wholly owned subsidiary AER. Engen owns the remaining 45% of Afric Oil (Pty)
Ltd.
18 See page 585 of the Commission’s Record.
14
based consortium comprising many historically disadvantaged groups. Dr Penuell
Maduna, Ms Hixonia Nyasulu and Mr Reuel Khoza 19 will, through various
businesses, collectively hold about 30% of equity in Tshwarisano, whilst other key
shareholders will own the majority 70% of equity. 20 Tshwarisano and Worldwide will
each own a 12,5% share of the Uhambo JV.
The Intervening parties
28. Prior to the commencement of the hearing of the proposed JV a number of
other oil companies filed notices of intention to intervene in the merger
proceedings. These were BP South Africa (“BP”), Shell Southern Africa
Energy (Pty) Ltd and Shell Southern Africa Marketing (Pty) Ltd (collectively
referred to as “Shell”), Caltex South Africa (“Caltex”), Total South Africa (Pty)
Ltd (“TOTAL”) and Masana Petroleum Solutions (Pty) Ltd (“Masana”). The
intervenors are collectively referred to as the “other oil companies” or “OOCs”.
The merging parties did not oppose these intervention applications which were
granted by the Tribunal.
BP
29. BP Southern Africa (BP) is a subsidiary of one of the world’s major oil companies.
There are 790 BP branded service stations, 26 depots and other distribution sites,
including three coastal installations. company has, in partnership with Shell, a 50%
stake in, the South Africa Petroleum Refineries (Sapref) at Reunion, 16 kilometres
south of Durban.
Caltex
30. Caltex, a joint venture between two of worlds major oil companies, Chevron
Corporation and Texaco, Inc. 21 Caltex owns the Calref refinery which is located in
Cape Town. It controls a network of approximately 1000 service stations.
19 These three were promoters of Tshwarisano, and were responsible for facilitating and
structuring the broadbased and representative BEE consortium comprising Tshwarisano.
structuring the broadbased and representative BEE consortium comprising Tshwarisano.
20 Amongst them are the previous Exel shareholders which will hold about 47% of the equity in
Tshwarisano.
21 Caltex Oil’s BEE partners holding 25% therein comprise African Legend Investment Ltd (15%);
Lithemba Investments Ltd (5%); SANTACO (3%); and the Caltex Employee Participation Plan (2%).
15
Shell
31. Shell is a global group of energy and petrochemical companies operating in over 140
countries and territories. Its South African subsidiary produces refined oil products at
Sapref in Durban in a 50:50 joint venture with BP and distributes and markets those
products to commercial and retail customers throughout South Africa. Shell has a
total of 746 branded service stations. 22
TOTAL
32. TOTAL, which is controlled as to 50,1% by the eponymous French oil
company, controls a national network of some 680 service stations. It hold
36,36% of the Natref refinery with Sasol holding the remaining equity.
Masana
33. Masana is a black empowerment energy company which entered the South
African petroleum industry during 2005 when it acquired BP’s commercial fuels
business. Masana is 55% owned by historically disadvantaged South Africans
and 45% owned by BP. It markets BP branded products in the commercial and
industrial segment of the retail market.
Department of Minerals and Energy
34. On 6 June 2005, the Department of Minerals and Energy (“DME”) filed its intervention
application. The DME’s concerns included, amongst others, fears that the merger
would:
Result in a need for government interference in product pricing between
industry players. Oil firms supply each other's retail outlets in regions
where they do not have refining operations;
Impact on entry into the market by BEE players and small businesses; and
“Undermine and compromise" the government's market liberalisation policy
22 See the Commission’s Supplementary Report on “the relationship between the retail petrol
service stations and the oil companies” from page 1729 of the Witness Statement bundle.
16
for the energy sector by raising the costs of doing business.
35. The DME was also concerned at the condition proposed by the Commission when it
recommended approval of the deal. The recommended condition which is
discussed below essentially provided that Uhambo continue supplying rival oil firms
pending the commissioning of an expanded petroleum products pipeline conveying
white fuel products between Durban and the inland market. The DME had said that
this could oblige the parastatal, Petronet, to construct a pipeline of greater capacity
than that necessitated by the aggregate shortfall for petroleum product in the inland
region.23 However, the DME subsequently withdrew its intervention application on
17 June 2005. 24 In withdrawing its application, the DME said it had since been
assured that the Commission's condition included all logistical means, including road
and rail, to move product inland.
36. During the hearing, the Tribunal was presented with evidence to the effect that
the DME had, in drafting its intervention papers, been assisted by the
attorneys of record for BP and Masana. The evidence revealed that the DME
has communicated its misgivings regarding the proposed transaction to the
then Competition Commissioner who suggested that it approach BP’s
attorneys for assistance in drafting its intervention application.
37. Further evidence suggested that DME’s subsequent withdrawal was linked to several
meetings between certain of its official and senior Sasol Oil executives. Both Mr
Oberholster and Mr Gumede, Chief Director of Hydrocarbons, testified that the
purpose of the meetings was to address the concerns raised by the DME in its
intervention application. evidence showed that Sasol had even prepared the DME’s
media statement explaining the department's revised position.
media statement explaining the department's revised position.
38. While the lobbying of government by the private sector is a legitimate activity,
the degree of intervention by BP’s attorneys and by the Sasol Oil management
reduces the weight that we accord to the DME position on this transaction.
23 The implications of this important insight are elaborated in our discussion of pipeline capacity.
24 See page 1764 of the transcript.
17
The Hearings
39. The hearing took place over 19 days during the period 331 October 2005. Argument
was presented on the 9 thand 11 thNovember 2005. During the hearing a number of
witnesses testified. The merging parties led the following witnesses: Ernst
Oberholster25; Robert Stillman 26; Quinton Swart 27; Lourens Coetzer 28; Stephan
Malherbe29; and David Wright. 30 The intervenors led the following witnesses David
Scheffman;31 Eric Reid 32; Deyar Natha; 33 Patrick Milner; 34 Simon Baker; 35 Simon
Bishop;36 Richard Fienberg; 37 and Sizwe Mncwango. 38 The Commission led two
witnesses, viz. Lennie Moodley 39 as well as the Commission’s Chief Economist,
Geoff Parr. The Tribunal subpoenaed the DME, which in turn designated Nhlanhla
Gumede to testify on its behalf. Mr Gumede is the Chief Director: Hydrocarbons of the
DME.
40. The following person’s statements formed part of the record but were not called upon
to give oral testimony: Ian Baxter, 40 Salomon Millard, 41 and Frans Kanfer for the
merging parties; 42 Robert Stewart, 43 Peter Linnegar, 44 Neil Biggs, 45 Kevin Baart, 46
25 Managing Director Sasol Oil.
26 Economic expert: CRA (formerly Lexecon) retained by the merging parties.
27 Manager: Intelligence & Strategy – Sasol Oil.
28 Manager: Road Logistics – Sasol Ltd.
29 Economic Expert: Genesis Analytics retained by the merging parties.
30 General Manager: Corporate Planning – Engen.
31 Economic Expert: LECG retained by Caltex.
32 Independent Consultant – BP.
33 Management Consultant – BP.
34 Director Shell.
35 Economic Expert: RBB retained by BP
36 Economic Expert: RBB retained by Shell.
37 Vice President: Marketing Operations – BP.
38 Managing Director Masana.
39 Executive Business Manager of Petronet, a division of Transnet Limited
40 Refinery Strategic Planner Engen.
41 Statistician from University of Pretoria retained by the merging parties
41 Statistician from University of Pretoria retained by the merging parties
42 Statistician from University of Pretoria retained by the merging parties
43 Consultant: PetroLogistics Chevron
44 Director and General Manager: Commercial & Industrial Marketing Caltex.
45 Area Manager: Property & Facilities Optimisation – Caltex.
46 Manager: Refining, Business, Support and Strategy – TOTAL.
18
Michael Holland, 47 Nicola Theron, 48 Etienne de Fortier, 49 Ellen Corrigall, 50 Anthony
Twine,51 Tania Slabbert, 52 Keshan Pillay, 53 and Cornelius Kramer 54 for the
intervenors. While these statements have been considered they are given less
weight than the evidence of witnesses who gave oral testimony and who were
therefore subject to crossexamination.
Refining And Marketing White Fuels In South Africa – The Background
Introduction 55
41. This transaction cannot be evaluated without an understanding of certain
critical background features. This requires a brief excursion into the history of
the refining and marketing of white fuels in South Africa. A number of diverse
factors are pertinent to this background. Primary amongst these are, firstly,
the strategic significance that fuel products assume in all countries,
compounded by the apartheid government’s vulnerability to oil sanctions.
Secondly, there is South Africa’s historic reliance on imported crude oil and
the consequent establishment of refinery capacity at the coast, some
considerable distance from the country’s inland industrial hub, the major
market for fuel products.
42. These factors led the South African government to search for fuel sources that
were not dependent on crude oil. That source was found in the country’s
abundant supplies of lowgrade coal, which enabled the establishment of
government initiated and funded synthetic fuel plants in the inland area
adjacent to the coal fields. The upshot, we will show, is a fuel industry
characterised by complex locational economics. These, in turn, have given
47 Economic Expert: PriceMetrics retained by TOTAL
48 Economic Expert: Econex retained by Masana
49 Geospace retained by BP.
50 Value Chain Manager – BP.
49 Geospace retained by BP.
50 Value Chain Manager – BP.
51 Econometrix, retained by BP.
52 Nonexecutive director – BP.
53 Nonexecutive director – BP.
54 General Manager – BP.
55 For the historical development of the South African oil industry see Mr. Deyar Natha’s witness
statement from page 943 onwards of the Witness Statement bundle and Mr. Richard Fienberg’s
witness statement from pages 895922 of the Witness Statement bundle.
19
rise to a regulatory system and a logistical infrastructure that respond, in
significant part, to these geographic features. These characteristics of the
market are largely common cause and are extensively canvassed in the
record. They are reproduced here insofar as they are required for a proper
understanding of the transaction that is before us.
43. We should not lose sight of the fact that these industrial policies, underpinned
by vast historical subsidies, have established a highly competitive domestic
producer of fuels and chemicals. However, it appears that little of the
competitive advantage that Sasol Synfuels, wholly owned by Sasol Ltd,
enjoys, inures to the benefit of South African consumers of fuel products. We
have already mentioned and will further examine the Components Supply
Agreement, which precisely ring fences this advantage, with the shareholders
of Sasol Ltd inside the ring and those who consume the product – starting with
Uhambo and ending with the consumers of fuel products – firmly on the
outside. It is our finding that a principal objective of the transaction, is to
ensure that Sasol Ltd’s multiple sources of competitive advantage –
technological and locational – are withheld from South African consumers.
The development of white fuel production capacity
44. Caltex, Shell, Mobil and BP (then known as Atlantic) commenced downstream
marketing of petroleum products in South Africa some 100 years ago. Until the
commissioning in 1954 of Mobil’s (now, Engen’s) Genref (now Enref) refinery, South
Africa did not have any refining facilities. Almost all petroleum product sold in South
Africa was imported as refined product by the respective marketing companies who
Africa was imported as refined product by the respective marketing companies who
distributed this to their branded retailers and various commercial customers. 56 The
pricing of the products to the enduser was based on import parity.
45. Government, with an eye to the strategic importance of petroleum products
and the balance of payment implications of its reliance on imported product,
investigated technologies that would help overcome the lack of indigenous
56 A small volume of petroleum product was manufactured from shale oil at the South African
Torbanite Mining and Refining Company (SATMAR) in Boksburg.
20
crude oil reserves. In the first half of the 1950s, the governmentinitiated
project to produce oil from South Africa’s abundant lowgrade coal reserves
saw the formation of the South African Coal, Oil and Gas Corporation Limited,
later Sasol Limited, initially funded by the stateowned Industrial Development
Corporation.
46. In 1955 the first oilfromcoalsynthetic fuel plant – Sasol One – was constructed. It
was located in the heart of the inland market at Sasolburg, adjacent to the coal
resources that are the most important input into the production process. We have
already briefly noted that in 1954 government had secured the conclusion of
agreements – dubbed the Sasol Supply Agreements (SSA) or the Main Supply
Agreement (MSA) between Sasol and the oil companies. 57 These agreements –
effectively a governmentbrokered and sanctioned form of private regulation obliged
the oil companies to service their marketing requirements in the inland or ‘Sasol
supply area’ by purchasing all of Sasol One’s production volumes prorata to their
market shares. The price of these volumes would be based on the ‘inbond landed
cost’ (‘IBLC’), calculated on the basis of the import parity price for fuel products. This
basis and its buildup to the wholesale and the retail prices are provided for in
government regulation and are outlined below. The Sasol Supply Area is depicted on
the map below:
Source: Petronet presentation
47. In return Sasol undertook to limit its entry into the retail market to the location
of Sasolbranded ‘blue pumps’ on the forecourts of service stations belonging
to other oil companies hence that component of the MSA referred to as the
‘blue pump agreement’. The principles of this market sharing agreement
effectively underpinned the regulation of the petroleum products market until
effectively underpinned the regulation of the petroleum products market until
its termination, at Sasol’s instance, in 2003. Note that Sasol One only
produced some 250 million litres per annum and, hence, when the MSA
initially came into effect, the inland marketers still relied on refined product
brought in from the coast.
48. The international oil crisis of 1973 accelerated government’s plans to expand the
57 This agreement is referred to interchangeably as the ‘MSA’ or ‘SSA’.
21
capacity of Sasol’s oilfromcoal facilities. The UN’s imposition – in 1977 of a
mandatory crude oil embargo underlined these concerns, as did the Iranian revolution
of 1979. Sasol Two and Sasol Three were commissioned at Secunda, also in the
inland region, in 1980 and 1982 respectively. Sasol Two and Three later combined to
form Sasol Synfuels. 58
49. In 1987 when natural gas condensate was discovered off shore, the Government built
a gastoliquids plant at Mossel Bay (now owned and operated by PetroSA). The
Mossgas plant commenced production in late 1992. 59
50. Government, in addition to its direct intervention through Sasol to secure
indigenous sources of petroleum product, also encouraged private sector
initiatives aimed at addressing these concerns. These included incentives to
invest in local refining capacity.
51. The first crude oil refinery was commissioned by Mobil – later Engen in 1954. It was
established south of Durban. This is the Enref refinery. In 1962 a ShellBP joint
venture commissioned a second crude refinery in Durban. This is the Sapref
refinery.60 At about the same time Caltex also decided to establish a refinery in
Durban but it was ultimately incentivised to locate its refinery in Cape Town. This is
the Calref refinery which was commissioned in 1966. 61 Government was also
determined to establish a crude oil refinery in the inland region. To this end, in 1969
58 Sasol Synfuels is a synthetic refinery 100% owned by Sasol, located in the inland region, close
to Johannesburg. It produces white fuels using gas derived from coal. This technology also results
in the production of proportionately more petrol than diesel when compared to a standard crude oil
refinery.
59 Mossref is a synthetic refinery 100% owned by PetroSA. It is located in the Cape region. It
produces white fuels from natural gas, which is shipped ashore at Mossel Bay. This technology
results in the production of proportionately more petrol than diesel as compared to a standard crude
oil refinery. Its products are primarily used to serve customers in the Cape. PetroSA is not yet
engaged in the marketing and retailing of fuels within South Africa and its output is supplied to
consumers via the other fuel marketers and retailers.
60 Sapref is a crude oil refinery 50% owned by Shell and 50% owned by BP, with each shareholder
having rights to 50% of the capacity of the refinery. It is located on the coast close to Durban. Its
crude oil is imported by tanker and its outputs are used to serve customers in KZN, and, insofar as
transportation capacity or ‘logistics’ permit, the inland region as well as the Cape and other areas of
Southern African.
61 Calref is a crude oil refinery 100% owned by Caltex. It is located on the coast close to Cape
Town. Its crude oil is imported by tanker and its outputs are primarily used to serve customers in
the Cape region.
22
government initiated the formation of a company whose shareholders were Sasol,
TOTAL and the National Iranian Oil Company (NIOC) with the intention of
establishing an inland crude oil refinery. Natref was commissioned in 1971 and is
located at Sasolburg. 62
52. The MSA was regularly extended as new inland refining capacity was brought
on stream. Hence, at the time of the establishment of Natref an agreement
was struck which guaranteed purchase by the oil companies of Sasol and the
NIOC’s share of the new crude oil refinery. The price paid by the oil
companies for this bulk supply was, as in the original agreement, also based
on IBLC, the basis specified in public regulation. In 1976, in anticipation of the
expansion of Sasol’s oilfromcoal capacity, government again initiated
discussions regarding the upliftment by the oil companies of the product of
Sasol Two.
53. However, the context for the extension of the MSA after the commissioning of Sasol
Two and Sasol Three differed in one significant respect from the earlier contexts –
with a combined output from Sasol Two and Three of some 5,3 billion litres per
annum, South Africa came to have surplus refining capacity. And the extension of the
MSA now meant that the OOCs would henceforth source a considerably greater
proportion of their inland requirement from Sasol’s synthetic capacity than from their
own coastal refineries. The upshot was the underutilisation and subsequent
decommissioning of some 30% of the coastal refineries’ capacities. 63 Both the
coastal refineries and Natref were compensated – in the shape of the payment of
‘synlevies’ – for the loss of refining margins on production volumes that were foregone
in consequence of the operation of the MSA. Note too that the mothballing of refining
in consequence of the operation of the MSA. Note too that the mothballing of refining
capacity was also compensated by the introduction of the ‘PAR’ mechanism which
effectively protects the oil companies' returns on investment in marketing assets.
However, whereas the ‘synlevy’ was recovered by government through a levy
62 The NIOC’s share in Natref was purchased by Sasol in 1989. Ownership of Natref – as well as
shares of the refinery’s output – is now shared as between Sasol (64,64%) and Total (33,36%).
Note that TOTAL could have exercised an option that would have allowed it to increase its share of
Natref to 50% but declined to do so because it could not reach agreement with Sasol on price.
63 In the ‘eighties – with demand for fuel products increasing by some 5% per annum over the
decade – the coastal refineries recommissioned or replaced the capacity that had been previously
mothballed.
23
imposed on consumers, the PARbased adjustments were recovered from consumers
through a buildup of the wholesale margin which then fed in to an adjustment of the
retail price. 64
54. The last of the MSA agreements was concluded between Sasol and the oil
companies in 1988. In terms of this agreement the oil companies were
obliged to purchase Sasol product up to a maximum of 7 740 million litres per
year. Purchases by the OOCs thus accounted for some 90% of Sasol’s white
fuel output. For the rest, the principles of the original MSA were effectively
retained – the Sasol volume uplifted by the individual oil companies was based
on their respective market shares; the price was based on IBLC; and Sasol
limited its retail presence to the socalled ‘blue pumps’, although the new
agreement did afford Sasol certain marketing rights in the commercial and
industrial sectors. The marketing of Sasol petrol through “blue pumps” at the
oil companies’ service stations was capped at a 9.23% market share. Sasol
was also permitted to market 22.5 million litres of diesel into the commercial
market.
55. In summary, then, there are, today, seven major oil companies operating in
South Africa, namely BP, Caltex, Engen, PetroSA, Sasol, Shell, and TOTAL.
All of these companies, except PetroSA, are vertically integrated in South
Africa, that is, they operate at each stage of the supply chain, namely refining
and production, storage, wholesale marketing and retail. South Africa has four
crude oil refineries (Natref, Calref, Sapref and Enref), one synthetic refinery
utilising natural gas (Mossref) and one synthetic refinery currently utilising coal
(Secunda). The map below identifies the location of the refineries in South
Africa:
64 At around 1989 after Sasol and TOTAL acquired NIOC’s interest in Natref, the PAR mechanism,
which had been in place from 1984 to 1989, was changed to MPAR which only measured the
profitability of marketing assets. The MPAR (which came into effect in 1990) was intended to confer
a fair return on the replacement value of assets used in the marketing of petroleum products.
24
Source: Simon Baker Witness Statement
56. All six facilities produce a broad range of white fuels, as well as black fuels. Enref,
Sapref, Calref and Natref use crude oil as an input while the synthetic fuel facilities at
Secunda and Mossel Bay use coal and natural gas, respectively. Although synthetic
fuel and crude oil refineries use different inputs and technologies in their production
processes, they nevertheless produce similar products. The composition of the output
of a refinery is, within fairly narrow limits, fixed by the technology used at the refinery
and the composition of its raw materials. Coastal refineries typically produce a
25
balance of high value (or white fuels) and low value products (or black fuels), based
on the need for bunker oil (a lower value product). The inland refineries typically
produce more high value products than the coastal refineries.
57. The “white fuels” are petrol, , jet fuel, 65 illuminating paraffin and liquefied petroleum
gas (“LPG”). 66 The “black fuels” are Bitumen, 67 Fuel oil products 68 and
Lubricants.69
South African fuel production facilities (2004)
Production
facility Input Owner Nominal
Capacity (bbl/d) Location
Enref Crude Engen 125 000 Durban
Calref Crude Caltex 100 000 Cape Town
Sapref Crude BP (50%) 90 000 Durban
Shell (50%) 90 000
Natref Crude Sasol Oil (64%) 69.120 Sasol Oil
TOTAL (36%) 38.880
Synfuels Coal and
Gas Sasol Oil 150 000* Secunda
PetroSA Gas and
Condensate
Central Energy
Fund 45 000* Mossel Bay
* Crude oil equivalent
Source: Swart witness statement (original source: SAPIA)
58. There is a locational disjuncture or ‘imbalance’ between production of white
fuel and its consumption. This demand/supply imbalance is present from a
national and regional (that is, subnational) perspective but most particularly
from the perspective of each of the oil companies. Natref (jointly owned by
Sasol and Total) and Secunda (Sasol) supplies the inland area and some
65 Strictly speaking, the synthetic refineries do not produce jet fuel. Secunda produces a jet fuel
component that needs to be blended 50% with crude oil derived jet fuel. Mossref does not produce
a jet fuel component at all, but only illuminating paraffin.
66 LPG is butane and propane gas compressed into a liquid form. LPG is formed naturally or as a
byproduct from oil refining. It differentiates itself from other energy sources on the basis of
portability, convenience, low sulphur, controllability and its clean burning nature. LPG is produced
and sold to resellers in bulk and cylinders and distributed to endusers.
67 A substance used in the roadbuilding industry.
68 Energy sources for heating and shipping purposes. They are a mixture of refinery residue and
distillate and differ in their sulphur content and flowing properties at a given temperature. Fuel oils
can be divided into light fuel oil, marine or bunker fuel oil and heavy fuel oil.
69 A distinct product group with varying degrees of similarity, lubricants are produced, blended and
distributed to industrial and commercial users. There are auto, industrial, marine and aviation
lubricants.
26
overland exports while Sapref (BP and Shell) and Enref (Engen) supply the
eastern coastal areas, ship some product to the inland area, ship some
product to the Western Cape area and export some product by sea to other
countries. Calref (Caltex) and PetroSA supply the Western Cape area and
also export some product.
Public Regulation 70
59. We have characterised the MSA as a form of governmentsanctioned private
regulation. As we have noted this agreement principally goes to the obligatory
upliftment by the OOCs of Sasol product in the inland area, and Sasol’s
concomitant exclusion from all but a limited share of the retail market.
Expressed in the lexicon of competition law, the MSA is concerned with the
geographic allocation of the market for the production of refined fuel as well as
the wholesale and retail markets for fuel. The price at which this product is
exchanged is set by government regulation. We turn now to a brief description
of those aspects of public regulation that have bearing on this transaction.
60. The two cornerstones of the present regulatory regime are the control of petrol
retail prices and import control on certain products. Buttressed between these
is the voluntary Service Station Rationalisation Plan (‘Ratplan’).
61. The regulated prices are based upon import parity. 71
62. The IBLC (‘inbond landed cost’) formula was introduced in the 1950s and was used
as the basis for calculating retail fuel prices in South Africa up until April 2003. It was
characterised as the international price element in the petrol price. It was calculated
by taking the average of the Singapore spot price and the posted prices in (US cents
per gallon) for diesel and for 93 and 87 octane gasoline, taken on the 15th day of
each month, at the Caltex Refinery in Bahrain, and 3 refineries in Singapore, (the
each month, at the Caltex Refinery in Bahrain, and 3 refineries in Singapore, (the
Esso, Singapore Petroleum Company and Mobil Jurong refineries), plus insurance
70Our sources for this section on public regulation are: www.dme.gov.za; www.mbendi.co.za;
http://www.mbendi.co.za/sapia/index.htm; http://www.mbendi.co.za/indy/oilg/af/sa/p0010.htm; http://
www.transportandconstruction.co.za/press/press200029.html.
71 The power to regulate prices is given by the Petroleum Products Act of 1977 (as amended).
27
and shipping costs from these refineries, plus amounts for losses arising from
evaporation and leakage en route, plus wharfage and landed charges for products
deemed to have been shipped from Bahrain and Singapore. Retail prices were then
derived by adding, as appropriate, the following elements to IBLC prices: retail
margin, zone differential, service differential, Equalisation Fund levy, fuel tax,
Customs and Excise duty, MVA levy, CRSF levy, and wholesale margin.
63. In April 2003, the Basic Fuel Price (BFP) was introduced to replace the IBLC
component of the pump price. According to the DME, the formula change was
necessary because an investigation by the DME in conjunction with the oil
industry, found that the previous formula had become outdated because of
changes in global markets.
64. Like the IBLC, the BFP is conceptually an import parity pricing formula and it was
intended to establish a realistic estimate of what it would cost to import substantial
volumes of refined fuel. 72 The most important difference between IBLC and BFP is
that BFP is based on the spot prices quoted daily in international markets whereas
the IBLC was based mainly on certain refinery gate postings that have, to a large
extent, fallen into disuse and are no longer reflective of actual market prices.
65. The other elements of the BFP are:
- Freight costs from these refining centres to South African ports;
- Demurrage (loading and discharging waiting time for tankers at ports);
- Insurance and minor shipping costs;
- The allowed value for product loss through evaporation during marine
transportation;
- Wharfage (harbour landing charges);
72 Note that BFP is, and IBLC was, actually set somewhat higher than import parity. This is
pointed out by Mr. Fienberg for BP who estimates that BFP is approximately 5c per litre higher than
a true import parity price (see page 2957 of the transcript) and confirmed by Mr. Oberholster. At
page 401 of the transcript Mr. Oberholster states: ‘..where we import from, we import from mega or
where the numbers come from, from mega refineries, huge cost efficient refineries, BFP relates to,
if you do that on a consistent basis, large volumes, it’s a true import parity price. However in fully
competitive, tough competing environment with people like Pick n Pay in the market, importing spot
cargos all over the place, we do believe that there could be a lower import parity price, which will
reflect in those markets and that would be, as I’ve said earlier, in the order of some 5c a litre below
the current BFP price, which in fact is that 1.3% of the price today.’
28
- Coastal storage to cover the cost of providing storage and handling
facilities; and
- Stock financing.
66. A comparison between the IBLC and the BFP from 1996 to September 2002 has
shown that the BFP has on average been lower by 4 cents per litre on 93 leaded
petrol, 7 cents per litre on diesel and 10 cents per litre on paraffin. The BFP is
reviewed once a month based on the average over the prior month of the daily
internationally quoted prices of petrol, diesel and paraffin. Since international prices
are quoted in US$, the Rand/US$ exchange rate will always be a factor in
determining local prices. 73
67. Working from the BFP, the pump price is built up as follows:
1. Basic Fuel Price +
2. Government taxes and levies 2. (Customs and Excise Duties, Fuel Levy,
Equalisation Fund Levy, Road Accident Fund Levy, Illuminating Paraffin Marker Levy)
+
3. Wholesale Margin: (Cents per litre gross marketing margin set by an annual oil
industry profitability review and subject to the approval of Minister) +
4. Service Differential: (Covers oil company depot operating costs and road delivery
expenses (from depot to customer) This is determined annually, subject to ministerial
approval) +
5. Zone Differentials: (Cents per litre costs of moving fuels from coastal port/refinery
locations to inland distribution centres, by pipeline, rail or road. These are determined by
individual Magisterial Districts and calculated by the oil industry, subject also to ministerial
approval for inclusion in oil company wholesale price structures) =
73 Sasol opposed the move from IBLC to BFP Sasol’s misgivings are clearly intimately tied with the
notion that this constituted the thin end of a wedge that would ultimately cause the authorities to
review their acceptance of import parity pricing. Indeed a strategy document prepared by McKinsey
for Sasol, opines that the ‘move away from IBLC to BFP potentially shows willingness to by the oil
companies to enter a destructive scenario’. This is elaborated below but suffice for the present to
note that a ‘destructive scenario’ is one in which BFP or Import Parity no longer constitutes the
basis for industry pricing. See page 583 of the transcript.
29
6. Wholesale Price: (The maximum price oil companies are permitted to charge service
stations or wholesale customers for fuels). These are set each month and are the sum of
all price structure elements except the petrol dealer margin) +
7. Dealer Margin: (Cents per litre which Service Stations are permitted to add to the
petrol price. The dealer margin is updated regularly and is subject to the approval of the
Minister for Minerals and Energy) +
8. Pump Rounding Factors (Ensures that oil companies do not gain or lose by charging
wholesale price levels in whole cents and so that service stations recover the full dealer
margin) =
9. Retail Price at the pump
68. The other major site of public regulation sets the framework for the opening,
closing and operation of retail service stations. This was initially enshrined in
the Service Station Rationalisation Plan or ‘Ratplan’. The apparent purpose of
the Ratplan was to regulate the growth of the retail market and to give smaller
companies an advantage in terms of growth potential. It attempts to realise
these objectives through the imposition of limits on the opening of new sites.
In order to protect employment at retail service stations, the Ratplan prohibits
selfservice. It appears that the ‘ratplan’ was superseded by the Petroleum
Products Amendment Act 58 of 2003 which will come into operation later in
this year. The establishment of a retail petrol station site and the acquisition of
a licence to operate as a fuel retailer, wholesaler or refiner is subject to an
elaborate licensing regime. Note that a retail license is not transferable and is
confined to a particular site. The license will lapse if a licensed retailer does
not commence retailing from the designated site within six months of the date
of issue of the license. It also lapses if the licensed activity is no longer a
going concern. Section 2A(5)(a) provides that a wholesaler may not hold a
retail license except for training purposes.
retail license except for training purposes.
69. In December 1998 government published a White Paper outlining energy
policy. Suffice to note that the White Paper commits government to wide
ranging deregulation of the white fuels industry. Of particular significance for
30
present purposes is the commitment to deregulate prices, including the retail
pump price of petrol.
70. The Petroleum Products Act empowers the Minister of Minerals and Energy to
prescribe ‘the price, or a maximum or minimum or a maximum and minimum price, at
which any petroleum product may be sold to any person’ . prices that were previously
fixed by regulation are no longer regulated or only regulated as to the maximum price
that may be charged. The structure of price controls is outlined in the table below:
Structure Of Price Controls 74
Petrol Diesel IP Jet Fuel LPG
Wholesale Price Maximum Maximum Maximum None Maximum
Retail Price Fixed None Maximum None
Commercial
and Industrial None None None None None
71. The most important price that remains fixed by government regulation is the
retail pump price of petrol. Documentary evidence establishing Sasol’s
opposition to the deregulation of the retail price of petrol has been presented
at these hearings and is discussed below. However we have already
intimated – and will further elaborate – that Sasol’s major preoccupation (and,
ultimately, the basis of its opposition to deregulation of the retail price) is with
the protection of the Basic Fuel Price or BFP, the basis on which the retail
pump price is calculated and the price at which Sasol volumes have been sold
to the inland marketing arms of the OOCs.
72. It is, of course, recognised that important interest groups are implicated in this
projected deregulation and that, accordingly, it will be necessary to implement
deregulation in a series of phased steps. The stated objective is to achieve
deregulation of pricing by 2010. We note that Mr. Gumede, the witness from the
74 Note that ‘retail price’ refers to those volumes sold from the forecourts of service stations.
‘Commercial and industrial’ sales are to large customer such as mines, local authorities and road
haulage companies. These are also retail sales but are subject to a regulatory regime that differs in
important respects from the regime applicable to service station retail sales.
31
Department of Mineral and Energy, indicated that this would probably be delayed,
largely, it appears, because of limited progress in the introduction of black economic
empowerment investors into the industry and in order to protect the returns of BEE
players already invested in the industry. 75
The Development of Logistics Capacity
73. We have already referred to a number of factors clearly destined to impact
significantly on the development of logistics capacity. The major market for
fuel products is the inland region containing, as it does, the country’s industrial
hub. Until the ‘fifties South Africa relied entirely on refined product shipped in
through the ports of Durban and Cape Town which was then transported by
rail and road to the inland markets. The ‘fifties and ‘sixties saw the
development of considerable crude oil refining capacity in the coastal areas
with, obviously, the continued requirement to move refined product to an
expanding inland market. But the ‘fifties also witnessed the development, in
the shape of Sasol One, of some inland synthetic fuel capacity and then, some
years later, in the shape of Natref, the development of an inland crude
refinery. The inland capacity established at this time did not – especially when
coupled with the growth of inland demand – relieve the necessity for the
coastal importers, and, later, refiners, to move considerable volumes of refined
product inland. And the establishment of Natref also meant that the crude oil
feedstock required for this plant had to be moved from the coast to the inland
region.
74. However, the commissioning, in the early ‘eighties, of the Secunda capacity
significantly changed the logistics requirements, particularly when placed in
the context of the MSA. The supplydemand imbalance between the coastal
the context of the MSA. The supplydemand imbalance between the coastal
and inland regions had been significantly reduced in consequence of the
Secunda output – that is to say the inland requirement for refined product
could be met by product from the inland refineries. However significant supply
75 See the exchange between Mr Manoim and Mr Gumede at page 17781779 of the transcript.
32
demand imbalances were maintained, indeed were exacerbated, in respect of
each of the individual oil companies.
75. Sasol, with its Natref and Secunda capacity, was extremely long in inland
supply and prevented, by the strictures on marketing contained in the MSA,
from altering even the extent of this imbalance. TOTAL, with its share of the
Natref capacity, was approximately balanced in the inland, but supplyshort on
the coast. The coastal refiners, were, demandlong in the inland region and
were prevented by the MSA from using their long coastal supply position to
rectify this – hence the requirement to mothball coastal capacity and the
consequent compensating subsidy.
76. This was the logic of the MSA – the inland refiners will satisfy inland demand;
and the coastal refiners will satisfy coastal demand. The means of achieving
this was a governmentsanctioned cartel – the MSA – that not only allocated
markets and, effectively, reduced output from the coastal refineries and Natref,
but which also effectively dictated the development of the logistical capacity
which was patterned around the market sharing arrangement.
77. In the period up to the ‘sixties refined product was moved from the coast to the inland
by rail and road. However, there can be no doubt – and this is constantly affirmed by
evidence submitted for this transaction – that the most costefficient mode of
conveying petroleum products is via pipeline. The comparative costs of alternative
logistics are discussed below. Note however that clearly the most cost effective
mechanism for squaring demandsupply imbalances at the level of the individual oil
companies with the distribution of demand and supply across the country is through
product swaps. These are ubiquitously employed both in South Africa and in other oil
product swaps. These are ubiquitously employed both in South Africa and in other oil
markets throughout the world. This belies the notion that this market requires
individual companies to be ‘balanced’ as between refining capacity and market
demand. The use of product swaps illustrates that this is a highly efficient market
quite capable of containing transactions costs without resorting to vertical integration.
78. In the early ‘sixties the stateowned South African Transport Services (SATS)
33
commenced construction of a 12 inch diameter pipeline intended to convey
refined product from Durban to Johannesburg. This pipeline – the Durban
Johannesburg pipeline or DJP – was commissioned in 1965. In 1972 in order
to accommodate the steady growth in inland demand for fuel products, the
DJP was extended to Pretoria West, Waltloo and Benoni from Alrode and to
Klerksdorp via Potchefstroom from Sasolburg.
79. Government also decided to accumulate crude oil reserves in disused
coalmines in the inland area at Ogies and at tank farms throughout South
Africa. To this end an 18inch diameter crude oil pipeline – the COP – was
commissioned in 1969. Once Natref was commissioned in 1971, the COP
was also used to convey the inland refinery’s crude oil requirements. Also
following the commissioning of Natref, a pipeline was constructed from Natref
to Johannesburg Airport in 1973 for the conveyance of jet fuel.
80. Demand growth for refined oil product in the inland market resulted in the DJP
becoming capacity constrained. In 1978, SATS commissioned the Durban
Witwatersrand Pipeline or DWP. This 16inch white oil pipeline from Durban to
Alrode via Ladysmith, Volksrust and Secunda and from Secunda to Witbank
via Kendal was intended to augment the DJP’s capacity in order to meet
growing inland demand for white fuels.
81. However, as already noted, Sasol Two and Sasol Three were commissioned in the
early ‘eighties. The last of the MSA agreements was concluded between Sasol and
the oil companies in 1988. In terms of this agreement the oil companies were obliged
to purchase Sasol product up to a maximum of 7 740 million litres per year. This
meant that the DWP and the DJP were significantly underand so Petronet – the
entity within Transnet (SATS’ successor) responsible for the pipeline network – began
entity within Transnet (SATS’ successor) responsible for the pipeline network – began
to examine initiatives aimed at improving the utilisation of its pipeline network. It
appears that the precise shape which this reconfiguration ultimately took was driven
by Sasol’s desire to transport methane rich gas (MRG) from Secunda to Durban.
However, it is clear that Petronet did not envisage that this reconfiguration of the
logistical capacity necessary for the transport of liquid fuels from the coast would
34
threaten inland supplies of white fuel products precisely because, as we elaborate
below, its thinking was rooted in the assumption that the MSA would maintain in
perpetuity.
82. While it is not, at this point, necessary to recount the precise detail of the
pipeline reconfiguration the upshot was that a significant portion of the pipeline
capacity that was previously available to all the oil companies for the
transportation of refined product from the coast – the DWP was now
dedicated to conveying Sasol’s MRG, leaving a single 12 inch pipeline, the
DJP, for the conveyance of refined product from the Durban refineries to the
inland. The net result was a reduction in white fuel product pipeline capacity
to some 35% of previous capacity.
83. Mr. Fienberg, a BP witness, testified that the OOCs opposed the
reconfiguration of the DWP on the basis that this would severely limit the
ability of the coastal refiners to supply their inland markets from their own
coastal refineries. However, avers Fienberg,
Petronet’s response was to contend that the Sasol Supply Agreement would
remain in force, which precluded the oil companies from supplying their inland
market demand from their own refineries .76
84. Fienburg testifies further that, despite Petronet’s assurances that adequate
capacity for the conveyance of white fuels would be brought on when
circumstances demanded it, in 2005, when the ratio of pipeline capacity to
inland demand had fallen to 25%, the OOCs established that Petronet had
concluded a further agreement with Sasol that reserved the DWP line for the
conveyance of MRG for a further 17 years, the rest of the pipeline’s useful life,
thus locking in the constraint.
thus locking in the constraint.
85. The relationship between inland demand, inland refining capacity, inland
demand and pipeline logistical capacity is clearly illustrated in the following
diagrams submitted by Mr. Fienberg in the course of his oral testimony:
76 Page 914 of the Witness Statement bundle.
35
86. The first diagram shows the development of refining capacity. The yellow bar
– that is the left hand bar – shows the development of inland refining capacity,
while the green bar, the bar on the right hand side, shows coastal refining
capacity. The blue line indicates inland demand. For our purposes the
significant events indicated in this diagram are the commissioning of Natref in
1971 when, for a brief period inland refining capacity exceeded inland
demand. By 1976 inland refining capacity stood at about 40% of coastal
refinery capacity. In 1982 Secunda comes onstream and the inland is
significantly supply long. The commissioning of Secunda gives rise to excess
refining capacity nationally, to such an extent that, in the same year, the green
bar indicates that the coastal refiners reduced their capacity by approximately
30%. The supplylong position of the inland pertains throughout the decade of
the ‘eighties into the early ‘nineties when a significant increase in inland
demand brings the region into a demandlong position. The green bars for
1994 and 2004 indicate that the coastal refiners have recommissioned the
plant mothballed in 1982 or have commissioned new capacity.
87. The second diagram plots pipeline capacity and inland demand. In the early
period inland demand was serviced by the relatively small Sasol 1 volumes
and by rail and road conveyance from the coastal refineries. In the midsixties
36
the DJP, with an annual capacity, of 3.2 billion litres was commissioned and
was, for a brief period, capable of meeting all inland requirement from the
coast. The DWP was commissioned in the late ‘seventies and this brought an
additional 6 billion litres per annum pipeline capacity onstream. Mr. Fienberg
points out that with the commissioning of the DWP all inland demand could
theoretically have been serviced from the coast. The graph shows that this
pertained until the mid‘nineties. However, once Secunda came onstream – a
few years after the commissioning of the DWP – the pipeline system was
significantly underutilised.
88. In 1995 – precisely when pipeline capacity was approximately equal to inland
demand Petronet turned the DWP over to Sasol for the exclusive
conveyance of gas from Secunda to Durban. This is the step down of the
product pipeline capacity line on the graph. At this stage the ratio of pipeline
capacity to inland demand fell from approximately 100% to 30%. A few years
later, with the extent of the logistics constraint climbing steeply, Sasol
terminated the MSA.
89. By 2005 the ratio of pipeline capacity to inland demand had declined to 25%.
Utilising the BP growth projections, Mr. Fienberg estimates that this would
have fallen to 20% by 2010. The extended DJP is expected to be
commissioned in the latter part of 2010. This is the final stepup of the pipeline
capacity line on the diagram. Recall that it will replace the existing DJP and will
provide total pipeline capacity of approximately 6 billion litres per annum. This
means even after the commissioning of the expanded DJP total pipeline
capacity for the conveyance of white fuels will still be significantly less than in
the period from 1978 to 1995, that is the period from when the DWP was
commissioned to when it was reserved for the conveyance of Sasol gas. This
bears out the contentions examined later that argue that the relief offered by
the expanded DJP will be for an extremely limited period at best.
90. Mr. Fienberg sums up the contents of the two diagrams as follows:
37
First of all we have Sasol’s acquisition in special circumstances, if you like, of 80%
of inland refining capacity and then there is a reconfiguration of the pipelines,
which really has the consequence of creating dependence of the oil companies on
the inland production capacity, and this would be passed on to Uhambo with very
little solution or limited solution post 2010. I think it’s the takeaway from those two
slides.77
91. In summary then there are three pipelines that link the inland to the coast,
namely:
- The 18inch crude oil pipeline (“COP”) from the coast to Natref (used, as the
name suggests, to transport crude stock) and the crude oil strategic storage
facilities at Kendal (near Secunda);
- The 12inch DurbanJohannesburg Pipeline (“DJP”) which links Durban to
Sasolburg and then extends to areas north of Sasolburg and is used to
transport white fuel products from the coast to the inland; and
- The 16inch DurbanWitwatersrand Pipeline (“DWP”) also referred to as the ‘Lilly’,
which links Secunda to Durban and is used by Sasol to transport methane rich gas.
78
77 See page 2954 of the transcript.
78 A fourth pipeline also exists between Natref and the Johannesburg Airport for the transportation
of Jet fuel.
38
xcii.The DJP is the most significant means of
transporting refined product inland. There are
two distinct sections of the DJP pipeline. The
southern section of the pipeline runs north from
Durban to Sasolburg and is used by the coastal
producers to transport their product inland, off
loading their product at a series of terminals
along the way. The northern section of the
pipeline runs north from Sasolburg. Sasol and
TOTAL inject Natref product into the DJP at
Sasolburg from which point the pipeline is then
used to convey this product plus product of the
OOCs coastal refineries further north. 79 In other
words, product is injected into the pipeline at
Durban (by the OOCs) and at Sasolburg (by
Natref). The DJP has 11 terminals where the
refined products are removed and transported by
road or rail to the relevant depots or service
stations.
93. Allocation of pipeline capacity is done by Petronet, based on usage in the
previous period, and allocated every six months. The price is uniform for all
users and is specified in a Petronet published tariff.
94. We must reiterate – and logistics will be examined in depth when we discuss
the likelihood of foreclosure – that pipeline conveyance is significantly more
cost effective than its nearest alternatives, namely road and rail. Ms. Corrigall,
a BP witness, whose witness summary is on record, sums it up thus:
“Moving product by rail and road is not only less efficient and safe than moving it
by pipeline, but it is also more expensive. By way of example, the current pipeline
tariff from Island View (BPSA’s depot at the Sapref refinery in Durban) to Pretoria
is 12,661 cents per litre, whereas the cost of moving product by rail from Island
View to Pretoria is approximately [ confidential: range from 1821 ] cents per litre.
View to Pretoria is approximately [ confidential: range from 1821 ] cents per litre.
79 We refer later to the consequences of the bottleneck in the DJP that is created at this point.
39
Recent experience has shown that the average cost of moving product at short
notice by road is [ confidential: range from 3235] cents per litre (excluding
storage and handling costs). These figures will clearly increase as the crude oil
price rises”. 80
95. Note that road and rail is used all over the world to deliver product to
customers and depots from the pipeline and ocean terminals, but in South
Africa, because the pipeline is constrained, these relatively costly modes of
transportation are also used to supplement pipeline transport.
96. After pipeline, longhaul rail is the most costeffective means of transporting
refined product to the inland region. Spoornet, a division of Transnet,
administers rail logistics in South Africa. The OOCs submit that Spoornet is
tightly constrained in the number of suitable tank wagons it can supply. Both
BP and Caltex have stated that Spoornet cannot even meet their current rail
requirements due to lack of sufficient rail tankers.
97. Longhaul road transportation of refined product is the least costeffective way
of transporting product to the inland area and is provided by a number of third
parties to which the oil companies have outsourced the service as well as by
oil company owned fleets.
98. Note too that storage facilities are also an important aspect of logistics capacity.
These are located in the inland and at the coast, and are linked by the product
pipeline. Depots are “shared” among all oil producers through socalled “hospitality
agreements”. We note that the mode of organising storage facilities in order to
manage demandsupply imbalances is further evidence of the efficiency of this market
and its ability to manage complex intercompany exchanges without vertical
and its ability to manage complex intercompany exchanges without vertical
integration aimed at ensuring company level balance in refining and marketing. Jet
fuel is stored at mobile dispensers at the airports, and is owned by the Johannesburg,
Cape Town and Durban International Airports. These mobile dispensers are owned
by a consortium of the six major oil companies.
99. The reconfiguration or ‘rationalisation’ of pipeline capacity that is described
80 See Ms. Corrigall’s witness statement at paragraph 3.1.5. These data were not challenged and
their broad magnitudes are confirmed in Mr. Swart’s witness statement.
40
above represented, from the perspective of the pipeline operator, the logic of
the MSA. As we have already indicated, from Petronet’s perspective, because
the MSA provided that Sasol product was to be preferred in the inland area
this would always limit the requirement to transport white products from the
coast, and, hence limit the necessity to provide additional pipeline capacity. In
the same vein the capacity of the jet fuel pipeline from Natref to Johannesburg
International Airport was increased in 1995 thus entrenching Natref as the
preferred inland provider of jet fuel, again predicated on the perpetual
existence of the MSA.
100. However, in December 1998 Sasol gave the requisite fiveyear notice of its
intention to terminate the MSA.
The Components Supply Agreement
101. We have already made mention of the CSA. It has proved difficult to locate
this important agreement in the body of this decision. It does not have the
lengthy history of the regulatory regime and the development of logistical
capacity. Indeed it has only recently been concluded ‘between’ Sasol
Synfuels and Sasol Oil which were themselves only until recently part of the
same division of the same company, Sasol Ltd. Uhambo will postmerger
become a party to this agreement in suitably amended form. It is clearly a
critical aspect of the background to this transaction.
102. We are candid in acknowledging that our understanding of this agreement may be
incomplete. In fact none of the witnesses who testified before us seemed willing to
claim a complete understanding of all of its terms. Mr. Wright, the Engen witness,
provided a halting explanation of the agreement. We were then advised that Mr.
Oberholster, Sasol’s principal witness, would be recalled in order to explain this
agreement. Mr. Oberholster prefaced his attempted explanation with a candid
acknowledgement that he had not read the entire agreement, although he professed
to understand the underlying principles. 81 However both Mr. Wright and Mr.
Oberholster appear satisfied that the CSA does cater for the core requirements that
81 Page 22156 of the transcript.
41
the respective JV partners have from the transaction although Engen is, as we shall
elaborate below, concerned that the agreement may be found wanting at competition
law.
103. The intervenors are also clearly not well placed to fully comprehend this
agreement. BP, the intervenor that has most fully considered the CSA,
alleges that the agreement contravenes several of the provisions of Chapter 2
of the Act, precisely Petronas’ and Engen’s concern. We naturally make no
finding in relation to this allegation here.
104. As already mentioned, the CSA essentially establishes the boundary between those
assets that are part of Sasol Synfuels, on the one hand, and, on the other hand,
Sasol Oil or, as it is sometimes referred to, Sasol Liquid Fuels Business. The former –
Sasol Synfuels – will remain a wholly owned subsidiary of Sasol Ltd, that is, its assets
do not form part of the JV. It is only the assets of Sasol Oil that are placed in the JV.
What this means is that the ownership of the fuel components generated by Sasol’s
oilfromcoal technology and the synfuel plant is not part of the JV. Sasol Oil begins
with the purchase from Sasol Synfuels of the fuel components and their conversion
into refined fuel. The assets that are required to perform this latter task comprise a
blending facility and a number of storage tanks that are, and must remain, physically
integrated with Sasol’s synfuel production plant. The CSA thus seeks to commercially
separate that which cannot be physically separated, with synfuel production and
output (the fuel components) remaining the property of Sasol Ltd through its wholly
owned subsidiary, Sasol Synfuels, and the conversion of these fuel components into
liquid fuels and the output thereof being the property of Sasol Oil and, hence, part of
the JV. 82
105. Sasol provides a number of rationales for the existence of this agreement. It points
105. Sasol provides a number of rationales for the existence of this agreement. It points
out that the synfuel process does not only generate feedstock for the production of
liquid fuels, but also generates an important chemical feedstock. It is also suggested
82 See page 22169 of transcript. Mr. Oberholster states at page 2218: ‘… and the concept was
how can we not include the refinery because of the difficulties mentioned, but how can we include
the economic benefits of a refinery similar to a coastal oil company refinery so that the value of this
is passed on to this liquid fuels business and hence in future also to any BEE participation in that
business, but not pass on the hardware because of the issues mentioned. And that is where we
came to the CSA, which included a virtual refining margin as part of the deal.’
42
that because there are different BEE codes applicable to liquid fuels and to the
chemicals industry, that these assets cannot be contained in a single corporate entity.
Sasol also argues that, because new clean fuel regulations will ultimately require
large capital investment in the synfuel plant, the separation of the plants avoids
burdening the BEE investors with the requirement to make the necessary
investments.83
106. None of these explanations is particularly persuasive. On the face of it there
would appear to be no greater reason why a separate entity, Sasol Synfuels,
rather than the JV, should produce and market the chemical feedstock – it
appears that until recently Sasol Oil was responsible for the marketing of all its
and Synfuels products. We cannot understand the reference to the different
BEE codes for liquid fuels and chemicals. There is, to our knowledge, no
prohibition on a single act of empowerment extending over the ambit of more
than one sectoral code – indeed, from this perspective, the argument smacks
rather of Sasol Ltd empowering only those sections of its business where
there is an operating code and hence a requirement to empower, while
retaining sole control over those aspects of its business which it is not yet
required to empower. As for the investment required in Sasol Synfuels, only
some 25% of the burden will fall on the BEE partners – the remainder will be
the responsibility of Sasol Ltd and Petronas – and, in any event, there is no
reason why the BEE investors could not raise their required share of a
potentially profitable investment.
107. We clearly need to dig deeper for an explanation for the existence of the CSA.
108. It appears that the core of the agreement is the requirement that Synfuels
sells, on an exclusive basis for a period of 10 years, all of its output of fuel
components to Uhambo. Uhambo is obliged to purchase all of this output. At
the end of this 10year period, Sasol Synfuel will sell a minimum of 3 billion
litres to Uhambo, and Uhambo will be required to procure this minimum
volume. The second period is also stipulated to be 10 years. The supply
83 Page 22167 of the transcript.
43
agreement effectively guarantees a market for all of Synfuel’s output, and it
gives Uhambo security of supply thus meeting the two major objectives of
Sasol and Engen respectively. In Mr. Oberholster’s words:
Just maybe the salient features of the agreement if I can touch on that. Its got an
exclusive period of ten years. Thereafter it is an evergreen agreement chairperson
with a minimum sales volume to Uhambo of 3 billion litres. We aim to produce at
the end of this period about 4,8 or 5 billion. So 3 billion of that would be a minimum
that has to go to Uhambo, the rest is saleable to other parties. It covers all Sasol’s
liquid fuels components in South Africa. 84
109. It appears to be the element of exclusivity in the agreement that most concerns the
intervenors. However it is also clear that Uhambo is the only party that possesses the
requisite equipment and location to convert the synfuel components into liquid fuel. It
appears to be common cause that the necessary blending equipment that will be part
of Uhambo cannot be viably reproduced by the OOCs or anyone else who may have
designs on entering this market. 85 This, of course, does not necessarily mean that
Uhambo and Sasol Synfuels have to enter into an exclusive agreement for the supply
and purchase of the synfuel components – other purchasers of the fuel components
could presumably enter into toll blending arrangements with Uhambo. But what
Uhambo gets from Sasol Ltd is the clearest possible realisation of Engen’s desire to
achieve security of supply: its get 10 years exclusive access to Sasol Synfuel’s fuel
components, that is, to all of the fuel output produced at Secunda. The combination
of an inland monopoly of refined product and the largest inland retail market presence
is the critical structural feature of the inland market that will enable the merged entity,
Uhambo, to defend and expand its share of the inland retail market and to protect the
Uhambo, to defend and expand its share of the inland retail market and to protect the
wholesale price.
110. Having agreed to the exclusive sale and purchase agreement, the next question is of
course the price at which the fuel components will be supplied. It should come as no
surprise that the basis for the price at which the exchange of the synfuel components
will take place is that which, as we are constantly reminded by Mr. Oberholster, is, in
Sasol’s view, ‘fair’, this being the import parity price or BFP. Again in Mr.
Oberholster’s words:
84 Page 2223 of the transcript.
85 This is acknowledged by Mr. Oberholster at page 2239 of the transcript and confirmed by Mr.
Fienberg at page 3098 of the transcript.
44
It [the sale of fuel components] is based on the BFP or then import parity principle
and it is in fact the BFP market price minus a derived virtual refining margin, which
is a net refining margin for a typical coastal refinery at the coast and that is the
price that we Uhambo would pay for the components and therefore we would earn
that margin if we are able to sell it BFP. 86
111. Engen and its controlling shareholder, Petronas, were sufficiently concerned about
the legal validity (at competition law) of this exclusive agreement that they insisted on
the inclusion of a ‘claw back’ provision that would ensure that they were compensated
for the value embedded in this exchange should the agreement be struck down for
contravention of the Competition Act. 87 However, our understanding of the CSA, is
that there would be no recompense, Uhambo will have no recourse against Sasol
Synfuels, should the ‘value’ of the CSA not be realised because of the inability of
Uhambo to transfer the product to the OOCs or their own inland marketing arms at a
BFPbased price. Mr Oberholster confirms this:
If Uhambo is only able to sell at less than BFP, it would then cut into its margin like
anybody else who had a margin and if it could not get the market price, would lose
some of that margin Chairperson. On the side of Uhambo there is a significant risk
Chairperson because it is a take and pay obligation. So Uhambo has to take all the
components and pay for all those components. 88
112. In short, the CSA guarantees Uhambo security of supply and, as long as it on
sells at BFP, it ‘guarantees’ the ‘virtual refining margin’; but it guarantees to
Sasol Synfuels BFP as the basis for pricing its fuel components.
113. That is why we observe in our discussion of the rationale of the transaction
that BFP is built into the pricing of Uhambo fuels from the point of the
exchange of fuel components between Uhambo and Sasol’s Synfuels. Sasol
exchange of fuel components between Uhambo and Sasol’s Synfuels. Sasol
Synfuels – 100% owned by Sasol Ltd has effectively immunised itself from
any of the downside that may come from competition in the wholesale and
86 Page 2224 of the transcript (our emphasis).
87 This, we understand, is common cause. Note citation in BP head of argument Para 9.7, pg142
from Sasol document entitles ‘Origin of, and Terms applicable to, the VRM Clawback, dated 13
September 2004 where it is clearly explained that the clawback was inserted because ‘..concern
was based on the fear that the CSA could be struck down for Competition Act reasons during the
exclusivity period.’
88 See page 2224 of the transcript.
45
retail fuel markets and, in so doing, has incentivised Uhambo to pass on the
product at the BFP based price. If competition forces down the retail and
wholesale prices from the BFP basis, all of the downside will be absorbed by
Uhambo, in which, we note, Sasol Ltd’s share is 37,5%; no downside arising
from competition in the wholesale and retail markets is absorbed by Sasol
Synfuels, in which, we note, Sasol Ltd’s share is 100%.
114. The other side of this coin is that the competitive advantages that reside in Sasol Ltd’s
technologies and in the location of its synfuels plant are locked in its wholly owned
subsidiary, Sasol Synfuels, and are not passed on to Uhambo much less to South
African consumers of fuel products. We understand that Uhambo will purchase the
fuel components at the equivalent price that a coastal refiner would pay for crude oil
plusthe cost of transporting the crude equivalent from the coast, that is at the inland
import parity price for a crude oil feedstock even though Sasol Synfuels’ Secunda
plant utilises the highly competitive oilfromcoal feedstock and it is physically located
in the inland. Note the following exchange between Mr. Oberholster, for Sasol, and
Sasol’s counsel, Mr. Cilliers:
ADV CILLIERS : Yes. Now the next point is some of the interveners witnesses’,
particularly Mr (inaudible) who read in [Fienberg] claim that Uhambo’s dominant
position arises from … will arise from advantages, which it will socalled inherit
from Sasol’s socalled privilege position of socalled subsidies, so (inaudible) calls
it. Now one of … let’s just deal with 3 of these briefly. One of the socalled
subsidies is that which Petronet gives to NatRef on the basis of this NatRef
neutrality principle. And the second of these alleged advantages is that inland
advantage, which we’ve said to accrue to Uhambo. Would your response to saying
those are benefits, which Uhambo would inherit from Sasol, who had historically
acquired these benefits ?
MR OBERHOLSTER : Yes Chairperson. These are pet subjects or these are pet 8 [hate]
subjects if you want to call them that. But let’s first deal with the one. The internal location
advantage, which Uhambo I understand, is said to inherit from Sasol Limited, or then from
Synfuels. Synfuels produces their components, which they sell to Uhambo, who then
reworks those or blends those into marketable products. Synfuels will get the full
locational advantage that they earn on those products. Uhambo will pay them for those
products, let’s be clear on that. The deal that we have with, or that Uhambo has with Sasol
Synfuels, and we’ll talk about the details thereof I guess later. But basically it is, we will
pay them the market price, which is deemed as BFP in the contract, minus a virtual
refinery margin, a net typical coastal refinery margin, plus included in the money pay them
will be the locational advantage. So from Synfuels, from the components, which is about
currently 6 billion litres, in future down to 5 billion litres, there’ll be no locational advantage
46
for Uhambo whatsoever. 89
115. There is a revealing aspect to Sasol’s loud proclamation that Uhambo will
inherit none of the synfuel or locational competitive advantages. This is
precisely what the OOCs, who are as little interested in robust competition as
Sasol, want to hear and so Sasol proclaims it as an advantage, a ‘selling
point’, of the CSA. The OOCs, as Mr. Fienberg’s testimony establishes,
profess difficulty in believing that Sasol would constrain itself in this manner.
But Sasol is to be believed passing these competitive advantages down
through Uhambo to the consumer is equally anathema to Sasol Ltd because it
risks triggering the downward spiral of the import parity price, a spiral that will
end at export parity.
116. But without the synfuel and locational advantages what can Sasol Ltd
bequeath to the purchasers of its fuel business in which it, Sasol Ltd, will
still retain a substantial interest? It gives it a guaranteed coastal refining
margin provided only that it onsells the refined product at BFP and it
gives it the incentive and the ability to protect this margin by
guaranteeing it a monopoly of (upstream) inland supply through the
CSA, and, through the merger, a dominant (downstream) inland retail
position. This structure will then allow the merged entity, Uhambo, to
protect and advance its ‘inheritance’ by deployment of its acquired
inland market power, by, as the evidence shows, foreclosure and
downstream pricing power.
89 See page 3689 of the transcript. N ote also the following exchange between Mr. Snyckers,
Sasol’s counsel, and Mr. Fienberg, a BP witness: ‘ ADV SNYCKERS : But with respect Mr Feinberg,
you touched on a number of topics and, for example, the exclusivity of the SCA and what that
you touched on a number of topics and, for example, the exclusivity of the SCA and what that
means and what it doesn’t mean and so on. But I’m concerned at the moment only with this one
rather prominent theme, which is that the advantages accruing to a Synfuel producer are not
advantages that are passed on to Uhambo. In other words, to the extent that you have a
subsidisation of Synfuels, to the extent that you have a cost advantage if your Synfuel production is
such with respect to the crude oil prices that you are advantaged and so on. All of those things are
insulated as a result of the virtual refining margins being a coastal margin. Do you understand that?
MR FIENBERG : Well, I understand to the extent that the Synfuels advantages will stay with Sasol
Limited that the Secunda transport tariff will stay with Sasol Limited. How they have then derived
the formula for the VRM I don’t know, but I understand it to that extent.’
47
117. However from the perspective of those mandated to protect and promote
competition and who are therefore not concerned to ensure the welfare of
either Sasol or the OOCs but rather of the end consumers, the prospect of
Sasol using its competitive and locational advantages to penetrate the
downstream market is an enticing one. The only possible objection to this
prospect can be one that insists that Sasol secured its competitive advantages
‘unfairly’, through government subsidy and regulation. However if these past
‘sins’ are to be corrected, then it is not for us to address them by permitting the
public distortions of the past to be corrected by the construction through a
private agreement the merger of a reconstituted market power which, as we
shall show, will likely take the form of a reconstituted cartel under Uhambo
leadership. By terminating the MSA Sasol allowed the first tender shoots of
competition to sprout. It gambled on stunting the growth of competition by
merging its upstream fuel business with Engen’s downstream retail business.
Our mandate is precisely to nurture these tender saplings regardless of the
anticompetitive designs of both Sasol and their reluctant competitors, the
OOCs.
118. We will show then that from Sasol’s perspective the critical objective of the
merger is the protection of BFP pricing – it achieves this because the merger
allows it to attain a major position in the retail market without the expedient of
actually competing for this share, a process which, if it is to succeed, will likely
necessitate it passing its competitive advantages from Sasol Ltd to Uhambo’s
fuel customers. And for Engen the merger provides security of supply and
removes the competitive threat of an aggressive Sasol entry into the
downstream market, a particularly daunting prospect if Sasol deploys its
downstream market, a particularly daunting prospect if Sasol deploys its
competitive advantages in forcing its way into the retail market. The
Components Supply Agreement is the contractual realisation of these
objectives.
48
Summary and Conclusion
119. From the perspective of competition law there can be no gainsaying the nature
of the MSA. It constituted a market sharing and output limiting cartel between
Sasol and the OOCs – Sasol agreed to limit its participation in the wholesale
and retail markets; in exchange the OOCs agreed to uplift, at a price based
upon import parity (viz. the IBLC, later BFP), the vast majority of Sasol’s inland
product, effectively accepting that they would not utilise their coastal refineries
to meet their inland marketing requirements except to the extent of any inland
shortfall between Secunda and Natref supply and inland demand. The
essential nature of the MSA is common cause – indeed Sasol has consistently
maintained, though not entirely convincing, that its reason for terminating the
agreement was because it was advised that it would fall foul of the
Competition Act.
120. The logic of this marketsharing cartel has structured the supply of the logistics
capacity necessary to convey white fuels from the coastal refineries to the
inland market. Although not much evidence has been led on the pre‘fifties
logistics, this was the period in which refined product was imported by the fuel
marketers and then conveyed to the inland by rail and road. Road and rail
were also used to convey refined product to the inland immediately after the
establishment in the late ‘fifties of the Durban refineries. Once, from 1965, the
DJP had been commissioned, the economics of conveying fuel products would
have certainly favoured the pipeline although a certain amount of road and rail
transport would still have been utilised in conveying product from the coast to
the inland.
121. However, as already indicated, the commissioning of the Secunda plants seen
in the context of the MSA drastically reduced the requirement for logistics
capacity needed to convey fuel products from the coast to the inland. In fact, it
led to the underutilisation of even the preferred pipeline capacity. This was
then rationalised to meet the requirements of a world where a minimum
amount of logistics capacity was required to convey product from the coast to
49
the inland.
122. This is the prism through which this transaction must be viewed. In our view –
and, we note again, this view is essentially uncontroverted the South African
fuel market, from the refinery level through to the level of the retail service
station, was cartelised for many years. The MSA was in effect the market
sharing agreement entered into by the participants in the cartel with the price
of refined product based on import parity or BFP which was then used to build
up to the wholesale price and the retail pump price.
123. In 1998 Sasol opted to exit from the cartel arrangement and so gave notice of its
intention to terminate the MSA. The notice of termination became effective on the 31
December 2003. Sasol terminated the MSA for a variety of reasons, the most
frequently cited of which was the fear that it would have been found wanting at
competition law. 90 But there were clearly other, arguably more pressing,
considerations. The new South African government clearly intended to limit its role in
the setting of fuel prices. It had already, to Sasol’s express dissatisfaction, changed
the basis for calculating the regulated wholesale and retail prices from IBLC to BFP.
It had stated its clear intention to deregulate the retail market, also a measure
resisted by Sasol, a measure that would likely have arraigned those members of the
MSAgoverned cartel with an inland retail presence – basically all the OOCs – against
that cartel member, Sasol, whose overwhelming presence in the market was as a
supplier of refined product to the OOC marketing arms in the inland region. The time
was clearly ripe for a reconstitution of the market.
124. And, in the precise timing of the termination of the MSA, there was a
significant carrot: with the reconfiguration of the pipeline network the logistical
significant carrot: with the reconfiguration of the pipeline network the logistical
capacity to convey white fuel products was more constrained than ever before.
It is clear that although other broader considerations may have influenced
Sasol’s decision to terminate the MSA, the opportunity was provided by the
logistical constraints that bestowed inland market power upon Sasol.
90 If this was indeed a major factor that prompted Sasol to terminate the MSA, it was notably
prescient in its thinking – the new Competition Act only came into effect in 1999.
50
125. Cognisant of the impending regulatory changes and of the likely divergence in
the interests of its erstwhile cartel partners, and emboldened by the existence
of logistics constraints, which, the evidence clearly shows, it was actively
planning to exacerbate, Sasol determined to strike preemptively. Hence, it
terminated the MSA. This has led to an outbreak of intense competition a
phenomenon commonly experienced when a cartel is broken by one of its
members. Competition predictably broke out in both upstream and
downstream markets. In the upstream market, the coastal refiners were now
free to market their product in the inland and this they attempted to do. In the
downstream market Sasol was at liberty to expand its presence at the retail
level, both its service station sales and footprint and its penetration of the
commercial and industrial market, and this it attempted to do.
126. The principal weapon in this conflict is logistical capacity – the capacity of the
OOCs to convey product from their coastal refineries to their inland marketing
arms at commercially viable rates. By exploiting the logistical constraints
Uhambo is able to maintain the wholesale price of fuel products in the inland
market at supracompetitive levels. This, the most important element in the
cost structure of the downstream retailers, will limit the prospect of
downstream price competition in the diesel market and in the industrial and
commercial markets, the only markets in which downstream price competition
is feasible. When the downstream price of petrol is deregulated the
maintenance of the wholesale price at supracompetitive levels will similarly
circumscribe the possibility of price competition in that market. The logistical
constraints – and the foreclosure strategy that it enables – will also enhance
constraints – and the foreclosure strategy that it enables – will also enhance
the ability of Uhambo to strengthen its already powerful position in the
downstream retail markets without resort to robust price competition, precisely
the mechanism that Sasol has, in large part, used to expand its penetration of
the downstream markets and which required discounting the wholesale price,
the most significant element in the retail price of petrol.
51
Rationale For The Transaction
127. With this background in mind, it is instructive to examine the stated objectives of this
transaction. The parties have presented the following rationale: 91
The proposed merger will lead to the creation of a large manufacturer and
marketer of liquid fuels in South Africa that is able to compete better with
the other oil companies in South Africa.
The proposed merger will lead to a materially better balanced business in
terms of refining capacity and marketing operations and achieve synergies
in manufacturing, supply and trading, marketing, the international business
and corporate services.
The proposed merger will enable the parties to comply with the petroleum
industry’s charter regarding ownership targets. It will also provide an
opportunity for the previously disadvantaged groups to invest in a more
balanced and competitive firm.
128. In the ordinary course, merger analysis does not draw heavily on the parties’
stated rationale for the merger. This usually amounts to little more than a
statement of intent and is generally expressed in anodyne terms that do little
to advance understanding of the competition implications of a merger
transaction. In this instance, however, it is instructive to juxtapose the stated
rationale with the record.
129. We are not here concerned with the first and third of the bullet points listed
above. The first may refer to any merger, anywhere. To the extent that it is
meant to convey the image of the merged entity as a struggling David pitched
against the Goliaths of the oil industry – a point injected by the merging parties
into the hearings at every available opportunity – it is of little more than
theatrical value. Suffice to point out that in the domestic fuel market, the
market with which we are concerned, neither of the merging parties is
market with which we are concerned, neither of the merging parties is
91 See Paras 1011 of Mr Wright’s statement at pages 2856 of the Witness Statement bundle; as
well as Para 15 of Mr Oberholster’s statement at page 419 of the Witness Statement bundle.
52
accurately cast in these terms – the one is the largest refiner and the other the
largest marketer of fuel product – and, as counsel for Shell noted in his
opening address, to the extent that a powerful shareholder is a valuable
weapon in competitive struggles in the South African market, Sasol, certainly,
has received its share of largesse from its erstwhile shareholder, the South
African government.
130. As to the third bullet point, empowerment is not merger specific. It is
mandated by the petroleum industry charter and will take place regardless of
whether the merger is approved.
131. It is the second bullet point that requires further examination. The reference to
‘synergies’ is standard mergerspeak and, where relevant, is examined when
efficiencies are considered. But the reference to the requirement for a ‘materially
better balanced business in terms of refining capacity and marketing operations’
demands further attention.
132. The requirement of ‘better balance’ suggests that the successful competitive
positioning of the merging parties necessitates the vertical integration of upstream
activities, refining, and downstream activities, distribution and marketing. While, since
Coase’s seminal work, we know that vertical integration may be preferred precisely
because it permits of more efficient coordination than arms length market driven
transactions, it would be difficult to make a case for ‘coasian’ efficiencies arising from
the combination of refining and marketing and distribution. 92 This was specifically
put to Dr. Scheffman, the Caltex expert in these hearings, who persuasively
dismissed these transactions costs efficiencies as a basis for vertical integration in
dismissed these transactions costs efficiencies as a basis for vertical integration in
this industry. 93 Mr. Reid, a BP witness, insisted that there was no particular virtue in
balance and noted that BP in its global operations intentionally maintained a refining
short/marketing long position, while other major oil companies took the opposite
view.94 We have already noted that the industry, both here and elsewhere, appears
to be characterized by particularly efficient market based arrangements such as
92 R H Coase, The nature of the firm (1937).
93 See pages 2076 – 2077 of the transcript.
94 See pages 2126 – 2127 of the transcript.
53
product swops and depot hospitality schemes for ameliorating the transactions costs
implications of imbalance.
133. Finally, we note that depending upon one’s geographic perspective, none of
the oil companies is in balance. That is, all require product for marketing in
regions of the country, where they have no refining capacity. Specifically what
this transaction seeks to achieve is better balance for the merged entity in the
inland region, the country’s largest market for fuel, where, with the exception
of TOTAL, no company is in balance.
134. An indicative sampling of the record that reveals the merging parties’ true rationale –
their actual intentions – is clearly presented in the BP heads of argument. But in truth
the testimony of Mr. Oberholster, Sasol’s principal witness, yields any number of
statements that confirm that better ‘balance’ or a ‘marketing presence’ is sought in
order to maintain the wholesale price of fuel products at the supracompetitive price
level provided for in regulation – the import parity price or BFP in respect of the
merged entity’s sales of bulk supply to the OOCs. In Mr. Oberholster’s own words:
The reasons for the deal, which I said from the Sasol side was this very fact that
when there is a new pipeline and subsequently regulation ( this should presumably
read ‘ deregulation’ ), we would be, as we are today, at the mercy of oil companies,
even more so. And therefore it is our view that if we are better balanced, it’s got
significant advantages to us. Some of them, a large part is the synergies which we
capture, but certainly also in our view it will make us better and that we can more
…we would have a better negotiating power to be able to negotiate fairer prices
with our oil company friends. That’s the point. 95
135. On numerous occasions Mr. Oberholster made it clear that he regards BFP as the
‘fair’ price. 96
95 See page 470 of the transcript.
‘fair’ price. 96
95 See page 470 of the transcript.
96 See, for example, page 391 of the transcript where, under cross examination, Mr. Oberholster
responded: “…an import parity price, yes Sir,…that’s the price we believe to be a fair market price
and the price we wanted from BP. ’ And also transcript page 363 for a strident defense of import
parity pricing: ‘..we regard import parity in the fuel industry as an appropriate market value
price…..And that’s currently used by government as part of the build up in the retail petrol price,
which is legislated. It is the price used in the MPar calculations where we calculate the marketing
margins, as it were, as a transfer price from the oil companies’ refining production to their
marketing. We believe that to be a legitimate market value price and that is why we’ve applied that
price. “(our emphasis)
54
136. Any number of Sasol strategy documents reveal that the objective of ‘better
balance’ or a ‘marketing presence’ is the maintenance of BFP as the base
price.
137. In this vein then, note the following extract from a March 2002 Sasol document
that is explicitly concerned to identify the strategic rationale for the
development of a marketing infrastructure:
The objective is to establish and control a profitable, sufficiently large and effective
marketing infrastructure on a national basis and focused in the main metropolitan
areas in order to protect and influence the wholesale fuel product price of the
Sasol Group of Companies. 97
138. Or, as stated in another internal Sasol document:
Primary objective: Create leverage in wholesale fuel price to other oil companies
by creating alternative distribution and value. 98
139. Or, again, in a third Sasol document, an undated presentation headed ‘Fuels
Marketing’:
(A) Main Objectives – To support the Sasol strategy to remain a wholesaler for the
bulk of its Automotive Fuels, this business unit must develop a direct marketing
infrastructure to be able to influence the market price of fuels and in this way to
protect the wholesale price to the oil companies 99
140. And, significantly, in a draft minute of a Sasol Oil board meeting:
Business Charter [for motorfuels and lubricants] …to enable us to grow our
business and to protect and influence the wholesale fuel price of the Sasol Group if
required 100
141. Indeed so intent was Sasol upon maintaining the BFP price basis that it,
ironically a company established precisely in order to reduce, for economic
and strategic reasons, South Africa’s dependence on foreign sources of fuel,
97 BP5 page 375.
98 BP4 page 229.
99 BP18 page 187.
100 BP4 page 396.
55
identified the following opportunity in order to maintain import parity pricing for
fuel:
Take over the least economical coastal refinery and run it at its cost breakeven
point. This moves SA to be a net importer of liquid fuels’. 101
142. This last statement is particularly revealing. It effectively proposes shorting the
national market – through acquiring and then reducing the output of a low margin
coastal refinery – in order to ‘legitimise’ import parity pricing. It is tantamount to an
acknowledgement that import parity pricing of fuel – or BFP – in a fuel exporting
economy can only be artificially maintained by administrative fiat (as has been the
case to date), or by collusive agreement (which, through the MSA, has also played an
important role in the maintenance of BFP), or by the unilateral exercise of market
power (which is proposed here, and which, in our view, is Sasol’s actual rationale for
the merger).
143. It appears that, for its part, Engen, with, by some considerable margin, the largest
inland (and national) retail market share, was anxious to defend its market position,
not only from aggressive independent entry by Sasol at the retail level – a strategy
clearly in place as merger talks commenced – but also against the prospect of a
foreclosure by Sasol, or worse, by a Sasol that had merged with one of Engen’s other
competitors.102
144. The first concern – aggressive entry by Sasol at Engen’s expense is naturally
neutralized by the merger. The second, the prospect of a supply squeeze, is dealt
with by the important Components Supply Agreement, a centrepiece of the merger
transaction, that effectively guarantees the merged entity – in which Engen’s
controlling shareholder, Petronas, has a 37,5% share – exclusive access to the fuel
components produced by Sasol Synfuels, which is not part of the merger. It is well
components produced by Sasol Synfuels, which is not part of the merger. It is well
put in a document prepared by Rand Merchant Bank, a transaction adviser to the
Engen board, which identified ‘the elimination of uncertainty regarding Sasol’s role in
the liquid fuels market and assurance on the sourcing of products for the inland
market’ as ‘ Engen's biggest benefit’ from the transaction. 103 It is not surprising then
101 BP4 page 400 .
102 BP 26 page 253259.
103 BP7 page 226.
56
that Mr. Wright, Engen’s project leader for the transaction and its witness at these
hearings, characterized this outcome as the ‘ happily ever after scenario’ contrasted
with the ‘ big bad wolf scenario’ which is Mr. Wright’s characterization of Engen’s
prospects in the event of an independent entry by Sasol. 104
145. These, in our view the true rationale for the merger as revealed in pertinent
strategy documents, do not, as we have already indicated, dispense with the
requirement to examine whether or not the merger will provide the merged
entity with the ability and incentive to realize these objectives. They do,
however, put in proper perspective the rationalization that has been repeatedly
offered for this transaction – the strategy documents reveal clearly that the
overriding intent, certainly from Sasol’s perspective, is the maintenance of an
administered price which has been set at a level, the import parity level, that is
manifestly supracompetitive in a competitively structured market.
146. The alternative mechanism for Sasol to achieve ‘balance’, its overriding stated
rationale for undertaking this transaction, is through organic growth of its retail
share. However this mode of entry would, as we elaborate below, have
necessitated aggressive retail pricing by Sasol and the consequent feedback
of pressure on to the wholesale price. This merger represents Sasol’s efforts
to counter these, the likely outcomes of a competitive entry into the retail
market.
147. Aggressive retail pricing is, of course, the last thing that Engen, the country’s
largest fuel retail merchant wants to entertain particularly if its security of
inland supply is threatened by an aggressive Sasol. It certainly has the most
to lose from this mode of entry. Hence, although each of the parties may have
to lose from this mode of entry. Hence, although each of the parties may have
their own particular reasons for merging, they coalesce to the extent that the
merger grants retail pricing power to the merged entity – the retailer, Engen, to
protect its retail margins and revenues; the refiner, Sasol, aptly characterized
by Mr. Reid as a ‘merchant refiner’, to ameliorate feedback from aggressive
104 BP28 page 4179.
57
retail pricing to the wholesale price.
148. Thus the merger’s rationale also has reference to the event that threatens to
trigger aggressive retail pricing, this being government’s commitment to
deregulate the pump price of petrol. Again, one does not have to divine this
from a complex reading of the merging party’s commercial incentives and
imperatives. It is stated with characteristic bluntness by Mr. Oberholster who
testified that
Margins generally for the oil industry in a [regulated] environment tend to be higher
than in a deregulated environment 105
149. And
So therefore if deregulation was to be postponed, it will be more profitable for
Uhambo and for Sasol and for BP and for Shell and for all other intervenors. 106
150. The link between the prospective deregulation of the retail market and the
maintenance of BFP is also clearly at the forefront of Sasol’s concerns. Note
the following exchange between Mr. Norton, counsel for BP, and Mr.
Oberholster:
MR NORTON : Could you read the last bullet point into the record please?
MR OBERHOLSTER : I will do that. “BP’s drive to terminate BFP as a reference
production price and aggressive marketing actions could lead to a earlier deregulation.”
MR NORTON : Yes this was another issue about BP that you didn’t particularly like, was
that BP’s insistence on a lower wholesale price might auger deregulation at an earlier
date, correct?
MR OBERHOLSTER : Well what we said is, I think there was 2 items there. It was
… what we said is, if BP’s drive to terminate BFP. Now can I just deal with that?
BFP is the government regulated build up price, which is regulated by government.
So your attack or your drive to terminate that firstly, and secondly your aggressive
marketing actions linked to that could, we believe at that point in time lead to
earlier deregulation. And if that’s the case then so be it sir. 107
earlier deregulation. And if that’s the case then so be it sir. 107
151. It is not surprising then that a Sasol/Engen presentation lists one of the
objectives of the JV as being to
105 See page 396 of the transcript.
106 See page 396 of the transcript.
107 Page 3934 of the transcript.
58
Actively lobby the postponement of deregulation. 108
152. Clearly if a floor is placed under the OOCs critical cost driver, the wholesale
price, it will ease the ability of the JV to enlist their support for lobbying for the
postponement of a measure which is targeted at imposing downward pressure
on the retail price, and thus a squeeze from both ends on retailing margins.
The pressure to cooperate with Uhambo will be irresistible if accompanied by
a credible threat to foreclose or to take the lead in initiating a price war.
The counter factual – independent entry by Sasol into the retail market
153. There is considerable evidence of the counterfactual, that is, of the positive impact on
competition of an independent attempt by Sasol to extend significantly its penetration
of the wholesale and retail markets. While this is an insufficient basis for finding that
the merger would substantially lessen competition – that the present structure
promotes vigorous competition, does not necessarily establish that an alternate
structure will stifle competition it naturally bears on the evaluation of the transaction.
Had the MSA still been in force and had government not committed itself to further
deregulation, the merging parties might have argued that impact of the merger on
competition would be neutral, an argument commonly advanced in mergers that take
place in highly regulated markets. 109 In this instance however we have evidence of
the functioning of the market after the removal of a major regulatory instrument, the
MSA, and, as we shall presently elaborate, the evidence is clearly of robust
competition. It is against this standard, the performance of the postMSA market, that
the merger’s likely impact must be assessed.
154. The termination of the MSA – itself partly predicated on the expectation of
relatively imminent deregulation has clearly led to an outbreak of competition.
relatively imminent deregulation has clearly led to an outbreak of competition.
And there is every reason to expect that robust competition will, but for the
prospect of the merger that is before us, characterize the future of the various
fuel markets, the more so if Sasol persists in its independent endeavour to
108 BP2 page 463.
109 Although previous decisions of the Tribunal have not viewed this argument favourably. See
Tongaat Hullet/TSB [1999-2000] CPLR 127 (CT).
59
correct the imbalance between refining and marketing that it professes to find
so disadvantageous. Indeed, it is on this basis, that Mr. Reid, a BP witness
with an impressive experience of a wide range of oil markets across the world,
argued that the structure of the South African fuel markets and that of its major
participants portended particularly robust competition.
155. The most persuasive evidence of the vigour of postMSA competition is
provided by Sasol’s principal witness, Mr. Oberholster. In short, the evidence
establishes that Sasol made impressive inroads into the retail markets,
capturing market share both in sales at service stations and in the industrial
and commercial segment of the retail market. Sasol has downplayed its
achievements and it is very likely that they did indeed undershoot Sasol’s
expectations and wishes. Certainly, they would not have met the expectations
of a company intent upon rapidly establishing a market share large enough to
support pricing power in the retail market as a mechanism for protecting the
wholesale price, Sasol’s avowed objective in establishing a marketing
infrastructure.
156. However other witnesses are clearly impressed by Sasol’s achievements in
the retail markets and offer persuasive evidence to back up this rosier
assessment. Hence when it was put to Mr. Fienberg, the BP marketing
executive, that Sasol had only been able to post 1.1% ‘organic growth’ – that
is growth that is not accounted for by acquisitions – in 2004, he responds:
Which still is not just 1.1%. That kind of market share movement is pretty
impressive and probably unprecedented, and again I don’t say that with a hint of
criticism. It’s very well done. But it’s just what surprised me from Mr Oberholster’s
criticism. It’s very well done. But it’s just what surprised me from Mr Oberholster’s
witness statement was that it’s impossible to grow and all the good locations have
gone. I mean it may surprise you to know that Exel and Sasol have got more
franchised sites, those are [more] sites with shops than BP has at this point, which
again is well done. It’s quite impressive, but it doesn’t stack up against the
conclusion that they’re unable to grow and compete in this market. They’re
competing very effectively. 110
157. Mr. Fienberg is pressed further by the merging parties counsel, Mr. Snyckers.
110 See page 3093 of the transcript.
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However Mr. Fienberg persists in his view that Sasol’s achievements in the
downstream markets are impressive. Note the following exchange:
ADV SNYCKERS : Well they’ve lost ground in 2005 in commercial. You don’t have
the commercial figures on their own?
MR FIENBERG : I’m afraid that I don’t.
ADV SNYCKERS : And they have gained only 1.2% in 2004 and 1.4% in retail in 2005 and
that is a function of the limited number of sites that are available?
MR FIENBERG : Mr Snyckers I’ll tell you we took 10 years to get that kind of market share
movement, which is the nature, I guess, of a regulated market and to be clear we don’t
state it as a criticism. Actually it’s a compliment. It’s been very significant growth. If we
take the inland market, inland retail market, sorry that’s gasoline, Mossgas, retail volume
growth inland, the industry volume change in the first 7 months of ‘05 versus the first 7
months of ‘04, the market grew by 89 million litres. Sasol’s volume change was 92 million
litres. So they captured the entire volume growth in the inland market and I think that’s
pretty good going. I would’ve liked to have done that.
ADV SNYCKERS : The ceiling is still very low Mr Feinberg because of the fact that you
can’t have new sites when the best sites have been taken.
MR FIENBERG : Well I’ll tell you that they’ve got more franchise sites in South
Africa than BP has and they’ve done it in 18 months. It’s seriously an impressive
piece of work actually, and that’s great. It doesn’t stack up against life’s so difficulty
they can’t compete. They’re a very effective competitor. 111
158. And further:
MR FIENBERG :.. And just by way of comparison, and I stand to be corrected here
by your clients, but I seem to recall a number of 61 new sites this year. Last year
we did all of 4, and I again I don’t want to put that in as sort of sour grape, not at
all, but it just doesn’t stack up against, there’s no locations left, it’s all terribly
difficult and we can’t compete. They can compete and they are.
ADV SNYCKERS : And you are aware of the difficulty they encountered with the 3
kilometre radius and the fact that they got knocked back on that?
MR FIENBERG : Yes we all are, but again I go back to the point. I think it would be
a fair argument if they’ve managed to build 4 sites and 3 sites. They’re actually …
and I’ll tell you something else about the sites, is that the throughput, the average
throughput through their sites is 1.5 times higher than the average of anyone else
out there, because they’re all new sites, they’re all franchise sites, they’re doing
very well. So the refrain that it’s impossible to compete and every decent site is
gone is just patently not true. 112
159. Mr. Fienberg’s assessment of Sasol’s marketing achievements is persuasive.
We stress that it may not meet the ambitions of a merchant refiner intent on
establishing the retail market share required to protect its wholesale price, to
111 See page 30956 of the transcript.
112 See page 30967 of the transcript.
61
give it, in other words, pricing power in a potentially deregulated retail market,
but it is clearly an impressive achievement, that speaks to the existence of
robust and effective competition in the retail markets. This is, in fact
acknowledged in Mr. Oberholster’s witness statement:
In both the commercial and retail markets there is significant competition between
the merging parties, oil companies and other independent resellers. 113
160. However, from the perspective of those interested in promoting competitive
markets, what is most impressive is that Sasol appears to have achieved
these marketing gains through robust competition on the merits.
161. Mr. Oberholster explains that Sasol has secured its sights and incentivised the
retailers marketing its brands by the provision of generous discounting of that
holy of holies, the wholesale price of petrol. Mr. Oberholster suggests that the
discounting of the wholesale price is a method of compensating a dealer
owner for the capital investment necessary to establish the site.
You have oil company owned and controlled sites and you have dealer owned and
controlled sites. Dealer owned and controlled sites, which many of those sites are
Exel sites, the dealer in many cases puts up the capital to build the site. He dishes
out all the capital. And to get a remuneration on that, they get a discount from the
oil company on the wholesale price for a payback on that capital. 114
162. This may be so, but, money being fungible, it – that is, the discount is clearly
the mechanism for gaining retail sites and hence retail market share and this is
clearly acknowledged by Mr. Oberholster:
MR NORTON : Well let me put the proposition very simply to you Mr Oberholster.
Exel wouldn’t be giving discounts off the wholesale price to its dealer owned sites,
unless it thought there was something in it for Exel.
unless it thought there was something in it for Exel.
MR OBERHOLSTER : Unless there was something in it for Exel, yes that’s true.
MR NORTON : Correct. What I’m trying to explore with you is what is the something in it
for Exel?
MR OBERHOLSTER: To be able to obtain that site.
MR NORTON : Correct. So in other words, it’s to be able to ensure that that is a captive
Exel site. Correct?
113 Mr. Oberholster’s witness statement, p6, cited in the transcript, page 479.
114 Page 459 of the transcript.
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MR OBERHOLSTER : I’m so careful when I listen to you. To ensure it’s a captive
Exel site? It depends sir. There are some of these agreements, which are month
tomonth agreements. There are some. There are some, which are longerterm
agreements. So if you can give me the example of which specific agreement it is,
then I can help you with that. But when you say captive, certainly to obtain that
site’s business, as it were, that would be the case that there would be competition
in the market and whoever were to offer a larger discount to that wholesaler, could
potentially be more likely to obtain the site. That is correct .115
163. We should emphasise that this discounting of the wholesale price is taking place in
the context of a regulated end price for the product. That is, we infer that if the
discount were capable of being passed on to the end consumer as a mechanism for
achieving greater throughput at branded service stations (that is attracting customers
away from OOC sites to Sasol sites) rather than merely a mechanism for acquiring
additional branded service stations, then the incentive to discount the wholesale price
would be even greater for a firm intent on capturing market share ‘organically’.
164. Sasol also achieved its inroads into the industrial and commercial segment of
the retail market by robust discounting, indeed by what Mr. Oberholster at one
stage referred to as ‘dumping’:
However, our threat to dump product in the commercial/retail diesel markets is real
and would hurt the oil companies on the marketing side. 116
165. There is unchallenged evidence to the effect that Sasol’s weighted rebates and
discounts were considerably higher than Engen’s. 117
166. Indeed, Mr. Oberholster acknowledges that were he compelled to accept an
export parity based price from the OOCs then his rational response would be
to aggressively discount in the wholesale market:
to aggressively discount in the wholesale market:
MR NORTON : It says, “EPP Incentive to grow commercial market.”
MR OBERHOLSTER : Correct.
MR NORTON : What does that mean?
MR OBERHOLSTER : That at the time, but there is a lot of explanation behind that
and if you want to I can take you through that. At the time that meant when we
115 Page 4601 of the transcript, our emphasis.
116 Citation from Sasol document ‘Sasol Horizon – summary of comments/themes from Friday
14/03 meeting’ cited in the transcript, page 473.
117 Page 515 of the transcript.
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looked at out marketing ambitions we said, if the oil companies were to give us an
export parity price for our production, as it were, specifically on the diesel side, it
would be more beneficial for us to try to aggressively take that market because we
would be able to discount significantly and still be better of, as it were. 118
167. The evidence clearly points to robust competition for retail, including
commercial and industrial, business, and this in the context of a still regulated
pump price for petrol. As is to be expected, the principal instrument in this
competitive battle is discounting of the wholesale price. This, combined with
the prospect of deregulation of the retail petrol price, is the standard against
which the merger must be judged.
The Relevant Markets
The relevant product markets and market shares
168. The identity of the product markets implicated in this transaction is clearcut
and common cause. It is agreed that the merging parties are both active in a
wide range of these markets. Moreover, when regard is had to the voluminous
argument and evidence submitted at these hearings, it appears to be
acknowledged that the most important of these product markets are those for
that broad category designated ‘white fuels’ – comprising petrol, diesel, jet
fuel, liquefied petroleum gas and illuminating paraffin and, within that
category, the markets for petrol and diesel.
169. Our analysis of the merger confirms that the merger is likely to lead to a
substantial lessening of competition in the markets for petrol and diesel
without countervailing consequences for efficiency or the public interest. On
this basis we have decided to prohibit the transaction. We have – following the
bulk of evidence and argument submitted to us – elected not to undertake an
bulk of evidence and argument submitted to us – elected not to undertake an
examination of the large number of other product markets involved in this
transaction reasoning that, even were the transaction to pass competition
muster in those other markets, this would not alter our finding of a substantial
118 See page 499 of the transcript.
64
lessening of competition in petrol and diesel or our decision to prohibit the
transaction.
170. The supply chain activities for petroleum products – the generic term that will
be used to refer to petrol and diesel are generally grouped in two broad
categories, the first consisting of oil exploration, extraction and transportation,
the second consisting of refining, marketing and distribution. This transaction
is clearly concerned with the latter category of activities. Within that category,
the parties to this transaction (and, indeed, the intervenors, with the exception
of Masana) are involved at each link in the supply chain, that is, in the refining
of petroleum product – which we will refer to as the ‘upstream market’ as well
as in the wholesale and retail marketing and distribution of these products, the
‘downstream markets’.
171. In the upstream market liquid fuels are produced from crude oil, coal and/or
natural gas. Crude oil is supplied by tanker from a number of sources
worldwide to the coastal crude oil refineries and conveyed via pipeline – the
‘crude oil pipeline or ‘COP’ from the Durban terminal to the inland Natref
crude oil refinery. The synthetic fuel refineries at Secunda use domestic coal
as well as natural gas obtained via pipeline from Mozambique. PetroSA in
Mossel Bay uses primarily natural gas from its offshore fields and some
imported feedstock.
172. The products produced in the refineries may be grouped into two broad
categories, namely ‘high value’ products and ‘low value’ products. It is these
high value products that are referred to as ‘white fuels’, the component
products of which are listed above.
173. Each of the refineries in South Africa (including those belonging to the merging
parties) produces petrol, diesel, illuminating paraffin and, with the exception of the
synthetic refineries, jet fuel, the various refineries do not generate the white fuel
products in identical proportions.
65
174. Petrol is a form of fuel used in spark ignition or internalcombustion engines for motor
vehicles. Two types of petrol can be distinguished; leaded and unleaded. However,
government is in the process of phasing out the use of leaded petrol by January
2006. In any event, leaded petrol can be substituted for unleaded petrol with minor
mechanical adjustments. Thus, for these purposes we will accept the definition of a
broader product market for petrol.
175. Diesel is a petroleumbased fuel used in engines that are ignited by compression
rather than spark. Diesel is commonly used for heavyduty engines including buses
and trucks. There are different grades of diesel depending on sulphur levels, but all
diesels within the standards set out by the South African Bureau of Standards are
interchangeable to a large degree. Unlike petrol, there is no regulated price for diesel
at the retail level and retailers are free to discount.
176. Illuminating paraffin (“IP”) is used as a source of energy for heating purposes. IP is
manufactured and supplied as “Illuminating Kerosene” and is extensively used in
South Africa in lamps, stoves and heaters. The demand for IP in South Africa is high
because a substantial segment of the population has limited access to affordable
electrical connections and appliances or other forms of energy. IP is also used as an
industrial heating fuel as well as for nonfuel applications.
177. Jet fuel is a special grade of kerosene that is sold almost exclusively to airlines. The
synthetic refineries do not produce jet fuel. Secunda produces a jet fuel component
that needs to be blended 50% with crude oil derived jet fuel. Mossref does not
produce a jet fuel component at all.
178. Liquefied petroleum gas (“LPG”) is butane and propane gas compressed into a
178. Liquefied petroleum gas (“LPG”) is butane and propane gas compressed into a
liquid form. LPG is formed naturally or as a byproduct from oil refining. It
differentiates itself from other energy sources on the basis of portability, convenience,
low sulphur, controllability and its clean burning nature. LPG is produced and sold to
resellers in bulk and cylinders and distributed to endusers.
179. The national data confirms that the merged entity will – by a significant margin
– be the largest participant in both the upstream and downstream markets.
66
The tables below are drawn from the Pricemetrics report commissioned by
TOTAL:
Upstream Production in South Africa 2004
Company Diesel Petrol Jet Fuel IP
BP 15.7% 10.6% 12.9% 9.7%
Caltex 15.0% 11.9% 16.0% 11.4%
Shell 15.7% 10.6% 12.9% 9.7%
Total 5.9% 6.1% 14.4% 0.0%
PetroSA 5.2% 7.3% 0.0% 16.5%
Sasol 24.2% 39.2% 28.9% 41.5%
Engen 18.1% 14.4% 14.8% 11.2%
Uhambo 42.3% 53.6% 43.8% 52.6%
Source: IMSS (Industry Market Share Statistics)
Downstream Sales of Petroleum Products in South Africa 2004
Company Diesel Petrol Jet Fuel IP LPG
BP 14.7% 16.3% 17.6% 12.1% 17.6%
Caltex 15.8% 16.9% 17.0% 15.2% 23.4%
Shell 18.3% 18.1% 19.8% 20.1% 24.8%
Total 15.7% 14.8% 13.5% 13.4% 3.1%
Sasol 8.3% 6.2% 10.3% 5.9% 14.6%
Engen 27.3% 27.8% 21.8% 33.3% 16.4%
Uhambo 35.6% 34.0% 32.1% 39.2% 31.0%
Source: IMSS/TOTAL
179. These tables reveal that in the upstream refining market, the market share of
the merged entity will be significantly larger than double that of the next largest
producer. It will account for over half of the petrol produced in South Africa
and for over 42% of the diesel produced. In the downstream markets the
merger of the Engen and Sasol brands as well as a number of smaller brands
that belong to one or other of the merging parties will result in the JV
controlling 34% of petrol sales and 36% of diesel sales in South Africa, slightly
smaller than double the market share of the next largest competitor.
The relevant geographic market and market shares
67
180. The identification of the geographic markets, though massively distorted by the
particular history of the development of refining and logistical capacity and the
corresponding regulatory regime, is also relatively straightforward.
181. As already elaborated, the MSA was, in essence, a market sharing
arrangement. It provided firstly that the downstream marketing arms of the oil
companies uplift the vast bulk of refined fuels produced by the inland
refineries. One of the OOCs – TOTAL – was effectively able to supply its own
inland downstream requirements from its share of the output of the Natref
refinery. TOTAL’s supply and demand were thus, to all intents and purposes,
balanced in the inland region.
182. Although each of the remaining OOCs – BP, Caltex, Engen and Shell –
controlled significant refining capacity at the coast, they controlled no inland
refining capacity. Historically they satisfied their inland marketing requirement
with product conveyed from the coast. Hence, they held a ‘long’ supply
position at the coast – long, that is relative to their coastal demand in order to
meet their long demand requirements in the inland. Thus a critical component
of the operational requirement of the coastal refiners was the logistical
capacity required to convey refined product from the coast to the inland, by a
significant margin the most important market for refined fuel products in the
country.
183. The MSA was concluded in order to provide the inland refiners with a secure,
guaranteed market for their product. In the initial years of the MSA regime the
inland marketing requirements of the OOCs considerably exceeded the output
of the inland refineries. Accordingly, notwithstanding the preference accorded
the inland refiners, the OOCs were still obliged to maintain considerable
the inland refiners, the OOCs were still obliged to maintain considerable
logistical capacity in order to convey the lion’s share of their inland marketing
requirement from their coastal refineries.
184. This changed dramatically with the commissioning, in the early ‘eighties, of
Sasol’s synthetic fuel plants which are located in the heart of the inland region.
68
With the commissioning of the Secunda refineries, the inland (and the country
as a whole), became supply long. The upshot of this was that the logistical
capacity used for the conveyance of refined product from the coast to the
region was considerably in excess of the demand for that capacity. This
ultimately led to the reconfiguration of the pipeline network, the largest and
most cost effective source of logistical capacity.
185. With the commissioning of Secunda the countryhad excess supply of refined product.
Because the MSA effectively excluded product refined at the coast from entering the
inland market, the country’s excess supply of refined product was reflected in overall
long supply positions for the coastal refiners. The upshot of this was the
decommissioning of approximately 30% of coastal refining capacity.
186. The quidproquo provided by the MSA to the OOCs for their agreement to
prefer the output of the inland refiners – expressed otherwise, for the coastal
refiners agreeing not to compete in the inland market for refined fuels – was
that Sasol’s entry into the downstream market, in all regions of the country
including the inland, was narrowly circumscribed. The upshot was that Sasol
was massively supplylong in the inland region. In the other regions of the
country it was demandlong, that is to say, for its relatively small coastal
marketing requirements it relied upon supply from the coastal refiners.
187. The geographic market imposed by the MSA is clear. It imposed, by agreement, an
inland geographic market for refined fuels, that is, it provided that inland purchasers
of refined fuel had no alternative but to source their inland marketing requirement
from the inland refineries. Even if the price of the inland refined product exceeded the
price that would have prevailed under competitive conditions, the terms of the MSA
price that would have prevailed under competitive conditions, the terms of the MSA
did not allow the ‘importation’ of product from the coast. We know, of course, that this
is precisely what happened. Had the coastal refiners been able to compete with the
inland refiners for a share of the inland market for refined fuels, the effective
reference or base price of the product would have been export plus the cost of
transporting product from the coast. Instead the reference price imposed was import
plus the cost of transport from the coast.
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188. Sasol’s decision to terminate the MSA notionally ‘frees’ the market for refined product
from these constraints insofar as the inland fuel marketers are now permitted to
source product from the coastal refineries. The base price for this product would be
that of the next best alternative price – the deep sea export price – plus the cost of
transporting the product from the coast to the inland market. However what was
previously constrained by agreement, is now constrained by logistical capacity – the
inland marketers may product from the coast, but because of inadequate logistical
capacity they are only able supply a portion of their needs. And, as we have already
observed, precisely part of the reason why they do not have adequate logistical
capacity is because the long period of the MSA rationally led to the demobilisation of
much of the logistical capacity that was previously utilised to convey product from the
coast, notably pipeline capacity, the most efficient form of logistics.
189. The upstream geographic market for refined product is thus bounded by the
constrained logistics that, even in the face of an exercise of market power by
the inland refiner, will prevent the inland participants in the downstream market
from replacing product refined inland with product conveyed from the coastal
refineries. The market shares in this market are obvious. Sasol, and Uhambo
postmerger, will dominate:
2004 Inland Actual production figures for Petrol, Diesel and Kerosene
Company Facility Actual Production Market
Petrol Diesel Kerosene Total
Sasol Oil Synfuels 4.02 1.41 0.58 6.01 57%
Sasol Oil 64% of Natref 1.04 0.90 0.61 2.59 25%
TOTAL 36% of Natref 0.76 0.89 0.29 1.94 18%
Source: Mr. Swart’s witness statement 119
190. It is common cause that there is a certain amount of logistical capacity
available through the pipeline network and via road and rail. This potentially
complicates the definition of the geographic market since it raises the question
of whether that portion of the output of the coastal refiners that can be readily
119 At page 16 of the Witness statement bundle.
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imported into the inland should not be included in the relevant geographic
market. Indeed, although the merging parties have ultimately contended for
the inland market as the relevant geographic market, their experts in their first
report suggested that,
the ability of the Durban refineries to increase sales in the inland area means that
the relevant market for determining prices at the production level in the inland area
must include the Durban refineries. 120
191. This would serve to introduce a horizontal dimension into the merger at the
upstream level, which, on this version of the relevant market, would
incorporate the merging of Sasol’s inland refining capacity with Engen’s large
coastal refinery. This may assume additional significance when the logistical
constraint is relaxed by the introduction of additional pipeline capacity. Caltex
has contended precisely for this wider definition of the relevant geographic
market.
192. However, we note that the Caltex expert, Dr. Scheffman, conceded that, were
logistics found to be the binding constraint, he too would concur with the
definition of the inland market accepted by the Commission, the merging
parties and his fellow intervenors. This is clearly articulated in Caltex’s heads
of argument:
The determination of the relevant markets is in essence a factual question that
must be resolved by considering the scale and durability of the logistical
constraints that limit the volume of refined product that the oil companies can
transport into the inland area from Durban. To the extent that the intervening
parties are correct that currently there is a limit to the amount of product that can
be transported from Durban to the inland area, then there is an inland market. 121
be transported from Durban to the inland area, then there is an inland market. 121
193. Although all agree that some logistics capacity exists, there remains a
significant shortfall, that is a significant amount of product in respect of which
additional logistics capacity would have to be found in order to prevent an
exercise of market power on the part of the inland refiner. Indeed it is common
120 November 2004 Lexecon Report at pages 1909 of the Commission’s record.
121 Paras 1415 of Caltex Heads of Argument.
71
cause that, even on the most optimistic view of available logistics, there will
remain a certain portion of inland demand that will have to be procured from
Uhambo. In short, the state of available logistics dictates that the inland
marketing arms of the OOCs are obliged to purchase a certain volume of
product from Uhambo – these are what are referred to as the ‘musthave’
volumes.
194. The vast bulk of the factual evidence in the evaluation of this transaction goes
to determining the quantum of available logistics. The OOCs and the
Commission contend for highly circumscribed logistical capacity (and thus for
significant ‘musthave’ volumes). By contrast, the merging parties insist that
the ‘musthave’ volumes, to the extent that there are any, are narrowly limited
because they contend for considerable untapped logistical capacity that can,
in the event of an attempt by the merged entity to exercise market power in the
inland, be deployed to convey refined product from the coast.
195. Moreover, the merging parties and the Commission contend that to the extent
that logistical constraints characterise the current period, these will be
eliminated with the commissioning – in late 2010 or early 2011 – of an
expanded DJP. However, the OOCs insist that this fouryear window is
sufficient time for foreclosure to do its work. In any event, they argue that the
expansion of the DJP will bring only temporary relief, at best, from logistical
constraints that, with the growth of inland demand, will reappear shortly after
the commissioning of this new logistical capacity.
196. It is our view – and the factual position will be examined at length – that there
are indeed significant logistical constraints in the current period and that the
are indeed significant logistical constraints in the current period and that the
relief provided by the expansion of the DJP is temporary at best. The
presence of these logistical constraints determines the boundaries of the
upstream geographic market, the market for refined product, as the inland. On
this version of the geographic market, the competitive harm potentially
wrought by the postmerger structure is foreclosure and it is this prospect that
72
is interrogated at length in the paragraphs that follow and which comprise the
vast bulk of factual evidence presented at these hearings.
197. Accordingly, we do not need to examine the Scheffman position, which
contends that, in the absence of logistical constraints – and only in the
absence of these constraints – for a wider geographical upstream market, one
that takes in the both the coastal Durban refineries as well as the inland
refineries. On this version of the upstream geographic market, the horizontal
merging of the parties’ respective refining capacities takes centre stage in the
enquiry and the theory of competitive harm posited focuses on the putative
ability of the merged entity to exercise control over divertible capacity, to, in
other words, control supply to the inland market by diverting capacity from the
Enref refinery to the deep sea export market. Dr. Scheffman’s theory is by no
means unpersuasive and should the commissioning of the expanded DJP
relax the logistics constraint, an examination of the implications of the merged
entity’s control of Enref’s capacity – which the merging parties clearly indicate
will be used as their swing refiner – is clearly pertinent.
198. However because of the clear evidence of a logistics constraint we do not
need – even in Scheffman’s own view to examine the implications of this
alternative version of the relevant market and its related theory of competitive
harm. We repeat: available logistics constitute the boundaries of the relevant
upstream geographic market as the inland, the old Sasol supply area.
199. On this version of the geographical market we are, at the upstream level,
dealing with a vertical merger, pure and simple. The fact that the merged
entity will include the Enref refinery at the coast has considerable implications
entity will include the Enref refinery at the coast has considerable implications
for the ability of the OOCs to resist a foreclosure attack mounted in the inland
market, but it does not impact on the share of the upstream inland market
which, though an impressive 82% before the merger, is not enhanced by the
formation of the JV.
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200. However, what does change is that this, the only inland refinery capacity, is
merged with the considerable share of the inland and national downstream
markets controlled by Engen. The tables below confirm Engen’s powerful
position in the downstream retail markets, both sales through its branded
service stations as well as in the industrial and commercial market. These
national downstream market shares are mirrored at the provincial level. The
table below reveals that Engen commands the largest share of service station
sales in Gauteng province, the core of the inland market. The addition of the
Sasol share of this market will give the JV a 40% share of sales of Gauteng
service stations and equally impressive shares of the other provincial markets
that fall within the boundaries of the inland geographic market, these being the
Free State, North West, Limpopo and Mpumalanga provinces, as well as
areas of significant demand in the border areas of the Northern Cape and
Kwazulu Natal provinces.
Sale of petrol through service stations 122
Province BP Caltex TOTAL Shell Engen Sasol/
Exel Uhambo
Eastern Cape 17 18 16 18 28 3 31
Free State 11 21 8 24 24 12 36
Gauteng 17 15 12 16 29 11 40
KZN 19 19 12 23 26 1 27
Limpopo 10 18 21 15 24 12 36
Mpumalanga 9 14 24 13 28 12 40
North West 11 17 12 16 29 14 43
N Cape 13 36 6 20 21 4 25
W Cape 19 21 11 20 27 1 28
201. As shown above, Uhambo will have significantly high market shares in all nine
provinces. In the allimportant Gauteng market, Uhambo will enjoy 40% of the
market for the sale of petrol at service stations.
Sale of petrol to commercial and industrial customers 123
Province BP Caltex TOTAL Shell Engen Sasol/
Exel Uhambo
122 Page 1927 of the Commission’s Record.
123 Page 1928 of the Commission’s Record.
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Eastern Cape 12 5 37 18 20 8 28
Free State 11 8 24 17 25 14 39
Gauteng 20 3 25 7 24 21 45
KZN 18 4 36 9 29 3 32
Limpopo 6 5 45 12 19 12 31
Mpumalanga 18 5 36 15 19 8 27
North West 24 14 19 9 27 7 34
Northern Cape 38 5 21 19 12 6 18
Western Cape 17 5 24 15 23 16 39
202. Uhambo’s market shares in all provinces range from 18% to, in Gauteng, 45%.
Sale of diesel through service stations 124
Province BP Caltex TOTAL Shell Engen Sasol/
Exel Uhambo
Eastern Cape 20 17 15 18 28 2 30
Free State 18 19 09 26 23 4 27
Gauteng 16 16 15 16 29 8 37
KZN 20 14 13 23 28 1 29
Limpopo 09 13 20 25 23 9 32
Mpumalanga 12 15 26 16 25 6 31
North West 13 17 12 17 31 9 40
N Cape 07 36 07 26 22 1 23
W Cape 22 16 16 21 24 1 25
203. As with petrol, Uhambo will enjoy very high shares in the Gauteng market as
well as the other inland provinces. Its market shares range from 23% to 40%.
Sale of diesel to commercial and industrial customers
Province BP Caltex TOTAL Shell Engen Sasol/
Exel Uhambo
Eastern Cape 11 14 18 22 28 7 35
Free State 5 28 11 17 33 8 41
Gauteng 13 11 10 20 36 10 46
KZN 15 13 20 21 29 3 32
Limpopo 14 20 19 21 18 8 36
Mpumalanga 8 13 13 24 29 13 42
North West 15 14 13 12 26 19 45
N Cape 16 18 27 16 14 9 23
W Cape 18 24 13 19 20 6 26
204. As with the other markets above, post merger Uhambo will enjoy significantly
high market shares ranging from 23% in the Northern Cape market to 46% in
124 Page 1931 of the Commission’s Record.
75
the allimportant Gauteng market.
205. The discussion, in these hearings, of the downstream market has proceeded on the
basis that it is made up of a large number of fragmented local markets. The basis for
this argument is that substitution takes place within a narrow geographical range, the
geographical range within which consumers would, in the event of a price increase at
Service Station X, transfer their custom to Service Station Y. However, the intuitive
sense of this proposition disguises the incontrovertible fact that all decisions pertinent
to competition at the retail level are made not at the level of the individual service
station but at the level of the national brand. 125 The most important element in this
decision is the wholesale price which is overwhelmingly the largest retail cost driver.
206. We accept that in the downstream market there is interplay between the local markets
– usually defined at the magisterial district level – and the national market. But
because the market shares of the participants and their footprints are in approximate
equivalence – and because of the key role played by the wholesale price in retail
pricing decisions – it is our view that competitive strategy will be formulated and
initiated at the national level. It is, of course, likely that, given the geographic
insulation of the inland market for bulk supply, price competition at the retail level may
well take a particular form in that region. However, our view remains that competitive
strategies will be formulated and initiated by the national brand managers, albeit that
they may adopt distinctive strategies appropriate to the conditions pertaining in the
various regions. 126
207. In summary then we find that the geographic upstream market (the market for
bulk supply of petroleum products) is the inland, what used to be called the
bulk supply of petroleum products) is the inland, what used to be called the
‘Sasol supply area’. The geographic downstream market (the retail market) is
125 Note page 2987 of the transcript where Mr. Fienberg of BP argues ‘ But I think at the end of the
day the brands, what tends to happen though in markets is that the brands tend to work in unison
because a brand has a position in the market and they get seen. If you go to all these markets,
what tends to happen, in my experience and the way that I’ve understood it, is that one brand in a
market gets seen as the price leader that everyone looks to and then follows.’
126 We have previously held that regardless of the fact that substitution decisions are made by
consumers within a narrow local market, the fact that competitive strategy is controlled by national
chain branded chain stores, the geographic market is thus national. See JDEllerines Case No
[19992000] CPLR 53 (CT) and followed in subsequent decisions.
76
national, although we emphasise that this does not preclude the possibility that
the national competitors will, in devising their retail strategies, take heed of
particular subnational features.
The Competition Analysis
Introduction
208. This transaction embodies both horizontal and vertical dimensions. Both
parties control refining capacity Secunda and a majority share of Natref for
Sasol and Enref for Engen – and both control wholesale and retail capacity in
the form of a network of depots and other distribution assets as well as a
network of retail service stations and a share of the commercial and industrial
retail market. These are, on the face of it, the horizontal dimensions of the
transaction.
209. However, given our finding on the relevant upstream market, there is no
horizontal merging at this level – the Natref and Secunda refineries are not in
the same relevant market as the Enref refinery. In the downstream market
both nationally and in the inland, the Engen marketing and distribution
networks will merge with the Sasol marketing and distribution networks.
210. From a vertical perspective the transaction represents the merging of substantial
refining capacity, on the one hand, with significant wholesale and retail capacity, on
the other. Uhambo will control some 82% of the output of refined fuel products in the
inland geographical market and its retail network will account for 40% inland fuel
sales. This structure immediately portends the prospect of input foreclosure which is
the focus of our competition analysis.
211. We know that the inland wholesaling and retailing arms of the OOCs have,
since the commissioning of the Secunda synthetic fuel plants in the early
‘eighties, procured the vast bulk of their fuel requirements from Sasol. The
‘eighties, procured the vast bulk of their fuel requirements from Sasol. The
only other inland refiner – TOTAL through its share of the Natref refinery – is
approximately balanced in the inland and is thus not a potential alternative
77
source of supply for the inland OOCs. We know too that Sasol’s position as
the monopoly inland fuel supplier was enshrined in the MSA, the very purpose
of which was to provide a secure market for Sasol’s output.
212. However, although the OOCs were dependent upon Sasol for their supplies of
product, the MSA effectively constructed a powerful mutualinterdependence. The
MSA limited Sasol’s participation in the retail market and so constrained the
development of an internal market for Sasol. In other words the MSA effectively
limited Sasol’s ability to integrate vertically, to enter the downstream wholesale and
retail markets. Accordingly Sasol was dependent on the OOCs as a source of custom
for the vast bulk of its considerable output of fuel. And, of course, in the coastal
markets Sasol’s limited, although by no means trivial, wholesale and retail
requirements were dependent on supplies sourced from the coastal refineries
controlled by the OOCs.
213. The termination of the MSA changed the rules of game. Sasol is permitted to
enter the downstream market. This it has done, to some degree through
organic growth and, now, through the proposed merger with Engen, the
largest inland retailer. The merger immediately and drastically reduces
Uhambo’s dependence upon the OOCs as a source of custom. And the
inclusion of the Engen refinery in the merged entity reduces Uhambo’s
dependence on the coastal OOCs as a source of supply in the coastal regions.
214. However, from the perspective of the OOCs, the change in the mutual
dependency that characterised the MSA era is asymmetric. As outlined
above, the OOCs argue that Sasol chose its moment for terminating the MSA
above, the OOCs argue that Sasol chose its moment for terminating the MSA
with considerable care, because, although the OOCs are no longer legally
obliged to uplift product from Sasol in order to meet their inland requirements,
limited logistical capacity constrains their ability to source product from the
coast and, so, their actual dependence on Sasol’s successor, Uhambo, as a
source of supply remains intact. However, the merger of Sasol and Engen to
form Uhambo will significantly reduce Uhambo’s dependence on the remaining
OOCs. The OOCs apprehend that Uhambo will utilise this uneven shift in the
78
power balance previously imposed by the MSA to foreclose the downstream
inland market, to deny them the amount of product they require and/or to
impose supracompetitive prices on the product that they are effectively
compelled to procure from the merged entity. This will permit the merged
entity to expand its already considerable downstream market share, and it will
serve to protect the supracompetitive wholesale price.
215. This brief summary should serve to dispel one of the contentions advanced on behalf
of the merging parties and that is that the threat of foreclosure arises from the fact of
upstream market power which Sasolalready commands and which is not
supplemented by the merger. On this version, the ability to foreclose is not merger
specific, is not brought about by the merger, but has always been within Sasol’s
power. There is no merit in this argument. There are numerous ways in which the
merger enhances the ability of the merged entity, relative to Sasol acting alone, to
foreclose. Most obviously, it does not have to foreclose Engen, Sasol’s largest inland
customer. And a foreclosing Sasol will not have the benefit of the Enref refinery or of
Engen’s extensive depot network, key assets that will limit effective retaliation on the
part of the OOCs. It is also clear that foreclosure is, in significant part, driven by the
objective of capturing, or, at least, credibly threatening to capture, increased
downstream market share – the Engen retail network will be a significantly more
effective springboard for downstream growth than the Sasol network.
216. Nor are we persuaded by the argument that the organic growth of Sasol’s
downstream retail network will ultimately result in a structure similar to the Uhambo
downstream retail network will ultimately result in a structure similar to the Uhambo
structure and will, thus, afford similar opportunities for foreclosure. Organic growth,
no matter how aggressive and successful, will not result in remotely the same
downstream market share for Sasol as that acquired through a merger with Engen.
Uhambo’s inland retail share is 40% while Sasol’s own most optimistic estimate is a
market share of the order of 15% through organic growth. In addition organic growth
is gradual, not immediate, and, hence, will not disturb the balance of power in the
same dramatic and immediate manner as the acquisition as Sasol gradually grows
its retail base in the country, its dependence upon the OOCs to supply its gradually
growing coastalnetwork will increase and it will do so without the benefit of the Enref
refinery as an integrated source of supply.
79
217. Above all, though, organic growth – by contrast with growth through
acquisition presupposes mechanisms that will promote robust competition.
As outlined above, this is clearly evidenced by Sasol’s recent – and largely
successful attempts to expand its share of the downstream market, a process
that has been characterised by aggressive discounting in the commercial and
industrial segments of the retail market and, even, it appears, instances of
discounting the wholesale price. We also reject the contention, frequently
advanced in these hearings, that we should view investment in additional retail
capacity as somehow wasteful. The competitive process is precisely animated
by new investment and the process that must follow if it is to realise an
adequate return. This is precisely what has happened in the fuel market. The
current extent of regulation obviously limits the extent to which competition has
broken out in consequence of Sasol’s attempts to grow its downstream market
share. But it offers a taste of what is to come in the event of deregulation.
218. The argument that asserts that it has never been the intention of the merging
parties to foreclose is equally unpersuasive. Subjective intent plays little or no
role in merger evaluation which is concerned to examine objective structural
change and to predict the consequential evolution of the capacities and
incentives of the merged entity. We have yet to hear a merging party proclaim
its intent to exploit its soon to be acquired market power. Indeed Sasol may
come closest in its candid embrace of foreclosure.
219. There is in fact a startling volume of documentary evidence that illustrates, in
the most graphic terms, the extent to which Sasol has contemplated and
actively planned for foreclosure. One example – and there are many available
actively planned for foreclosure. One example – and there are many available
will suffice. A position paper submitted to the Sasol board dealing with the
company’s postMSA strategy states:
Since road, rail and pipeline capacity determine the volumes that the oil companies
cannot supply from the coast, it is expected that the oil companies will endeavour
to increase this capacity. It is thus in Sasol’s interest to absorb as much of the
80
potential logistics capacity as possible. Sasol would, however, have to
demonstrate that such initiatives hold economic benefit for Sasol. 127
220. This not only accurately portrays the predatory content of a foreclosure strategy and
Sasol’s clear willingness to pursue it, it also indicates that the authors knew that it was
in potential contravention of the law, hence the need for an ‘alibi’. It would clearly not
be difficult to demonstrate the ‘economic benefit for Sasol’ though it may have been
more difficult to square with the provisions of the Competition Act. However predation
of the sort contemplated here would have been extremely difficult to detect and
prosecute. We note that it has been contended that this all reflected, at most,
strategising on Sasol’s , and therefore cannot be said to represent the views of
Uhambo’s and management. This too falls into the category of assessments of
subjective intent which, as we have already emphasised, play no role in merger
evaluation.
221. In that vein we are not persuaded by the argument that there are, in the event of a
merger actually enabling anticompetitive conduct on the part of the merged entity,
competition remedies available as well as powers at the disposal of the Minister of
Mineral and Energy that would safeguard consumers against any anticompetitive
postmerger conduct. Were this argument to be accepted there would be no purpose
in merger regulation which is specifically designed as a preemptive measure aimed
at maintaining competitively structured markets. The conduct remedies available in
Chapter 2 of the Act and the administrative remedies available to the Minister are, for
a variety of reasons, difficult to apply and, hence, even if the merged entity was in
breach of the Competition Act or of any of the duties imposed by other statutes, the
breach of the Competition Act or of any of the duties imposed by other statutes, the
consumer and the national economy would be obliged to endure lengthy and costly
periods of anticompetitive conduct before the perpetrators were brought to book. We
repeat, merger regulation is an ex antemechanism precisely designed to maintain
structures conducive to competition. An appeal to the existence of ex post remedies
in the event of anticompetitive conduct is simply beside the point.
222. The likelihood of foreclosure then hinges on a single, objective enquiry: In the event
127 BP19 page 311. Our emphasis. Also see page 4358 of the transcript where documentary
evidence of Sasol’s plans to identify ‘ ways in which we can block or limit road and rail capacities’ is
put to Mr. Oberholster in crossexamination. On page 439 of the transcript Mr. Oberholster states
‘..if we could increase the cost for the oil companies that would suit our purposes. It we were able
to limit the logistics, it would again suit our purposes.’
81
that Uhambo attempts to deny or reduce supplies of product to its downstream
competitors, will the OOCs be able to replace Uhambo product with product brought
in from their coastal refineries?’
223. The OOCs insist that they cannot mobilise sufficient logistical capacity to
replace all of Sasol product. Indeed it is probably common cause that not all
of Sasol’s product can be replaced. However, the OOCs insist that the scale
of available logistics capacity is such as to ensure that their downstream
marketing arms will depend on Uhambo for a large portion of their
requirements. Should Uhambo foreclose this volume, the OOCs would lose
considerable downstream market share to the merged entity. Alternatively
Uhambo could utilise the credible threat of foreclosure to raise the price of its
inland product or maintain the price at supracompetitive levels. This would
raise the costs of the OOCs relative to Uhambo thus giving the latter a
downstream competitive advantage that will have been acquired through an
exercise of market power.
224. For their part, the merging parties insist that the OOCs have significantly understated
the amount of available logistics. On the merging parties estimate of logistical
capacity, a foreclosing Uhambo would be left with significant unsold product. It would
then either have to reduce output from its inland refineries and so forego the refining
margins.128 Or it would have to accept the lower margins available on export
markets.
225. The merging parties also argue that even if there is a logistics constraint, this
will be relaxed once the extended DJP is commissioned. They insist that
should they attempt to foreclose in this window period before the new pipeline
should they attempt to foreclose in this window period before the new pipeline
capacity comes on stream, there are strategic responses available to the
OOCs that would ensure that any market share lost as a result of foreclosure
would be immediately recoverable. For all these reasons, they conclude that
foreclosure would be an unprofitable, and, hence, irrational strategy.
128 Note that the CSA obliges Uhambo to purchase all of Synfuel’s output of liquid fuel component
so any reduction in inland refining capacity would have to be borne by the high margin Natref
refinery.
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226. Before turning to a detailed consideration of the evidence regarding the
viability of foreclosure, a word about the general approach adopted by the
merging parties is apposite.
227. Much of the evidence submitted by the merging parties appears to proceed,
firstly, on the premise that if it can be shown that it is technically feasible for
the OOCs to convey product to the inland region then it will have been
established that foreclosure cannot be pursued successfully by the merged
entity. Secondly, the merging parties cast foreclosure as a monopolisation
strategy and, hence, if it can be shown that the foreclosing entity will not
succeed in removing the targets of foreclosure from the market, then it will
have been established that foreclosure will not be rationally pursued.
228. We do not accept either of these premises. The possibility of foreclosure is not
rejected by an argument that demonstrates the technical feasibility of overcoming
siegelike conditions. If, in order to overcome input foreclosure, the OOCs are forced
to resort to manifestly uneconomic methods of conveying product from the coast, then
the foreclosure must be judged a success. In fact, the objective need not even be the
elimination of competitors and the capture by the foreclosing entity of ever greater
shares of the downstream market. Indeed the merged entity may well forebear from
acquiring significantly greater market share if other objectives are achieved. In this
case, the evidence shows that the principle objective of foreclosure is to impose BFP
pricing on the OOCs shortfall or ‘must have’ volumes and to impose the highest level
of ‘must have’ volumes possible. 129
129 In similar vein, note Paras 54 of Shell’s Heads of Argument points out that even if it were
shown that the OOCs were capable of physically bringing in supplies from the coast, the additional
costs entailed thereby may reduce their ability to compete with Uhambo thus still enabling Uhambo
to achieve the objective of gaining, through foreclosure, additional downstream market share. Shell
also points out – persuasively we believe – that ‘the refusaltosupply strategy need not take the
form of the immediate cessation of all supplies on day one. Instead Uhambo might selectively, but
repeatedly, deny the OOCs supply at certain depots for limited periods, sufficient to disrupt the
OOCs supplies to dealers in the vicinity of those depots, causing the OOCs to be seen as
unreliable. This in turn would permit Uhambo to target those dealers, promising more reliable
supplies that the OOCs could offer.’ Shell goes on to argue that such a selective foreclosure
strategy would make considerable sense if Uhambo’s marketing network was not immediately
capable of immediately absorbing all of the volumes supplied by the OOCs. See Para 55 of the
Shell Heads of Argument.
83
229. We repeat: the OOCs would not continue to utilise manifestly uneconomic
means for conveying product from the coast even if technically feasible. At
some stage – as we have been constantly told by the merging parties –
‘rationality’ would prevail and the OOCs would agree to pay the BFP price on
that portion of its inland requirement which it is not commercially viable to
convey from the coast, that portion of their requirement subject to a credible
threat of foreclosure. BFP will, as under the MSA regime, be the industry
accepted pricing norm for the lion’s share of the Uhambo product and, to boot,
it will have established its ability to punish those participants in the industry
that attempt to question this norm.
Foreclosure – profitability and credibility
230. The merging parties contend that foreclosure would be an unprofitable and
ultimately selfdefeating strategy. They argue that the OOCs are capable of
mobilising logistics capacity that will enable them to replace a significant
proportion of their inland requirement that is currently purchased from Sasol,
with product conveyed from their coastal refineries. Essentially the merging
parties argue that the OOCs would be able to convey sufficient product from
the coastal areas to service their core requirements and that, at best, the
merged entity may acquire, temporarily, a small part of their rivals’ market
share. Moreover, the merging parties insist that this gain in market share will,
given a rational strategic response by the OOCs to foreclosure, be temporary
and will revert to the OOCs once the expansion of the DJP lifts the logistics
constraint.
231. The upshot of this attempt at foreclosure, argue the merging parties, is that the
merged entity would be left with significant excess supply in the inland region.
merged entity would be left with significant excess supply in the inland region.
It would then be obliged to reduce output from its relatively high margin Natref
refinery or, failing that, it would have to place its excess product on lower
margin export markets. These would either be the limited overland export
markets or they would be overseas markets in which case the merged entity
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would have to convey the product to the coast. The merging parties also
contend that, in the event of foreclosure, the OOCs would utilise their coastal
production capacity and their storage capacity to retaliate and that the costs
imposed on the merged entity would also have to be factored into the profits –
or, in the merging parties contentions, the losses – entailed in foreclosure.
232. A number of models of the commercial consequences of foreclosure were
constructed. The merging parties’ model was presented by Dr. Robert
Stillman, their expert witness. Shell’s expert, Mr. Simon Baker, also presented
the fruits of his modelling exercise as did Mr. Simon Bishop on behalf of BP.
233. Each of these models arrived, as might be expected, at widely divergent
outcomes. The parties’ model (henceforth ‘the Stillman model’) demonstrated
that, under most assumptions, foreclosure turned out to be unprofitable. BP’s
model (‘the Bishop model’) found significant profit in foreclosure. The Shell
model (‘the Baker model’) found that foreclosure was clearly profitable,
although less so than the findings of the Bishop model.
234. It is, for present purposes, most fruitful to compare the results of the Stillman and
Baker models. Mr. Baker selfconsciously adopted the design and variables of the
Stillman model while Bishop’s model is less easily compared to the others. This does
not mean that we believe that all of those aspects of Bishop’s model that part
company with those of his counterparts are incorrect. 130 However, clearly the
Stillman model represents the merging parties’ best case. Mr. Baker, by adopting the
model of the merging parties, has placed himself on his opponent’s chosen terrain but
has nevertheless arrived at conclusions that are hostile to the parties’ case. Because
has nevertheless arrived at conclusions that are hostile to the parties’ case. Because
130 Note particularly the unilateral effects built into the Bishop model. These essentially reflect the
rents to be derived from the supracompetitive prices charged by the merged entity as its
foreclosure strategy yields increasing downstream market power. These rents are not incorporated
in the Baker model or the Stillman model. However while it would be extremely difficult to quantify
the rents so earned and so a ‘pragmatic’ model, such as the Baker model, omits reference to these
unilateral effects, this does not mean that they should be ignored. In order for unilateral effects to
present themselves, foreclosure need not increase the price of the product; it may merely maintain
the supracompetitive BFP over a larger volume of output than would be the case in a non
foreclosure situation. Unilateral effects account for a significant portion of the profit found in the
Bishop model. However, while the concept is easy to defend, the number is not and is accordingly
difficult to build into a defensible modelling exercise.
85
the respective models are identically constructed, the debate is then reduced to the
validity of the data and the underlying assumptions. This then becomes an evidence
based enquiry rather than one over the merits of the respective models’ designs.
What emerges is that the merging parties are unable to sustain their case on the
basis of their own model design. There is then no need to debate the merits of the
Stillman model versus the Bishop model.
235. Before turning to a highlevel comparison of the two outcomes modelled by
Mr. Stillman and Mr. Baker, a word about the evidence presented by the
parties is apposite. A pattern of the empirical evidence presented by the
parties is how over time, over the successive refinements of their model (and
the same is broadly true of the data presented on efficiencies), the data
utilised grew increasingly favourable to the outcome sought by the merging
parties. Indeed Dr. Stillman candidly acknowledged that on the first run of his
model the conclusions indicated that foreclosure was indeed a profitable
strategy. He advised the parties of this outcome and other data – data more
favourable to establishing that foreclosure was not profitable was placed at
Stillman’s disposal. In fact certain major determinants of the model’s ultimate
conclusions – for example, the conveyance of diesel in the crude oil pipeline –
had not been considered at all in the initial run.
“DR STILLMAN : Let me break that into pieces. I absolutely reject the suggestion
that I have given instructions or told the parties that they need to go find logistics.
That I reject. What is correct is that in doing the work in March I was surprised
when one actually ran the number in the manner we did, that foreclosure was a
closer call than I had assumed it would be in working in that section of the report in
closer call than I had assumed it would be in working in that section of the report in
November. The November report was more qualitative. It talked about the kinds of
effects and it is accurate to say that in doing the work on actually running the
numbers, I personally was surprised at how that foreclosure was not the absolute
losing proposition that it seemed to me that it was in November .
ADV ROGERS : And was that an impression or view, which was conveyed to your clients?
DR STILLMAN : I am sure that, we certainly had phone calls. We had various kinds of
exchanges. It is certainly possible.
ADV ROGERS : And it was after that that these additional logistics came to the fore. I am
not putting it to you that you told them to go and dredge them up, but it is after this, at
least as a matter of time that these additional logistics came to the fore.
DR STILLMAN : The logistic certainly, there are certain changes in the model that take
place after March and the people who put them together presumably have basis for their
86
numbers.131
236. From March to August 2005 additional work had been done on various issues,
including logistics. This resulted in “ the new logistics with expandable logistics
[which] made foreclosure look less profitable ”.132 The Shell heads of argument
calculate that the additional logistical capacity ‘discovered’ between the preparation of
the merging parties’ expert report of March 2005 and the subsequent report of August
2005 permitted the conveyance of an additional 2,06 billion litres of fuel. These are
broken down between the utilisation of the crude oil pipeline whose projected
logistical capacity increased from zero in March to one billion litres in August,
additional road and rail logistics of 0,56 billion litres, 130 million litres from the de
bottlenecking of the DurbanJohannesburg Pipeline, and an additional 400 million
litres of annual capacity from logistics capacity freedup by Engen. 133
237. While we do not put the credibility of Dr. Stillman (or Mr. Malherbe, who
submitted evidence on efficiencies on behalf of the merging parties) at issue –
they worked with data provided by representatives of their clients – this pattern
is noteworthy and does cause us to view some of the data with scepticism.
And there is, in several cases, evidence additional to the fortuitous movement
in the data that corroborates our scepticism. For example, as we shall
elaborate below, Sasol itself initially argued – in documents and presentations
that were prepared before the filing of this merger – that it was not technically
feasible to put diesel up the COP. This view is presumably reflected in the
merging parties’ initial failure to mention this as a possible means by which the
OOCs could challenge a foreclosure strategy on the part of the merging
OOCs could challenge a foreclosure strategy on the part of the merging
parties. However, once Dr. Stillman’s initial conclusions directed the parties to
rethink the availability of logistics capacity, they not only reversed their
reasoning regarding the technical limitations of conveying diesel up the COP,
they found an additional 1 billion litres per annum logistics capacity in this
pipeline. ‘’Garbage in; garbage out’ is the caution customarily urged upon
131 Page 8289 of the transcript
132 See page 928 of the t.
133 Para 119 of Shell’s Heads of Argument.
87
those who rely on econometric and other statistical techniques and while not
all of the data used in the parties’ model is to be so characterised, some of it
does appear sufficiently contrived to warrant that description.
238. The following table is derived from a high level comparison of the Stillman and
Baker models. Recall that Mr. Baker adopted Stillman’s model design. Where
they part company is in certain of the assumptions incorporated in their
respective models, notably demand growth projections, logistics and margins.
Many of the elements referred to here are only examined in length when we
turn to a detailed appraisal of foreclosure. However it may help to guide the
reading of the fact intensive review of the foreclosure arguments.
239. A further difference relates to the assumptions made by Dr. Stillman and Mr. Baker
about how the parties would probably respond to foreclosure and nonforeclosure
respectively. These assumptions concern, in particular, the marketing behaviour they
would adopt in the two hypothetical scenarios.
Assumption Stillman (CRA)
(Merging parties)
Baker (Revised)
(Shell)
Inland demand of OOCs 7.56 billion litres 7.56 billion litres
Growth in demand Uhambo business plan
Petrol 1% Diesel 3.5%
Shell’s estimates
Petrol 2% Diesel 4.9%
134
Logistics
Diesel in COP 1 billion litres pa No diesel brought up COP
OOCs existing DJP
capacity 2.83 billion litres pa 135 2.83 billion litres pa 136
Debottlenecking
northern DJP
Yield additional road
logistics of 0,3 billion litres
Yield additional road
logistics of 0,148 billion
litres pa
Timing of DJP
expansion capacity 1 January 2010 1 January 2011
Divertible logistics
(AOL) 0.27 billion litres 0.27 billion litres 137
134 He later adjusted his projections for the anticipated effects of the taxi recapitalisation
programme (“TRP”) which in effect reduced petrol demand and increased diesel demand.
programme (“TRP”) which in effect reduced petrol demand and increased diesel demand.
135 The merging parties assume an operational capacity of 3.2 billion litres and retention of 370
million litres by Uhambo.
136 Mr. Baker accepts CRA’s figure.
137 Shell questions whether the OOCs would be contractually free to discontinue supplying their
African Overland (AOL) clients. Shell also submits that it has not been established that the product
88
Existing road/rail
1.95 billion litres (Swart) +
additional 270 million
diverted AOL logistics =
2.22 billion litres138
1.350 billion litres 139
Growth in road/rail
15% pa further logistics of
1.16 billion litres up till
2008140
No expansion in rail
capacity but additional road
logistics of 250m annually.
Freed up Engen 0,17 billion litres 0,128 billion litres
Gantry capacity at
Durban
CRA does not consider
gantry constraints
Total capacity of 4.049
billion141 litres with
additional 3 bays in 2007
(4.716 billion litres) and
another 3 bays in 2008
(5.431 billion litres). 142
currently transported to the AOL markets is physically moved from the coast. If the product was
purchased from Sasol in the inland and then transported from Gauteng to the AOL markets, it is not
selfevident that these same logistics would in a foreclosure scenario be available to the OOCs on
the coast. But Mr. Baker nevertheless uses CRA’s figure.
138 1.39b allocated to road and 560m to rail. See Mr. Swart’s Table 38 at page 545 of the witness
statement bundle.
139 1 billion litres for rail and 350million for road – but OOCs submit that actual figure is 1.085,
therefore Mr. Baker’s figure, though lower than the merging parties contention, is more generous to
the merging parties than that contended for by the OOCs.
140 340 million in 2006, 380 million in 2007 and 440 million in 2008. Expansion would cease after
2008 in view of the impending commissioning of the new DJP in 2010. Paragraph 75 of Dr
Stillman’s witness statement at page 107 of the witness statement bundle.
141 There are 7 bays for BP/Shell at Island view (one other bay is used to load heavy furnace fuel
and white spirits), 4 bays for TOTAL at Island view and 8 bays for Engen at Wentworth. During
August 2005, the 7 bays at BP/Shell’s facilities loaded 227 million litres per bay. Shell assumes that
with some additional effort a further efficiency of about 5% could be achieved. Mr. Baker adds this
and assumes a capacity of 238 million litres per bay per annum. He then adjusts downwards
TOTAL’s capacity by 10% for and Engen’s by 20% to take account of the assumed inefficiency
which would be experienced if the TOTAL and the Wentworth facilities were, in consequence of
foreclosure, to be used by more outsiders and if Uhambo was not fully cooperative in regard to the
use of Wentworth. The total 4.049 billion therefore = 238 x 7 for BP/Shell; 238 x 4 x 90% for
TOTAL; 238 x 8 x 80% for Wentworth. See Shell’s heads of argument from paragraph 237.
89
Market share
Assumes instantaneous
recovery of market share
by the OOCs upon supplies
becoming available again
Assumes an irreversible
gain in retail market share
of white fuels
Diesel retail sales Does not factor this in Includes diesel retail sales
Prioritisation of transport Prioritise OOCs shortfall
volumes
Prioritise all transport
capacity without leaving
inland short of diesel.
Deregulation
Petrol retail deregulated by
2009
Petrol retail margin will
decrease to 31 cpl
Initially 2010, changed after
Gumede’s testimony to
2011.
petrol retail margin reduce
to 16 cpl (for the period
20112015)
Discount sales to OOCs 15 cents per litre below
inland BFP
15 cents per litre below
inland BFP
Margins
Uhambo’s margin on
inland BFP sales 143 41 cents per litre 28 cents per litre 144
Margin on AOL sales 15 cents per litre above
export parity
4 cents per litre above
export parity 145
Cost of transporting
to Durban for export
foreclosure
scenario
21 cents per litre 26 cents per litre 146
Margin on retail
petrol sales for
period 20062008
42 cpl on retail petrol sales 42 cpl on retail petrol sales
Combined Uhambo
margin on captured
downstream sales
147
16 cents per litre 148 16 cents per litre 149
142 When Mr. Baker deducts the KZN, Swaziland and Lesotho demand figures from the total
gantry capacity, he arrives at a net amount of gantry capacity available for loading vehicles
destined for the inland market. Comparing the results for 20062010 with the available inland tanker
capacity for the same period, he finds that gantry capacity is the binding constraint in all years
except in 2008. Shell submits that if one holds Mr. Baker’s gantry capacity assumptions constant
but adjusts the tanker capacity downwards by eliminating the debottlenecking effect of additional
148 million road logistics and by assuming that tanker expansion would cease after 2008, one finds
that tanker capacity is the binding constraint in all years except 2007. Shell submits that even if the
merging parties were to show that tanker capacity is greater, it would not help since on Mr. Baker’s
generous tanker capacity assumptions, the binding constraint is not tanker capacity but gantry
capacity.
143 Coastal BFP plus 11 cents per litre locational advantage.
144 Assumed initial Lexecon model’s differential of 15 cents per litre but assumed the locational
advantage was 13 cents per litre.
145 Mr. Baker used initial Lexecon model’s assumption.
146 Baker based this on the estimated cost of a front haul trip and Swart appears to have
accepted this figure as the cost of contracted services from road haulers. See page 55 of the
witness statement bundle. Stillman’s figure is an average based on the assumption that Uhambo
would use 50% contracted transport capacity (at 26cpl) and 50% backhaul capacity (at 16cpl).
90
Total LOSS R1 billion R2
billion150 PROFIT R3.435 billion
240. In addition to the expert economists we have heard much detailed evidence
and much argument from technical experts who were, for the most part,
employees or former employees of the merging parties or the intervenors.
Many of the differences of both sets of experts are not susceptible to definitive
judgement. We understand that foreclosure would not be rationally pursued if
it appeared manifestly unprofitable, if, in other words, it appeared that the
product denied by the foreclosing entity was easily substitutable with similar
products or, as is pertinent to this case, with the identical product supplied
from elsewhere. However, the decision can rarely be assisted by the
accountingtype treatment in which these hearings have become mired.
241. Merger analysis is inherently predictive. That reality cannot be denied by
attempting to ascribe a veneer of absolute certainty to matters that, by their
very nature, cannot be known in advance with absolute clarity. Hence, and by
way of just one example, it is widely acknowledged in these hearings that the
future rate of growth of demand for petrol in the inland impacts significantly on
the profitability of foreclosure. And yet legions of highly trained economists
repeatedly get more easily predicted estimates than this hopelessly wrong.
242. The merging parties have been candid in acknowledging this while, as is to be
expected, they simultaneously attempt to prod the Tribunal in their direction.
Hence, after an elephantine attempt by the merging parties to construct the
foreclosure balance sheet, all that is brought forth is the following timid mouse:
The conclusion to be drawn from the foregoing is that it is not (at) all clear or likely
The conclusion to be drawn from the foregoing is that it is not (at) all clear or likely
147 Shell expressed doubt about the accuracy of this figure as it is supposed to be a “volume
weighted average marginal margin” applicable to the combined commercial markets of Engen and
Sasol. Mr Swart puts Sasol’s commercial margin at 18cpl and Mr Wright puts Engen’s at 16,8cpl.
The 16cpl can’t possibly be an average of the two.
148 Mr. Baker uses the merging parties’ figures.
149 Mr. Baker uses the merging parties’ figures.
150 Page 108 of the Merging parties Heads of argument. See also paragraph 113 Table 5 of Dr
Stillman’s statement at page 120 of the witness statement bundle.
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that foreclosure will be profitable; on the contrary, it will probably be
unprofitable.151
243. There can be no doubt whatsoever that the intervenors could, on a reading of
the same evidence, make the opposite claim in the same highly qualified
terms. Indeed an examination of the evidence leads us to conclude that those
who apprehend foreclosure could make a considerably more emphatic claim
than that made on behalf of the merging parties.
244. This is why the credibilityof a threatened foreclosure is so important. Neither the
Tribunal, nor the Commission, nor the merging parties, nor the intervenors, can
decide with absolute certainly – beyond all reasonable doubt – whether or not
foreclosure will be profitable. We can however say with confidence that it is a credible
threat. There can be no gainsaying that, on its face, a vertical transaction such as
this one, between parties who hold powerful positions in both the markets in question
– in one a near monopoly, in the other the significantly largest market share –
portends the very real prospect of the merged entity pursuing foreclosure in its
rational commercial interest. The numbers may conclude that the prospects for a
profitable actual foreclosure are uncertain. However given the certain reality of the
structural change wrought by the merger, and the numbers, which, on the very best
reading for the merging parties, are equivocal, it would be an extraordinarily bold
business person who did not take the threat of foreclosure seriously. Whether
Uhambo will win a foreclosure war with the OOCs may not be beyond all doubt; but its
clear ability to mount a major campaign and to cause considerable damage is
confirmed again and again by the evidence and argument presented at these
hearings.
245. We will examine the ‘big ticket’ issues in the debate, those ‘silver bullets’ that
will determine whether or not Uhambo has the capacity to mount a powerful
campaign and so confirm the anticompetitive promise of the structural change
or, conversely, whether the OOCs have the capacity to resist foreclosure
aimed at increasing downstream market share and maintaining the BFP
wholesale price over as large a portion of petroleum product as possible.
151 Page 113 of Merging Parties’ Heads of argument.
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246. Hence robust rates of growth in the inland market for white fuels will, in a
foreclosure environment, permit the foreclosing entity to rapidly acquire market
share, and thus significantly strengthen the credibility of the foreclosure
threatened by the structural opportunities afforded by the merger. This then
warrants close examination.
247. Access to a major new logistics resource will, on the other hand, significantly blunt the
threat of foreclosure. The prospect of utilising the COP for the conveyance of diesel
is the only major new logistic resource contended for by the parties that would make a
major difference to the ability of the OOCs to resist foreclosure. 152 Were this
feasible, it would be the logistical basis for the resistance to foreclosure. This issue is
examined as are several other issues relating to pipeline capacity.
248. While we do examine the more significant arguments around road and rail capacity,
scrabbling for extra road tankers, marginally reducing the voyage times of long haul
carriers, and increasing gantry productivity are important in the normal course of
business and competition in competitive markets, but they do not add up to much as
mechanisms for resisting an attempted foreclosure and hence do not reduce the
credibility of the threat of foreclosure that is implicit in the structural change. We do
not examine some of the more exotic claims. For example, while the claim that the
debottlenecking of the northern DJP will release additional pipeline capacity is
examined, the contention that this will then have a knockon effect on the distances
that long haul trucks will have to travel and hence on their turnaround times, does not
warrant detailed consideration. These esoteria may well entertain competing micro
economists, but they do not, we are certain, weigh heavily in a strategic business
economists, but they do not, we are certain, weigh heavily in a strategic business
152 Note that of the 2,06 billion litres of new capacity that the merging parties unearthed between
the March and August 2005 expert reports, 1 billion is derived from the use of the COP for the
conveyance of diesel.
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decision to embark on or resist foreclosure. 153
249. Finally a strategic response capable of drastically limiting the duration of the
foreclosure and one that enables the targets of the foreclosure to rapidly
regain lost market share may also constitute one of those weapons that
weaken the credibility of a threat of foreclosure. This too receives detailed
consideration.
250. These are, in our view, the critical issues on which to focus the utilisation of the COP
for the conveyance of white fuels as well as aspects of road and rail logistics; the rate
of growth of demand; and a possible strategic response on the part of the OOCs that
will enable them to regain lost merger share when the extended DJP limits Uhambo’s
foreclosure armoury. They are the critical items not merely because their impact on
the outcomes of the various models is most powerful but because they alone have
the potential to severely dent the credibility of a threatened foreclosure. We will, for
the sake of completeness, mention a number of other, less significant issues raised in
the foreclosure debate, but they, are in our view, not dispositive of the main question
before us: does the merger credibly threaten to underpin successful foreclosure of the
inland retail (including the commercial and industrial) market?
153 A witness, who clearly understood this fundamental point, was BP’s Mr. Fienberg. In the
course of a lengthy exchange under crossexamination, in which Mr. Snycker’s, counsel for the
merging parties, attempted to cast the alleged absence of documentary evidence of the OOCs
search for alternative logistics as proof of their lack of belief in the actual prospect of foreclosure,
Mr. Fienberg responded as follows: ‘ You know, at the end of the day I don’t fill my bath with a
teacup. I open a tap and water comes out the end of a pipe and I think what we are trying to do
here is to say somehow we’ll find some way of transporting billions of litres of product by truck and
by all sorts of manner and means. You know that’s why the focus has been on the big
infrastructural debate. I think that the persistence around where is this foreclosure strategy, where
is our response to it, the response is in this room, because it’s a strategic response.’ At page 3013
4. Mr. Snyckers dismissed this response as ‘preposterous’ and even used the occasion to remind
Mr. Fienberg that he was testifying under oath. We do not agree with Mr. Snyckers. We understand
Mr. Fienberg to be arguing, with the aid of an apt analogy, that major strategic interventions, like
foreclosure, can only be met by major strategic responses, such as the construction of significant
new infrastructure or by an attempt to prevent a merger which is considered to be the basis for a
successful strategy of foreclosure. Fienberg does not consider it adequate to respond by a lengthy
contemplation of the prospect of reducing long haul vehicle turnaround times from X hours to XN
hours – this, in Fienberg’s estimation, is precisely an attempt to fill a bath with a teacup. The
hearings, we repeat, have become mired in these issues that do not, either singly or collectively,
have much, if any, bearing on the large question of foreclosure. We have examined some of these
and they are discussed in this decision mostly they serve to confirm our view of their essential
irrelevance.
94
i.The merging parties provide the following table showing the extent
of the road and rail transportation constraints on the OOCs. The
table assumes that TOTAL is balanced in its inland production and
demand and therefore relates to only BP, Shell and Caltex. The
table further relates to 2006, and has accepted Mr. Baker’s figures
of growth in demand for petrol and diesel.
(a
)
Inland demand of OOCs 7,56 billion litres
(b
)
DJP capacity available to OOCs (assuming an operational
capacity of only 3,2 billion litres, and a retention of 0,37
litres by Uhambo)
2,83 billion litres
_____________
4,73 billion litres
(c) Admitted actual road and rail capacity of OOCs 1,043 billion
litres
3,687 billion
litres
(d
)
Additional sources of transportation available to
OOCs
Additional capacity in DJP if scheduling inefficiencies give
way to transporting only petrol, or large slugs of petrol and
diesel
0,3 billion litres
Increase in road capacity due to debottlenecking of DJP
in October 2005
[This is the figure contended for by the OOCs; the
merging parties contend this figure should be 0,3 billion
litres]
0,148 billion
litres
Road and rail capacity freed up by Engen as result of
merger
[This is the figure contended for by the OOCs; the
merging parties contend this figure should be 0,17 billion
litres]
0,128 billion
litres
Growth in road and rail capacity in 2005 and 2006
[This is Baker’s figure, though he reduces it to 0,43 due to
alleged gantry constraints)
0,5 billion litres
Diversion of AOL transports 0,27 billion litres
Aggregate 1,346 billion
litres
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(e
)
Shortfall in transportation capacity: 2,341 billion
litres
251. The above figure of 2,341 billion litres is close to Mr. Baker’s figure of a
shortfall of 2,4 billion litres, and shows the extent, in absolute figures, of the
transportation constraints of the OOCs.
Rates of growth in the demand for white fuel products
252. This factor exercises a major influence on the results of the various models. In the
face of logistical constraints, the higher the rate of growth in demand, and particularly
inlanddemand, the greater the dependence of the inland OOCs on Uhambo.
253. Each of the intervenors and the merging parties has submitted projections for
the growth of demand for petrol and diesel. The Uhambo and the Engen
estimates for petrol growth are the lowest estimates recorded – the Engen
estimate of 0,2% growth is a notable outlier. The Shell estimate for petrol
growth of 2% per annum which is the estimate used in the Baker model is in
the middle range of the estimates and slightly higher than the Uhambo, Engen
and the Sasol estimates (the Stillman model uses the lower Uhambo forecast
of 1%). The Shell estimate of 4,9% for diesel growth (growth, note, off a
significantly lower base volume than petrol) is at the upper end of the
spectrum of estimates although not markedly so and is close to Engen’s
estimate of 4,7% annual growth. Uhambo and Sasol’s estimates of diesel
growth – 3,5% and 3,4% respectively – are the lowest of any of the oil
companies’ estimates of growth in diesel demand.
Estimates of Growth rates in PETROL demand
Source Rate
BP Bishop 3%
BP Twine 2.2%
TOTAL (for years 2005 – 2014) 2.2%
Shell 2.0%
TOTAL (for years 2004 –2014) 1.6%
Sasol 2006 budget 1,4%
Uhambo business plan 1%
Engen Business plan 0.2%
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Estimates of Growth rates in DIESEL demand
Source Rate
BP Bishop 6%
BP Twine 5.6%
Shell 4.9%
TOTAL 2005 – 2014 4.8%
Engen Business plan 4,7%
TOTAL 2004 –2014 4.5%
Uhambo business plan 3.5%
Sasol 2006 budget 3,4%
254. It is common cause that the impact of the various demand growth estimates is
highly significant.
255. We have been presented with bald estimates by the participants in these
hearings – many of whom appeared to rely on independent experts – but
surprisingly few have attempted to explain the underlying basis for their
estimates. A notable, if somewhat unfortunate, exception is Mr. Swart of Sasol
who indicated that Sasol had used an observed correlation between the
Consumer Price Index and petrol demand to estimate demand growth.
However, there is no discernible causal relationship between these variables
and despite persistent crossexamination and questioning by the Tribunal, Mr.
Swart was not able to provide a convincing explanation of the relationship or
any reason why the projected movement of the CPI should be utilised in
projecting future demand for petrol.
256. In our view, common sense would suggest a high degree of correlation between
income growth and rates of growth in fuel consumption. 154 It may also reasonably be
hypothesised that changes in the distribution of income would correlate with shifts in
demand for fuel products.
257. Fuel products are widely consumed in most areas of economic activity and it is
154 This hypothesis was put by the Tribunal to Mr. Baker who concurred. We note too that Mr.
Swart has used GDP growth as his explanatory variable for diesel growth but failed to explain why
he did not employ the same basis for estimating petrol growth – the inference that we draw is that
the results of what would have been a perfectly obvious exercise to undertake did not suit his case.
97
axiomatic that the higher the rate of economic growth, the higher the rate of growth of
demand for fuel products, although this will naturally be influenced by the sectoral
distribution of this increase in overall economic activity – that is to say, certain sectors
are clearly more fuel intensive than others. However, to hypothesise a positive
correlation between growth in output and growth in fuel demand appears eminently
reasonable. We note that Shell’s bases its estimates of a 2% rate of growth in petrol
demand and a 4,9% rate of growth in diesel demand (adjusted upward to 5,1% to
take account of the taxi recapitalisation programme) on a predicted GDP growth rate
of 3,5% per annum which appears reasonable, even conservative.In other words,
most predictions of future economic growth rates exceed those achieved in the last
several decades and, accordingly, one may reasonably hypothesise that the rate of
growth of fuel demand will also increase over the rates of the recent past. Note too
that we are here concerned with the inland region – the industrial engine of the
economy – whose growth rates can reasonably be expected to exceed the national
rates.
258. Income distribution will also impact on fuel demand growth because it will, inter alia ,
influence the purchase of motor vehicles. So too, of course, will the interest rate.
The latter has declined significantly and no forecasters are estimating a foreseeable
return to the years of punitively high interest rates. It is widely accepted that there
has been an important change in distributional patterns in the past decade and that
this is manifest in the significant growth of a middle class out of the historically
disadvantaged population. 155 These factors undoubtedly help explain why
persistently buoyant motor vehicle sales have been a significant feature of the
consumer led boom of the past several years. These factors then also suggest an
increase in the rate of growth of demand for fuel products over recent historic trends.
259. We also heard lengthy technical argument concerning the impact of fuel
efficiency on demand growth. These relate to the taxi recapitalisation
programme, which will usher in the replacement of petrol by diesel in the
nation’s taxi fleet and to predicted advances in vehicle and fuel technology.
While the impact of the taxi recapitalisation is relatively clear – although we
155 This issue and its impact on consumer behaviour and pattern is comprehensively dealt with in
Ellerines/Relyant Case No. 56/LM/Aug04
98
note that the project is proving immensely difficult to implement – it is also
relatively neutral in the foreclosure debate because the decrease in petrol
demand will be replaced by an increase in diesel demand albeit not in a one
toone ratio.
260. The merging parties also argued that the movement towards dieselpowered vehicles
and the improvement of diesel engine and fuel efficiency will depress the rate of
growth of demand for white fuels. 156 These arguments were contested by the
intervenors who suggested that regulation aimed at lowering the sulphur content of
diesel may actually increase diesel consumption. The arguments around fuel and
engine efficiency appear highly speculative. In any event the direction of the impact of
the various predicted efficiencies on fuel demand is not consistent and their net
impact is therefore likely to be low
261. In summary, it appears eminently reasonable to expect a correlation between
fuel demand growth and income growth as well as changes in the distribution
of income. Both of these explanatory variables suggest an increased rate of
growth for fuel demand over growth rates experienced in the recent past.
There is no discernible reason to predict petrol growth rates on the basis of
movements in price variables in the manner suggested by Mr. Swart which
apparently represents the reasoning underlying the Sasol and Uhambo
projections.
262. We can arrive at few definitive findings in this regard. Under the
circumstances the most prudent path would appear to lie in following the herd
many of whom, we note again, have relied on independent experts such as
Econometrix and the Bureau of Economic Research. We note that the Shell
estimates which are used in the Baker model are, particularly for petrol
demand growth, at the lower end of the cluster and, given particularly that the
estimates used in the Stillman model are low outliers and that the variable
156 During Mr. Swart’s evidenceinchief, Mr. Cilliers for the merging parties put it thus: “ The
picture here Chair is that there has been a swing away from the use proportionately, away from the
use of petrol towards the use of diesel and then on top of it the diesel vehicles, like the petrol
vehicles, but even more so, have increased efficiencies although you proportionally use more
diesel, you use less diesel than you would have used with the old type model.”
99
used by Mr. Swart to predict petrol demand growth is plainly wrong, it appears
reasonable to accept the assumptions incorporated in the Baker model.
Logistics – pipeline, rail and road
Introduction
263. As already noted, the MSA required the OOCs to purchase Sasol product
preferentially to the extent of some 7 billion litres per annum representing
approximately 90% of Sasol’s annual refined output from Secunda and Natref.
These purchases were made at BFP. The OOCs shortfall was conveyed by
pipeline, rail and road from their Durban refineries to their inland marketing
arms.
264. The scale of the logistics problem is laid out in the merging parties heads of
argument.157 There – based on actual 2004 requirements and utilising the growth
figures of the Baker model – the inland requirement of the OOCs is set at 7,56 billion
litres for 2006. 158 Utilising certain of the key assumptions of the Baker model
though at times drawing on the merging parties assumptions – available DJP
capacity, the road and rail capacity admitted by Mr. Baker and additional sources of
transportation accepted by Mr. Baker are deducted from the requirement of 7,56
billion litres leaving a shortfall in transportation capacity for 2006 of 2,341 billion litres.
This – representing slightly in excess of 30% of their 2006 inland requirement – is, in
the absence of additional logistics, the extent of the OOCs dependence on Uhambo
in respect of which the OOCs fear foreclosure.
265. The merging parties contend that there is sufficient additional logistics capacity
available to the OOCs to convey this shortfall from Durban to the inland. The
merging parties insist further, that even if Uhambo successfully foreclosed on
this product or part thereof and, in the process gained market share from its
this product or part thereof and, in the process gained market share from its
downstream rivals, their rational accommodation – which is argued to consist
of a careful prioritisation among their inland customers – will ensure that the
157 Page 79 of the Merging parties’ Heads of Argument.
158 This represents the requirement of BP, Caltex and Shell. Total, through its share of Natref
output, is assumed to be balanced in the inland.
100
losses of market share would be immediately recouped when the expanded
DJP relieves the logistics constraint. This would limit any gains derived from
foreclosure to the period up until the expanded DJP is commissioned.
266. As already noted, prior to the commissioning, in the mid‘sixties, of the first
pipeline – the DJP the OOCs used road and rail to convey product from the
coast to the inland. The pipelines were put in place to facilitate the
conveyance of product including white fuels as is evidenced most strongly by
the subsequent commissioning of the DWP. This changed with the
development of Natref and, most especially, Secunda and, critically, with the
successive extensions of the MSA to cover the rapidly growing inland product.
267. The clear signal conveyed to the key providers of logistics – namely, Petronet
(pipeline), Transnet (rail) and the coastal OOCs (road) – by the massive
development of inlandproduced refined product and the extension of the MSA
was that henceforth the product produced inland would be used to satisfy
inland demand. This significantly reduced the requirement for logistics
capacity to convey white fuels from the coast to the inland.
268. Petronet responded to this signal – although with a significant time lag by
converting the critical DWP into a gas pipeline reducing, by close to 70%, the
pipeline capacity for the conveyance of white fuels.
269. Rail capacity is, like pipeline capacity, ultimately controlled by Transnet. If
Transnet’s pipeline operator responded to the market allocation arrangement
provided for in the MSA by reducing its capacity to transport white fuel to the
inland, then we may infer that Transnet’s rail division would have responded
similarly. That is, even if it could not, as with the DWP, convert the rolling
similarly. That is, even if it could not, as with the DWP, convert the rolling
stock capacity to alternate uses, we can readily infer that, using the same
reasoning as Petronet, it would not have invested in the expansion of this
capacity. This squares with the difficulties to which the OOCs have attested in
getting additional rail capacity out of Transnet.
101
270. Although not much evidence has been led on the history of logistics there is
every reason for assuming that the OOCs would, rationally, have responded in
the same way, that is, that they would have significantly ‘liquidated’ much of
their own logistics capacity. This refers primarily to road capacity. Indeed, in
response to Secunda and the extended MSA, the OOCs took the drastic step
of mothballing significant coastal refinery capacity. It is then reasonable to
infer that they would have done the same with respect to their logistics
capacity. The independent trucking operators who operated the long haul
petrol tanker fleets would also have been cognisant of the reduction in
demand for their services and so, they too, would have had no incentive to
maintain their own capacity.
271. Sasol then gave notice of termination of the MSA. We have shown above that
the timing of the termination of the MSA coincides with the high point of the
logistics constraint. Sasol announced its intention to invest aggressively in
new retail capacity. Although this would have undoubtedly concentrated the
minds of the OOCs on future Sasol strategies, including the possibility that
they may have to ramp up logistics capacity, on its own even the termination
of the MSA and the entry by Sasol into the retail market did not, of itself,
portend a radically new situation insofar as logistics requirements were
concerned. That is to say, Sasol’s solo entry into the retail market portended a
gradual buildup in its retail activity across the country. In the inland region it
would still have relied for the foreseeable future on the OOCs to take much the
lion’s share of its inland supply off its hands and it would have relied on the
OOCs for product in the coastal areas. In short Sasol on its own, even without
OOCs for product in the coastal areas. In short Sasol on its own, even without
the envelope of the MSA, was in a substantively unchanged bargaining
position.
272. The merged entity will not be similarly constrained. A Sasol merged with
Engen’s inland retailing capacity, Uhambo, in a word, will have far less inland
supply to dispose of to the OOCs and it will control a major coastal refinery on
which it could rely for its coastal requirements – that is, Uhambo’s dependence
102
on the OOCs both as customers in the inland and suppliers at the coast is
much reduced relative to that of premerger Sasol.
273. However even after the merger Uhambo will still have significant, albeit much
reduced, inland supply to get rid of; and the OOCs, despite mobilising
additional logistics capacity, will still have considerable inland demand that it
will need to satisfy. The postmerger bargain is over price. This is
foreshadowed in the current postMSA, premerger situation with Sasol, by its
own admission, intent upon maintaining BFP over as large a volume as
possible. The OOCs could only obtain a reduced price for its shortfall volumes
if it weakened Sasol’s monopoly of inland supply and this could only be done
by bringing in product from the coast. And for this, the OOCs had to persuade
Uhambo of their logistics capacity to bring this product into the inland. They
had, in other words, to demonstrate to Sasol that they could procure sufficient,
commerciallyviable logistics capacity to replace inland Sasol product with that
shipped from their own coastal refineries.
274. However there is already evidence that this new situation has not influenced
the investment decisions of two of the major logistics producers, Petronet and
Spoornet.
275. Petronet’s investment planning is explicitly – and there is testimony from Mr.
Moodley to this effect driven by a ‘rational bargaining’ assumption. That is,
its plans assume that whatever is produced inland, will be consumed inland.
If you’ve got product in that particular area you [would] consume that product first
before you bring product from any other area. 159
276. This is why the planned expansion of the DJP cannot have been predicated on
‘irrational’ bargaining. That is, Petronet, given its stance and, crucially, given
its commercial interests, could not have agreed to expand the DJP because it
its commercial interests, could not have agreed to expand the DJP because it
foresaw a situation of long term ‘irrationality’. Indeed, it has just confirmed that
159 Page 207 of the transcript and also see pages 3313 of the transcript.
103
all capacity in the DWP pipeline – initially a refined product line that was, in the
face of the MSA, converted to a gas line – has, until the end of its life, been
contractually reserved for the exclusive use of Sasol’s gas requirements.
Petronet permitted this conversion because it assumed that under conditions
of rational bargaining the capacity in the DWP would not be required to convey
white fuel from the coast. By the same token it has now decided to expand
the DJP because it believes that demand growth in the inland will imminently
justify the necessary investment. By expanding the DJP it has not thrown its
adherence to a ‘rational bargaining’ norm out of the window.
277. The significance of this observation is that even if the expansion of the DJP
assists the OOCs in overcoming foreclosure in the first years of its expanded
existence, it will ultimately not do so because the expansion has been
predicated on demand growth under conditions of ‘rational bargaining’. The
expansion of the DJP from a 12inch to 16inch pipeline is predicated on
expected expansion in inland demand, not on expected ‘irrationality’. That is,
it is predicated on the calculation that the capacity of the expanded pipeline
will be fully utilised. For this reason an expansion above 16 inches – to which
Moodley understandably refused to commit – is extremely unlikely. If the
decision to expand the DJP from 12 to 16 inches was predicated – as it must
have been on Petronet’s view of demand growth in circumstances of
rationality, it is difficult to see why it should agree to expand the DJP beyond
16 inches unless its inland demand projection has changed and there is no
evidence for this. Indeed ‘irrationality’ would be an extremely risky basis for
Petronet’s investment decision making because, as pointed out in the
Petronet’s investment decision making because, as pointed out in the
hearings, as soon as capacity to overcome foreclosure becomes available, the
incentive to rational bargaining, including the agreement to price competitively,
is overwhelming and Petronet will then immediately be burdened with excess
capacity.
278. This is clearly borne out in Mr. Moodley’s testimony. 160
160 See preceding footnote for reference to Mr. Moodley's views. It is also well understood by the
104
279. Similar considerations apply to the likely expansion of rail capacity. It seems,
in any event, to be common cause that expansion of rail capacity for this
purpose is not on the cards. But even if expansion of that rail capacity
necessary to convey white fuel was feasible, then similar considerations as
those outlined above would apply. That is, Spoornet, already constrained and
with considerable demand for new investment already imposed on it, is hardly
likely to invest in new rail capacity dedicated to the conveyance of fuel if that
investment is predicated on ‘irrationality’. Like Petronet it will look at the
overall balance of inland demand and supply and if there is sufficient capacity
to bring shortfall into the region it will assume that existing capacity will be
‘rationally’ deployed to this end.
280. Where then does this leave us with respect to logistics capacity?
281. The above analysis suggests that Petronet will not rescue the OOCs from a
foreclosure strategy. From Petronet’s perspective foreclosure approximates a
rational outcome. After all foreclosure may simply – or simplistically be
construed as an effort to enforce the core maxim of rationality that holds
‘inland product to be consumed inland’. It abstracts from another set of
realities, viz. first, the fact that inland production is thoroughly dominated by a
company that will attempt to extract a price commensurate with its market
power; and second, that, after the merger the largest inland wholesaler and
Department of Mineral and Energy Affairs, at least as the position is represented in its intervention
application, the DME contended that it is difficult to establish the rationale for the transaction, given
the regulatory framework that it, the DME, is responsible for implementing in the industry. It
submitted that: “The reasons that are put forward in the Commission recommendations are either
not valid or go against the provision of the statutes governing the sector…If the merger is allowed
on this basis, will Government not be obliged to provide additional pipeline capacity to other
players, in order to ensure a more levelled playing field?”
The DME went further to say that: “The DME is also concerned that the conditions proposed by the
Commission are entirely dependent on the construction of a pipeline by the third party, Petronet. As
we understand it, Petronet is not a party to these proceedings and its commercial imperatives to
construct a pipeline may or may not coincide with the requirements of a competitive
environment. For commercial reasons, Petronet may find it unprofitable to construct a
pipeline that will have more capacity than was immediately required , since its shareholders
would, like all other shareholders in similar circumstances, want a reasonable return on their
investment within a reasonable time.”
105
network of retail outlets will be tied to the company that monopolises inland
refinery capacity.
282. Similar considerations apply to the expansion of rail capacity.
283. Where pipelines are concerned, we are largely left with the possibility of
bringing diesel up the underutilised COP. The DWP is out of the equation
because it has been signed over to Sasol in perpetuity; further extension to the
DJP (that is, above 16 inches) in the immediate future (that is, to deal with
foreclosure) is, for reasons outlined above, highly unlikely. There are other
less significant pipeline related possibilities posited by the merging parties that
we will consider and then we must consider the prospect for expanded rail and
road haulage logistics.
Diesel and the Crude Oil Pipeline
284. We have noted that in 1969 a pipeline was commissioned in order to convey crude oil
from Durban, its port of entry, to storage facilities in disused coal mines at Ogies, in
the inland area. This was essentially an attempt to counter looming threats to South
Africa’s oil supply. It was also designed with the construction of an inland crude
refinery, Natref commissioned in 1971, in mind. It is an 18inch diameter crude oil
pipeline that runs from Durban to Kendal via Richards Bay and Sasolburg. The
government began using the COP for the storage of crude oil at Ogies in March
1969.161The COP is currently used to transport crude oil from Durban to Natref. It is
not used to transport white product. 162 The COP’s current capacity runs at 134
million litres per week (mlpw), its current average usage is around 99 mlpw, and
Petronet has budgeted in the region of 98 mlpw for this financial year. 163 In order to
place Natref in an identical position with respect to its crude oil procurement as its
place Natref in an identical position with respect to its crude oil procurement as its
coastal counterparts, tariffs were not levied on the use of the COP until 1987. Instead
tariffs raised in respect of the DJP crosssubsidized the cost of the use of the COP.
285. The contention that this pipeline can be utilised to convey diesel together with crude
161 See page 3 of Annexure “A” of BP’s Heads of Argument.
162 See pages 247 and 291 of the transcript.
163 See page 204 of the transcript.
106
oil is a cornerstone of the merging parties’ efforts to demonstrate that the OOCs have
at their disposal sufficient logistics capacity to convey product from their coastal
refineries to the inland and so break any attempt at foreclosure. The OOCs, for their
part, insist that there are massive obstacles to be overcome – obstacles that may well
prove insurmountable – if the COP is to be utilised for the conveyance of diesel. At
least they insist that there are massive unresolved questions concerning the use of
the COP for this purpose, which questions cannot be resolved in time to counter a
foreclosure strategy. Note – and this is elaborated below – that the only previous
occasion on which the COP was used to convey diesel was when, in 20012, a fire
caused a long shutdown at Natref. However, on this occasion, because Natref was
not able to use any crude, diesel alone was conveyed through the COP. As we shall
see, even under these circumstances, considerable quality problems were
experienced.
286. Before considering the various technical arguments, we should comment on
the reliability of the evidence in the light of the opportunism displayed by both
Sasol and the OOCs regarding the conveyance of diesel in the COP. We
should also comment on certain statutory stipulations regarding the utilisation
of the COP.
287. The OOCs and Sasol have not always adhered to the respective viewpoints
for which they have contended in these hearings. In the committee stage of
the parliamentary process through which the Petroleum Pipelines Bill was
obliged to pass, the OOCs and Sasol took diametrically opposed positions to
those taken for the purposes of the present inquiry. At issue in the
parliamentary hearings was the mooted introduction of a provision in the Act –
a provision that found its way into the original draft of the Bill reserving the
a provision that found its way into the original draft of the Bill reserving the
COP for crude oil. This position was supported by Sasol and vehemently
opposed by the OOCs. Each invoked technical arguments in support of their
respective positions, technical arguments that are for the most part
diametrically opposed to those presented at these hearings. The reasons for
these dramatic shifts in position are plain – the OOCs were anxious to prevent
a statutory bar on the utilisation of the COP as a multiproduct pipeline; Sasol
107
was intent on reserving the COP for crude oil. Indeed this may well be
counted as one of the earliest skirmishes in the inland supply war that has
been described in such considerable detail in these hearings, with the OOCs
anxious to keep open all available options for overcoming possible foreclosure
and Sasol equally intent upon shutting them down.
288. In our hearings, each side – that is, the merging parties and the OOCs – has made
much of the extent to which their opponents have departed from their original
positions on the feasibility of conveying diesel in the COP. Clearly we cannot draw
definitive conclusions from these mutual shifts in position, although we can
understand why, even if the OOCs did honestly harbour serious doubts regarding the
technical feasibility of bringing diesel up the COP, they would nevertheless have
vehemently opposed a statutory bar on this possibility, a bar that, given the
vicissitudes of the legislative process, would then likely have prevailed even in the
event that the technical difficulties proved to be surmountable. Sasol’s position was
that it was not technically feasible to convey diesel up the COP, although even then it
sought statutory protection of its position. 164
289. We will then draw our conclusions from the evidence and argument presented at
these hearings, ignoring, for the most part, the opportunism displayed by both sides.
It is however noteworthy, particularly given the immense importance that the issue of
the conveyance of diesel in the COP has assumed in the case against foreclosure,
that the merging parties damascene conversion to the view that this is indeed feasible
has come at the last possible moment. Hence in the merging parties’ November 2004
submission to the Commission there is no mention of the possibility of conveying
diesel in the COP. They were similarly silent in their March 2005 submission and this
164 The transcript of Mr. Oberholster’s crossexamination at pages 443453 details the evidence of
Sasol’s continuing efforts to prevent the COP from being used for the conveyance of diesel
including enlisting the support of the government and the motor vehicle manufacturers. At page 443
Mr. Norton for BP puts the following Sasol documentation to Mr. Oberholster:‘And then it says here
“Johan, Pieter, please see attached document package as a substantiated position statement on
the unacceptable risk of using the COP to transfer both diesel and crude”. It then goes on to say “I
have spoken to Daimler Chrysler, BMW and to Barloworld about this issue”. I presume it should be
‘issue’. “All indicated that they are willing to state their disapproval for the proposal to bring diesel
up the COP. All still remember the pain of the previous incidence”. The next paragraph “I could
forward certain portion of this document to them for information. However, I do not think that we
need to give them incentive to do something with it. If you could give them concrete evidence that
Petronet is wanting to go down this route, then I believe we could get some response out of them.
Do we have something in writing to this effect? Comments. Regards Dow”.
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supposed logistical capacity is canvassed for the first time in CRA’s August 2005
foreclosure model. 165
290. Before turning to the technical evidence, evidence which is focused on the
capacity of the COP and critical issues surrounding the safeguarding of the
quality of product conveyed in a multiproduct line, we should also note that
the eventual outcome of the abovementioned dispute in the parliamentary
process, while stopping short of legislating in favour of a singleproduct COP,
manifestly favours Sasol’s preferred position by explicitly giving Natref first call
on the capacity of the COP and on its mode of utilisation.
291. Section 20(1)(f) of the Petroleum Pipelines Act 60 of 2003 (“PPA”) provides:
“a petroleum pipeline may be licensed for either crude oil or petroleum products, or
both, as long as sufficient pipeline capacity is available for crude oil to enable the
uninterrupted operation of the crude oil refinery located at Sasolburg, to operate at
its normal operating capacity at the commencement of this Act and for so long as
that refinery continues as a going concern”
292. In our view then the Act expressly entrenches a statutory preference that the
COP must be used to convey crude as opposed to white product. It therefore
envisages that Sasol and Total (as the joint shareholders of Natref) will enjoy a
privileged position when it comes to use of the COP, since their interests will
be served before those of the OOCs.
165 This was put to Dr. Stillman who offered the following, rather lame, response: “…The issue of
diesel in the crude oil pipeline was pointed out to us in about June or July, June roughly I would say
more likely, of this year. And when it was presented, of course as an outside economist, we asked
questions about it. Not that we could evaluate the technical merit of it, but a more fundamental
question, which is where did this come from. And the answer that we received is that this was an
issue, the issue of the diesel in the crude oil pipeline is something that has been in the industry for
some time, but that in the course of working on Uhambo’s business plan and trying to analyse …
not the business plan, but on really the operations of Uhambo on a going forward basis, the
planning teams had spent more time working on this issue of designer crude and the ability to use
the crude oil pipeline for other purposes rather than simply crude oil. The statement to us is that it
was really in the course of realising that there were technical solutions and that this designer crude
was a feasible way of using the crude oil pipeline, that there was a revisiting of the feasibility of
using the crude oil pipeline for diesel. Again, the technical merits are something that I cannot
address, but that’s a background to the diesel and the crude oil pipeline in our analysis.“ From page
768 of the transcript.
109
293. An email message from Mr Moodley describes the statutory preference in the
following fashion:
Petronet will have to guarantee Natref crude continuity of supply and therefore
crude will take priority in the crude oil pipeline. Only the balance of the capacity of
the COP that Natref does not utilise, can be utilised for refined products. 166
294. Mr Wright, the witness from Engen described Moodley’s formulation as “an obvious
industry truism”. 167
295. This is confirmed in the following exchange between Mr. Moodley and the
Tribunal:
CHAIRPERSON: Does the Act require you to prioritise the use of crude in this
pipeline?
MR MOODLEY : It merely says that we need to continuously supply NatRef and what
continuously means is again up for discussion.
CHAIRPERSON: It will be on Natref’s terms how … they will be the client and it will be on
their terms that you will supply them, however frequently they want it or in whatever size
slugs they want it. That is what the relationship will be that will dominate the pipeline, the
use of the, the operations of the pipeline.
MR MOODLEY : My understanding is as long as you do not compromise the output of
Natref in your operation.
CHAIRPERSON: And that will be, whether the Natref operations are compromised or not,
will be a decision that the Natref Management or owners will take and will convey to you.
MR MOODLEY : Will engage with Petronet .168
296. In our view then the Petroleum Pipelines Act makes it clear that the party that
controls the operational requirements of Natref, whose majority shareholder is
Sasol and will be Uhambo, is given statutory confirmation of its dominance in
relation to the utilisation of the COP. In our view, this – a classic example of
the proverbial fox being placed in charge of the henhouse – is, on its own,
sufficient basis to conclude that the COP cannot be relied upon to convey
diesel.
diesel.
297. Nor is this the only instance in which the successful conveyance of diesel
166 Annexure DN4 to Natha's supplementary affidavit .
167 P1713 – 1714 of the transcript.
168 Page 299 – 300 of the transcript.
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through the COP will depend upon the cooperation of the Natref
shareholders. For example:
(a) Interface 169 and crude tankage 170 would have to be built at Natref. 171 Given that
Uhambo – Natref’s majority shareholder would naturally not undermine its own
attempted foreclosure, any cooperation would have to come from TOTAL. It is not
readily clear how TOTAL could be persuaded that to build such tanks would be in its
best interests.
(b) TOTAL would also have to be persuaded to process the interface. The CRA report
submitted on behalf of the merging parties assumes that the interfaces would be
processed utilizing TOTAL’s share of Natref refining capacity. 172 Although Mr Natha
suggested in his statement that a processing fee of at least 15cpl would be charged
(based on the 2001/2002 experience), there would seem to be no reason why TOTAL
would be willing to process the interface for the OOCs at all.
(c) The coastal refineries would thus have to sell the interface to TOTAL (with
TOTAL keeping the refined product). A price would have to be negotiated, but
on the face of it as Shell argues – TOTAL would presumably wish to buy the
interface as crude (since this is what it displaces). The OOCs would thus be
refining crude into diesel at its coastal refineries, transporting it to Natref and
selling it as crude, thereby losing the refining margin on the diesel.
(d) TOTAL’s willingness to buy the interface (even at crude prices) will depend on
its own production requirements. The interface would refine predominantly into
diesel, whereas crude would typically yield 40% petrol, 40% diesel and 20%
169 The ‘interface’ issue is critical and is elaborated below. It refers to the ends of each ‘slug’ or
batch of diesel that will, to a certain volume all agree, be contaminated by the adjacent crude batch.
This interface will have to reprocessed at Natref and storage tanks will have to be constructed to
hold this contaminated diesel prior to its reprocessing.
170 Additional crude storage capacity will have to be build in order to hold the additional crude
stock that will be required for the period that the COP is utilized to convey diesel.
171 Note page 454 of the transcript cites document from Sasol Oil Technical Services that states
“when the [Natref} refinery is operated under normal production conditions, no tanks would be
available to handle intermixtures”.
172 See Para 65 at page 105 of the Witness Statement bundle.
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kerosene. Accordingly, Total would only agree to purchase the interface if it was
willing to skew its production towards diesel.
298. These problems are crisply summed up by Mr. Natha:
…TOTAL is petrol short in the inland market and diesel and jet surplus. So if they
process this diesel rich mixture through their refinery, they will be limited on the
amount of crude they can run, because the amount of diesel they can make is
determined by the hardware facilities that they have. Therefore, they will not be
able to earn the full margin that they would earn by processing the normal crude
diet where they would make petrol, diesel and jet, amongst other things, and under
a full margin.
So, under those circumstances, given that they are short of petrol capacity, they
would not be interested in us processing the diesel through there, because it
affects their profitability and the ability to meet their market demand in the inland
market.
So, that’s part of the problem. I understand that capacity on the conversion
units is tight. Now what could they do to be friendly and kind? They would
have to change their crude diet, which would have less diesel in it so that
this would allow it to balance. And it’s not a simple issue, because I
understand that for every one litre of diesel it would have an implication of
threeinone to the crude that they process of fourinone in the ratios. 173
299. Shell contends – and it is correct that there is no evidence to establish that
TOTAL would be prepared to incur the opportunity cost involved in the
reprocessing of the interface. It is further contended that in the absence of
such evidence, diesel cannot be transported in the COP since there is no
practical alternative to using Natref for the reprocessing of interface.
300. We should also note that it is common cause that the feasibility of conveying
300. We should also note that it is common cause that the feasibility of conveying
diesel in the COP can only be confirmed by extensive testing and, moreover,
that significant capital expenditure and time is required to conduct the
necessary tests.
301. For example Mr. Moodley, Petronet’s witness, who generally occupied the middle
ground in this debate, made it clear that while he believed that it may ultimately prove
possible to convey diesel in the COP, was nevertheless careful to emphasise that the
173 Page 2274 of the transcript.
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conveyance of white fuel and crude oil required the prior resolution of “specific quality
issues”174and that these were related to the possibility that the white fuel conveyed
in the COP may prove to be “offspec” 175as a result of contamination. Moodley
testified:
And as much as we are confident that it can be done, it’s not proven by ourselves
yet. We engaged the industry with regards to a program to get a test done and
until we do the test and we look at what the constraints are with regards to that, we
will not be able to say for sure that we can put diesel in the crude line or not.
However our view is that we can, but we need to identify or let’s say quantify the
risks that we believe are there and how we can mitigate them. 176
302. On the question of risk, Moodley appeared to suggest that, given the underutilisation
of other Petronet facilities, there was not a business case for Petronet to assume any
of the risk for the conveyance of diesel in the COP. 177
303. The importance of testing was confirmed by Mr. Wright from Engen who testified it
would be necessary for testing and pilot studies to be done in order to investigate the
feasibility of transporting diesel in the COP and that such studies have not yet been
performed. In Mr. Wright’s own words:
Nobody has really tried to find a solution for the crude oil pipeline issue…both in
practice or in real life .178
304. Mr. Wright also testified that in order to undertake the necessary ‘test run’ capital
expenditure which he estimated to range from R160mR340m would have to be
undertaken.179
..if we’ re going to make this system work, one would have to put facilities in
place180
174 See page 229 of the transcript as well as page 328 of the transcript.
175 See page 229 of the transcript.
176 Page 229 of the transcript.
177 Mr Moodley put it this way: “So as much as we prove technology or we do not prove it, we
don’t believe that it will be utilized at this point in time, because I’ve indicated figures to you
showing that the other lines that we thought would be constrained and the deep water leaking are
not being fully utilized at this point in time.” See pages 229230 of the transcript.
178 Page 1707 of the transcript.
179 Exhibit 42 .
180 Page 1674 of the .
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305. The extent of what Mr. Wright referred to as the ‘hardware solution’ that would
be required to reengineer the COP for multiproduct use was spelt out at
length by Mr. Natha:
You also have to … this is a routine operation, install equipment to detect the
interfaces. So, you would have to install instrumentation that would measure
density differences, sound effects, all that sort of equipment on the line so that you
could reasonably accurately identify the interface between the two.
Next, the pipeline itself will have to be examined for its design. Are there
any dead legs? By dead legs we mean that if a product that’s moved before
the diesel coming, it might be stuck somewhere or the valve locations might
cause it to stick and then when the diesel come through it would pick up the
crude. So you want to avoid that kind of problem.
Now experience overseas and here would tell you that when you design a
line to carry crude oil, you’re not that careful, because it’s got a single
purpose, single product carried. So there may be a need to modify the line
to remove these socalled obstacles. Then because you are carrying two
distinct products, one being a refined product and the other being crude, at
hour (this should probably read ‘every’) inlet and outlet you’re going to have
to have positive isolation in the manifolds between the pipelines to make
sure that there is no contamination. So you would have to put in things like
double block and bleed valves, proper positive isolation valves to ensure
that that mixing doesn’t take place.
Then if you have pumps along the line, as we have with the crude line, we
have 5 booster pump stations between Durban and Ingogo. I think the last
one is at Fort Mistake, but somewhere there. These pump stations and the
way we operate them and the sequence in which you operate them, would
way we operate them and the sequence in which you operate them, would
have to be very thoroughly worked through to avoid causing problems
when we run this pipeline.
Despite putting all this fancy equipment and valves and positive isolation,
you also are going to have a system to detect leaks, because you don’t
want the one product to go into the other product. So you are going to have
to install equipment for that.
Finally, on this part of what you have to do with the line … it’s not the end of the
story, but at this point, when the product reaches Sasolburg, we are going to have
to have proper lab facilities to test for all the specifications of diesel. This gets even
more tricky come 2006 when we switch to the Euro specs for diesel and unleaded
gas, etc. So the testing would have to be done. ”181
181 Pages 22662268 of the transcript.
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306. Shell submits that there is no dispute with regard to the two aspects of the “hardware
solution” that would be necessary to enable the COP to be used for the conveyance
of diesel. Firstly, it will require significant capital investment to effect the hardware
solution. The capital costs would have to be incurred by Petronet and by the OOCs.
Secondly, it will take a considerable period of time to implement the hardware
solution. Although the merging parties appear ultimately to contend that 6 months
would be sufficient, Mr Wright testified that it could take 18 to 24 months to effect the
necessary changes. 182
307. On the assumption that the new DJP will come onstream in 2010, it follows that the
necessary capital expenditure would have to be recouped in a window period of some
2 years. Shell submits that it is extremely unlikely that any institution would be
prepared to invest in the required “hardware solution” in circumstances where it would
have no more than 2 years in which to recoup its investment. Mr Natha testified that
such an investment would make no business sense:
Then you have to go to the economics, the cost benefit and you have to say to
yourself if I spent all that money and there is another line coming on in 2010, am I
going to be able to justify the expenditure? With the help of one of my guys, we did
a discounted cash flow analysis of what would it be if you had to recover this over
two or three years and we got a negative NPV and a negative IRR. Now as a
businessman I think I would find it very hard to justify that expenditure. 183
308. In light of the above, Shell submits that there is no evidence to show that
either Petronet or the OOCs would be prepared to incur the capital costs that
would be necessary in order to make the COP suitable for the conveyance of
diesel.
would be necessary in order to make the COP suitable for the conveyance of
diesel.
309. The merging parties counter that Mr Natha’s assertion that the DJP would become
constrained again by 20122013 selfevidently necessitates the use, in future years,
of additional logistics including the COP. They submit that if the DJP does become
constrained then it is inappropriate to do the NPV and IRR over the limited period
allowed for in Mr. Natha’s calculations because, on his own evidence, the need for
use of spare capacity in the COP would again arise and continue onwards from
20122013. They further submitted that the investment also, at minimum, ensures
182 Page 1710 of the transcript.
183 Pages 22722273 of the transcript.
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backup capacity and would not be redundant. 184 While there is undoubtedly an
element of truth in these counterarguments, there nevertheless remain an extra
ordinary number of unknowns to justify an essentially defensive, though substantial,
investment. In our view, it is precisely when hardnosed business people are called
upon to make this sort of investment that they would begin contemplating the relative
benefits of cooperation over competition.
310. There is, to be sure, significant argument regarding the precise scale of the
necessary expenditure and the time necessary to confirm the contending hypotheses.
But, the fact is that no one – not even the merging parties – was able to testify
unequivocally that diesel can, in the absence of testing, be conveyed in the COP. At
best the supporters of this untested proposition are able to state a claim that their
technical arguments are likely to be confirmed by the necessary tests. Given the
depth of technical dispute and the paucity of experience with respect to multiproduct
pipeline conveyance (at least, multiproduct conveyance involving crude oil and white
fuels), given the importance of this claim with respect to the overall profitability or
otherwise of foreclosure and, last but not least, given the importance of the product
markets relevant to this merger, accepting allegedly certain outcomes of tests that, all
agree, must still be conducted, is asking for greater latitude than any adjudicator
should be willing to extend.
311. We will nevertheless examine the various technical arguments advanced
during the hearing and placed on the record. As will be elaborated, our review
of the technical debate confirms the conclusions reached on the basis of the
statutory position, namely that the COP cannot be construed as a logistics
statutory position, namely that the COP cannot be construed as a logistics
resource available to those who have an interest in conveying diesel to the
inland, much less to those who have an interest in overcoming attempts on the
part of Natref’s largest shareholder to foreclose the inland market.
312. The technical arguments are voluminous and complex. The arguments that
reject the possibility of using the COP to convey diesel are clearly and
comprehensively outlined in Shell’s heads of argument and in the testimony of
Mr. Natha. They, and the counter arguments presented by the merging
184 Page 262 of the parties’ Heads of Argument.
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parties, are reproduced in some detail here because the claim regarding the
logistical opportunities afforded by converting the COP to multiproduct use is,
arguably, the most important made in support of the merging parties
arguments against the profitability of foreclosure. The arguments focus on
questions of quality and volume.
313. It is common cause that when the COP was used to pump refined products during
2001 – 2002 in the wake of the Natref fire, this led to major quality problems. In
particular, problems were caused by particulate contamination, a rise in sulphur levels
and water in diesel. 185 These quality problems arose in the circumstances where the
COP was being used exclusively for the transportation of refined products. They have
not yet been resolved. On the contrary, they are likely to be exacerbated in
circumstances where the COP is used to convey crude and diesel in “blocked
operation” in the manner envisaged by the merging parties.
314. The potential quality problems identified by the OOCs are summarised under
five headings: water and particulate matter contamination, sulphur
contamination, wax contamination, lubricity additive and the potential impact
on the quality of product carried in the northern DJP.
Potential water and particulate matter contamination
315. Mr. Natha testified that during the Natref shutdown in 2001 and 2002 problems
were experienced due to water and particulate matter in diesel transported via
the crude oil pipeline even though, in that period, diesel tanks at Natref were
available to allow for settling to occur and for the removal of the water and
particulate matter. He testifies further that during 2002 diesel was pumped
directly into depot storage tanks in which it was necessary for the diesel to
stand for a period of time so as to allow the water and particulate matter to
stand for a period of time so as to allow the water and particulate matter to
settle. This affected the ability of the OOCs to timeously meet their respective
inland customer demands.
185 See page 1524 of the transcript. See also Exhibit 42.
117
316. In support of his views, Natha cited the following passage from a report
prepared by Angus Quayle of Engen in which the following issues were raised:
(2) The extent of the contamination of the first diesel through the line was greater
than anticipated. Some 8 million litres at the interface with the crude oil were “off
specification” on corrosion. Another 10 million litres were contaminated with
particulate matter, apparently asphaltenes picked up from the old section of the
COP between Ingogo and Coalbrook. It was necessary to install a jump over to
enable contaminated diesel ex the COP to be segregated in Natref tankage for
subsequent disposal. All this took time and, in addition, essentially the entire 75m
ton diesel import was used for the initial line fill or downgraded. It was therefore the
end of July before product ex the COP started reaching inland depots. 186
317. Natha submits that the presence of water in the diesel and/or particulate
matter has dire consequences for customers. They must be removed before
diesel is supplied to customers, and doing so results in delays and additional
costs.
Potential sulphur contamination
318. Mr. Natha’s testifies that the sulphur entrained in the COP would cause diesel
transported via the COP to be “offspecification”. Thus removing excess sulphur
would require the reprocessing of additional volumes of contaminated diesel at a
suitable refinery. As already noted Natref does not have available capacity to remove
the sulphur concerned. TOTAL requires its entire share of capacity to meet its inland
demand. Hence, even if the necessary capacity existed at Natref, it would be costly
and only available from Sasol. In a foreclosure scenario, Sasol would be unwilling to
provide capacity at Natref for the reprocessing of “offspecification” diesel so as to
remove sulphur.
remove sulphur.
319. He notes further that in 2006, the permissible sulphur content in diesel will be
reduced from 0,5% mass per kilogram to 0,05% mass per kilogram.
Potential wax contamination
320. A further concern relates to the contamination of diesel due to potential wax
186 Annexure D2 of Natha’s supplementary witness statement.
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precipitation from crude oil which could result in the “uncontaminated” diesel being
“offspecification”. Mr. Natha cites an email prepared by a Technical Adviser at Shell
Global Solutions addressed to Shell SA:
One slight technical detail which crossed my mind handling your query: the ‘white’
product contamination with crude could be originating from wax precipitation by the
gas oil and hence crude/wax traces are experienced for a longer period than
anticipated. We could assist in carrying out a desk study (incl. Some lab tests)
whether this is likely for the system you have run and confirm this effect. In other
words, care should be taken what product you put next to crude!” 187
321. Mr Moodley also raised concern about the potential contamination of diesel by
wax precipitation from crude oil:
With regular switching between crude and refined products there is a greater risk
of contamination. Maintaining product quality poses significant challenges and the
following issues need resolution:
• Effect of waxes on refined products;
• Pickup of particulates by the refined product;
• Trace element contamination;
• Discolouration of product. 188
Lubricity additive
322. Mr. Natha testifies that the new specification for diesel will require a lubricity additive
at the time of, or after, blending which could further complicate the reprocessing of
contaminated and “offspecification” diesel. Natha submits that this is caused by the
fact that the additive which would be present in the diesel could potentially damage
the refining equipment used to reprocess contaminated diesel. It is Natha’s view that
any of the above contaminants which could cause the “uncontaminated” diesel to be
“offspecification” would pose significant problems for consumers with potentially
substantial financial implications for those marketing and utilizing the contaminated
product.
Potential impact on northern DJP
187 See Mr. Natha’s annexure DN3.
product.
Potential impact on northern DJP
187 See Mr. Natha’s annexure DN3.
188 Email from Moodley to Shell reproduced in Natha annexure DN4.
119
323. According to Mr. Natha, the quality risks would not be limited to volumes of
diesel transported via the crude oil pipeline, since the diesel would be pumped
at Sasolburg into the northern section of the DJP to supply the inland market
with white fuel products. Should this diesel be “offspecification”, it could cause
the entire white fuel product inventory in the northern DJP to be “off
specification”.
324. Indeed it appears that Sasol shared this concern about contamination problems and
sought assurances from Shell with regard to the transportation of diesel in the
COP.189
325. Mr. Natha submits that these concerns appear to be based on evidence of the
failure of diesel engines due to particulate matter in diesel transported in the
COP during the Natref shutdowns in 2001 and 2002. We are told that this
matter caused costly damage to engine filters and injectors as well as to diesel
engine fuel management instrumentation. Natha indicated that due, at least in
part, to these diesel engine failures, the National Association of Automotive
Manufacturers of South Africa insisted on the need to introduce a
specification, which is now in force, regarding the absence of particulate
matter in diesel.
326. While the merging parties have presented an alternative view of the feasibility
of conveying diesel in the COP, at best they are entitled to a finding that the
technical questions are unresolved. They have certainly not succeeded in
dispelling the considerable array of doubt generated by the evidence
submitted in support of their opponents’ contentions.
327. The merging parties have tended to rely on the views taken by some of the
OOCs in the parliamentary debates surrounding the Petroleum Pipelines Act.
We have already indicated that we do not intend according much weight to the
We have already indicated that we do not intend according much weight to the
views presented there, but that we do understand why, even if the OOCs
189 Natha’s Annexure DN5.
120
harboured genuine doubt about the utilization of the COP, they would
nevertheless have been justified in arguing against a statutory foreclosure of
that option. The merging parties have also placed reliance on industry
discussions that appear to confirm the willingness of the oil companies to test
the COP for the purposes of utilizing it for the conveyance of crude. In
particular they refer to a meeting of the industry association’s (SAPIA)
technical committee held in November 2004 which, following a presentation by
Petronet, concluded that,
..industry had accepted the use of the COP for diesel pending the execution of an
industry agreed process prior to the intended use. 190
328. The merging parties’ submit that Mr Wright stated in his report that the merging
parties believe that with the necessary quality controls, technical guidance,
infrastructure and capital that would need to be spent (to, for example, deal with
particulates and free sulphur) a permanent solution to the known problems could be
implemented within a period of approximately six (6) months, assuming an EIA can be
obtained in a short time period and an appropriate location is selected. Mr Wright
stated that the most likely option would be that the diesel is taken into the Durban
Natcos tanks, pumped up the COP in sequential slugs between crude oil, the
interfaces would be reprocessed as would the diesel (filtered and additised) before
being certified and released into the market. 191 Mr Wright conceded that it is not
common practice to convey diesel by crude or pipeline due to concerns with sulphur
contamination in the handling of the interface between the crude and diesel. He did,
however, testify that these problems have been overcome in respect of a Canadian
however, testify that these problems have been overcome in respect of a Canadian
pipeline where white products and crude are transported with additional infrastructure
and the effective use of additives. And as such, he concluded that it is very probable
that with the correct infrastructure (that has not been available in previous South
Africa situations) diesel could be conveyed with crude through the COP and could be
marketed without problems. As a result, the merging parties submit that Mr Wright’s
evidence is aligned with the position advanced by all of the coastal refineries before
the Parliamentary Portfolio Committee.
190 Exhibit 42, page 16, Para 4 (our emphasis).
191 See Exhibit 42, page 1, Para 5.
121
329. The fact is that the merging parties evidence is hedged with massive qualification as
is demonstrated by the underlined passages in the previous paragraph. And at no
stage is it contested that ‘industry processes’ – testing – would have to precede the
utilization of the COP for the conveyance of diesel. Indeed this is specifically
conceded. Note that these industry processes would have to involve all industry
participants including, of course, the merged entity, which will also be the majority
shareholder of Natref and which will have an interest in delaying and derailing an
outcome that allowed the COP to be used for the conveyance of diesel. 192
330. The merging parties have also attempted to call into question the credibility of Mr.
Natha’s evidence. His evidence is impugned as unduly ‘negative’ and it is pointed out
that he is a former senior executive of BP’s local subsidiary. We, by contrast, found
Mr. Natha to be a particularly credible and wellinformed witness whose substantive
contentions were – in their entirety – maintained under rigorous crossexamination.
While his previous employment at BP is, of course, noted, this is no more a basis for
a farreaching finding on credibility than would be warranted by Mr. Wright’s current
position with Engen. 193
331. Finally, contend, the OOCs, even if we are of a mind to conclude that the COP
is a potential source of logistical capacity for the conveyance of diesel, the
merging parties have nevertheless significantly overstated the available
capacity of the COP. Bear in mind the absolute statutory preference accorded
to the conveyance of crude oil.
332. The merging parties submissions on the capacity of the COP commence with the
observation that there is spare capacity in this pipeline. This is undoubtedly accurate
192 Note Mr. Oberholster’s candid acknowledgement of his interest in obstructing the utilisation of
the COP and of his willingness to be uncooperative: ‘ If the oil companies do not purchase the from
Sasol, if they are able to use the crude oil pipeline, it would in fact further diminish the amount of
volumes that they would want to purchase, as it were, from Sasol. So, if I can make it technical
difficult from my point of view to do that at this stage, saying that I will not … well, not saying that I
will not supply my technical knowledge to do this, but at least not being participative in that.’ At
page 444 of the transcript.
193 Note too that Mr. Wright’s own credibility is called into question by his massive, inexplicable
overstatement of his own company’s (Engen’s) use of road and rail capacity. This is dealt with
below.
122
and is common cause. 194 The merging parties point out that if the spare capacity of
1,18 billion litres were utilized to transport diesel at a hypothetical 8,5 cents per litre, it
would translate to income of R120 million per annum for Petronet. They added that as
long as the project was feasible and in Petronet’s interest, Petronet would want to run
the project. It was a fair assumption that if the calculations showed that Petronet (as a
profitmaking commercial entity) could make money out of it, then it would
happen.195
333. The contention that there is 1.18 billion litres per annum spare capacity in the COP
relies upon the calculations of Mr. Swart, a Sasol witness who nevertheless conceded
that technical work would need to be done to ensure the quality of the diesel. 196 In
CRA’s analysis, Mr Swart’s calculations were repeated and relied upon and the
additional transport capacity in the COP of just under 1.2 blpa of diesel was reduced
by CRA by a service factor of 85% resulting in an estimated volume of diesel that the
OOCs could transport in the COP of around 1 blpa. 197
334. The merging parties further submit that Mr Moodley of Petronet confirmed that the
nameplate capacity in respect of the flow rate is 840 m 3 per hour and that using a
rate of 800 m 3 per hour would be a conservative assumption. 198 Mr Moodley was
taken to Mr. Swart’s calculation of spare capacity in the COP of 135 m 3 per hour
which translates into spare capacity of 1,18 blpa. The merging parties submit that Mr
Moodley did not dispute the calculation but said that the 135 m 3 per hour spare
capacity was a theoretical capacity. In fact, Mr. Moodley clearly testified that it would
be incorrect to conclude that the spare capacity in the COP would permit the
conveyance of 1 billion litres per annum of diesel.
conveyance of 1 billion litres per annum of diesel.
194 It is the merging parties’ submission that the CEO of Petronet, Mr Moller, on 22 March 2005
said that Petronet’s model assumes a full COP whilst it “…has become common knowledge that
the DJP line is running at high levels of capacity and the crude line at much lower levels. This is
exactly the opposite of what we had assumed in our model but the statement that there is still spare
pipeline capacity available is and remains true” . (See also Annexure “DN1” to Mr Natha’s
supplementary statement.)
195 See page 257 of the transcript.
196 See Mr.Swart’s Witness Statement, page 47, footnote 62.
197 CRA Report, page 104105, Para. 66.
198 See page 245 of the transcript.
123
I think one must be careful of saying if one just does a pure number calculation
and one looks at a billion. Operationally if one puts the plan into operation, you
might not be able to achieve a billion. And due to the particular intricacies of the
network and some of the intricacies one must be aware of is that the booster
stations were used to boost up the flow rate to the 840 level. The booster stations
are not able to handle multiproducts. So if one has to look at multiproducts going
through that system, you would have to discount the booster stations in your
calculation, which will significantly reduce that capability. There is a capability, but
it’s not correct to draw a conclusion that it will be a billion litres. 199
335. Shell argues that there are at least 3 reasons why it is incorrect to conclude
that 1 billion litres of diesel might be transported in the COP.
336. Firstly, the pumping rate in the COP is reduced when it is used to convey multi
products as opposed to a single product.
If there are multiproducts in the COP, it would be necessary to turn off the
boosters. What this means is that, whereas the COP runs at full flow when
there are single products in the line, it runs at a reduced flow rate when there
are multiproducts 200
Mr Moodley estimated a pump rate of 650680 cubic metres per hour as a
result of the need to turn off the booster pumps. 201
337. Secondly, the flowrate in the COP depends on the rate at which diesel is
injected into the COP in Durban.
For diesel to be transported in the COP at the rate predicted by the merging
parties, the diesel transfer into the COP would have to occur at the same
rate that crude is transferred in the COP. The reason is obvious: the COP
can only pump as fast as the rate at which product is delivered into it.
The evidence establishes that it is not possible to deliver diesel in the COP at
The evidence establishes that it is not possible to deliver diesel in the COP at
the assumed rate of 800 cubic metres per hour that forms of the basis of the
merging parties’ estimate. According to Mr Moodley, diesel is currently
199 Page 256 of the transcript.
200 P284 of the transcript.
201 P285 of the transcript.
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injected into the DJP at a rate of 400 cubic metres per hour. If diesel were to
be injected into the COP at the same rate, it would reduce the pumping rate
of the whole line. 202 Shell submits that if diesel were to be injected into the
COP at a rate of 400 cubic metres per hour, this would of itself reduce the
amount of diesel that may be conveyed to approximately half of the merging
parties’ estimate.
338. Thirdly, difficulties will be experienced when it comes to storing the diesel that
the merging parties envisage will be conveyed in the COP.
Mr Wright’s illustrative figures assumed the use of diesel slugs of 60 million
litres in the COP. However, Mr Wright conceded that the coastal refiners do
not currently have tankage facility to receive 60 million litres of finished
product.203
Contaminated diesel would need to be taken out of the COP and stored at
Sasolburg. The only storage facilities in Sasolburg are Natref’s operational
tanks. These tanks would not be available for the storage of contaminated
diesel since they would be in ongoing use to store crude oil. 204 It would
accordingly be necessary to build tank facilities at Sasolburg to store
interface and diesel. Mr Natha estimated that the cost of this would be
approximately R100 million. 205
339. What then are we to conclude from this welter of conflicting evidence?
340. We should be careful to clarify from the outset that there is no question of onus
involved here. That is to say, there is no onus on the merging parties to prove that
diesel can be conveyed in the COP, just as there is no onus on their opponents to
establish the opposite. However, if we are to permit the COP to be factored into the
logistical capacity potentially available to overcome foreclosure, then we must be
satisfied that, on a balance of probabilities, it is likely that diesel can be so conveyed.
satisfied that, on a balance of probabilities, it is likely that diesel can be so conveyed.
202 P286 of the transcript.
203 Page 1613 of the transcript.
204 Supplementary witness statement of Natha, Para 3.5.
205 Page 2270 of the transcript.
125
We are not persuaded that this is the likely probability. Nor, as we have already
emphasized, can anyone be so persuaded in the absence of the testing and the
necessary ‘industry processes’ which all witnesses agree is a prerequisite to
conveying diesel in the COP. All concede that to convey diesel in the COP without the
certainty that rigorous testing will bring to the process cannot be entertained – the
consequences of error, all concur, would be potentially disastrous. 206
341. We note too that all concur that, even if testing was to confirm the contentions
of the merging parties, significant time and capital investment would be
required to turn these hypotheses into reality. Indeed it is agreed that time
and investment would be required simply to undertake the tests, investment
that could not be recouped should the tests fail.
342. In our view, the merging parties submissions on the question of the COP illustrate the
faulty premise underlying their conceptual approach to the question of overcoming
foreclosure. They have dealt with the question of the COP – as with many of their
other contentions regarding the availability of logistical capacity – as if it were a purely
technical problem susceptible to purely technical solutions. While we concede that in
times of war nations often relegate economic considerations to second place, the
same cannot be said of firms, even under conditions of commercial war. We cannot,
in other words, lose sight of the essentially commercial nature of this conflict. It is our
206 Mr. Norton for BP put documentation to Mr. Oberholster that graphically illustrates Sasol’s
appreciation of the risks involved in conveying diesel in the COP: ‘MR NORTON : and it says here
“crude oil pipeline conversion to multiproduct operation – product quality and market risk
implications considerations position statement”. Do you see that? MR OBERHOLSTER : Correct.
MR NORTON : If I could just read what the summary of that document says “the proposed usage of
the crude oil pipeline as a dual crude and diesel product supply infrastructure is not technically
advisable. During both instances that the COP has been used to supply crises a number of very
costly market incidents occurred. Considering the technical challenges presented to the
stakeholders in the proposed COP fuel supply chain and the current inability to manage these, as
was demonstrated during the 2001/02 supply crises, provides conclusive prove as well as firsthand
experience of the unacceptable risk of this diesel supply option”.
And then going to the bottom of the paragraph “there is no reasonable evidence that corrective
action programs have been developed by either Petronet and/or the oil companies wanting to make
use of this option. And thus the overall risk is still unacceptably high”.
And then it goes on to say “there is little doubt that the proposed conversion of the crude oil
pipeline from its current function to supply crude only to convey multiproducts and more
specifically crude and diesel, does present very significant product quality challenges and would
introduce additional risk to the diesel consuming customer base in the South African Highveld
region”. Do you see that? MR OBERHOLSTER : And all three points were accurate.’ Page 4467 of
the transcript.
126
strongly held view that rational commercial considerations would not justify the OOCs
relying on the COP to convey diesel – expressed otherwise, the credibility of the
threat of foreclosure is not reduced by the presence of the COP as a potential
additional source of logistics capacity.
343. In this vein, we should also record our concern at the statutory preference that crude
oil – and, by extension, those parties interested in conveying crude oil – is accorded
in the Petroleum Pipelines Act. We note the legal tactics employed by Sasol in
resisting efforts by Petronet to reconfigure the pipeline between Natref and
Secunda.207 While we do not necessarily question the legitimacy of the litigation,
we, above all, would be na ïve to deny the opportunities for lengthy and costly
filibuster implicit in the statutory preference that is effectively accorded to the interests
of the merging parties. In this vein we have noted Mr. Oberholster’s candid
acknowledgement of his interest in obstructing the process of using the COP for the
conveyance of diesel in the COP.
344. We find, then, that the incorporation in the Stillman model of the assumption that the
OOCs will, in the event of foreclosure, utilise the COP for the conveyance of diesel
cannot be defended.
Rail and Road Logistics
345. We emphasise that pipeline is, by a considerable margin, the most cost efficient mean
of transporting fuel over long distances. While the inland location of the Sasol
refineries will always give the inland refiners a cost cushion visavis their coastal
counterparts, it appears to be generally accepted that where pipeline capacity is
available the differential is sufficiently narrow to allow for effective competition
between the two sources – one coastal, the other inland – of refined product. This
does not appear to be the case with respect to rail and, particularly, long haul road
conveyance.208 Accordingly much of the discussion of mechanisms to increase road
and rail capacity falls into two overlapping categories.
207 See discussion of the section on the debottlenecking of the DJP.
208 A Sasol document discussing the logistics constraint acknowledged that “the cost of bringing
product inland on new trucks with front haul only would be 22 to 24c a litre and as such significantly
higher than current means of transportation” and hence that “in order to bring this additional product
inland economically, the marginal margin on the respective coastal refineries will have to exceed 11
to 13c a litre”. BP19, page 315.
127
346. Firstly, there are proposals that essentially go to improving the productivity of
the existing rail and road networks. Decreasing trip times and loading times fall
firmly into this category. In respect of these proposals we are compelled to
ask why, if these significant improvements in productivity are easily available
and economically efficient (as they must be if they are to defeat foreclosure),
are they are not already in operation? Surely, the haulage operators and the
oil companies are always concerned to operate at the highest attainable levels
of productivity. We suspect that the correct answer is that all of these are
crisisrelated measures that could be sustained for a relatively brief period, if
at all. This was, indeed, confirmed, by Mr. Coetzer, the merging parties’
logistics expert, who constantly referred to these as responses to crisis.
347. Secondly, there are proposals for the expansion of existing road and rail capacity.
These are manifestly designed to deal with foreclosure because, absent the
foreclosure, had there been a business case for investment in expanded capacity, the
investments would have been made. These measures immediately confront a query
raised by the counsel for Shell early in the hearings. On the parties’ case, it is
‘irrational’ to bring in product from the coast when there is available product inland.
The parties predict a return to ‘rationality’ once the competing interests have tested
their respective strengths and weaknesses. Once ‘rationality’ is restored there will be
no further need for this additional logistics capacity. But, if these investments are
notmade, there is, even on the parties’ version, a strong case for foreclosure because
the OOCs will not have put in place the capacity to defeat foreclosure. And, in any
event, the merging parties insist that in 2010 the expanded capacity in the DJP will
event, the merging parties insist that in 2010 the expanded capacity in the DJP will
eliminate the logistics constraint. That is, there will be no use for the additional rail
and road capacity. This calls into question the commercial sense of considerable
investment in additional capacity – frequently investments that will have to be made
by independent logistics providers – which will have only a limited productive life,
which indeed may have no life beyond their coming into being.
348. These observations bring into sharp relief a basic premise that underlies many
of the merging parties’ contentions regarding the scale of available logistics, a
premise to which we have already referred but which bears repetition. The
128
merging parties seem to assume that as long as they can prove the technical
feasibility of bringing additional product from the coast, their task with regard to
establishing the futility of foreclosure is complete. This abstracts from the
commercial viability of the new investments proposed and from the
sustainability of crisis measures to increase productivity. These observations
are particularly pertinent to road and rail because it is common cause that
these, and especially road, are particularly costly modes of conveyance even
before the additional and highly costly investments in unsustainable
productivity increases and commercially nonviable logistics equipment.
349. We note, however, that the merging parties have a definite shortterm interest
in driving up the marketing expenditure for the OOCs: through the operation of
the MPAR mechanism, these considerable investments in marketing capacity
will ultimately raise the regulated price even though all the costs of the
additional investment will be borne only by those subject to foreclosure.
However the increased price will reverberate to the benefit of all fuel
marketers, including the foreclosing entity who will not have had to undertake
any increased expenditure but which will nevertheless receive the increased
price giving Uhambo an immediate gain from engaging in foreclosure.
Road logistics
350. Liquid Fuels are highly flammable and accordingly specialised tankers are required to
transport liquid fuels by road. In terms of the National Road Traffic Act, petroleum
based flammable liquids are classified as “dangerous goods” and may only be
transported in vehicles that meet certain prescribed standards. 209
351. Road transportation of petroleumbased flammable liquids is divided into long
351. Road transportation of petroleumbased flammable liquids is divided into long
haul transportation and secondary distribution. Road transportation into the
inland market entails loading product into the tankers at the refineries in
Durban, driving the product inland and unloading the product at the inland
depots. However tankers are used not only to transport fuel to the inland areas
209 Regulation 275 of the Regulations promulgated in terms of the National Road Traffic Act.
129
but also within the KZN coastal region and for conveyance of fuel to Lesotho
and Swaziland. The duration of a round trip depends on the distance involved,
the gradient from the coast, the amount of driving hours allowed to ensure the
safety of the driver, and the loading and discharging operations, state of roads,
topography and health and safety and environmental considerations.
352. Oil companies in the main employ their own fleets of tankers for the purposes
of secondary distribution – i.e. transport of fuel from depots to retail outlets.
Some oil companies outsource the secondary distribution function to transport
companies. They engage transport contractors to undertake longhaul and
pointto point fuel haulage. The oil company would typically haul a maximum
load of fuel based upon the legal limits, which are based on gross vehicle
mass, the standard being 56 tonnes as well as the axle masses as stipulated
in the Road Traffic Act.
353. Longhaul fuel tankers typically comprise a ‘tractor’ (the truck component) and a
tanker combination conveyed by this truck tractor. The tanker combinations for long
haul typically comprise two units (a socalled interlink or semi and pup
combination).210 Tankers typically comprise authomous compartments – usually 5 in
a large unit, and 3 in the smaller units. The maximum volume of such a compartment
is 6500 litres, the typical volume is about 5000 litres. The compartment sizes vary
between 4500 and 6500 litres. These compartments may be regarded as minitankers
for the purposes of loading product – different products may be loaded in each
compartment, and 4 compartments may be loaded while one is left empty, which is a
safe way of tranporting heavier product in a tanker designed to convey the maximum
volume of a lighter product.
354. The volume that can be hauled depends upon the product mass, the mass of
354. The volume that can be hauled depends upon the product mass, the mass of
the vehicle and the configuration of the tanker i.e. compartment numbers and
sizes. Diesel, petrol and kerosene can be conveyed in the same tankers.
Because diesel is heavier than petrol (800 to 850 grams/litre as compared to
750g/l), a tanker designed to convey the maximum volume of petrol (which
210 Mr. Coetzer’s witness statement.
130
tends to be 44,000 litres) would exceed the specified mass limit were it to be
filled with diesel instead. Kerosene is heavier than petrol and lighter than
diesel, i.e. about 780g/l.
355. No washing or treatment of the tanker is necessary to prepare it for carrying a
diesel load after a petrol load. Some transport companies do however insist on
washing between loading diesel and petrol, to avoid any chance of
contaminaiton. Washing entails going to a washbay, either owned by the
transport company itself or by a third party operator, and having the tanker
washed at an average of about 2 to 3 hours for the exercise, and at a cost of
about R600 to R800.
356. The merging parties submit that there are a number of avenues through which road
haulage capacity could be efficiently increased. 211 We will address a number of the
most important contentions here and indicate the responses of the OOCs.
Tanker Capacity
357. According to Mr. Coetzer, there is currently tanker capacity totalling 2408
combinations. Of these 1608 combinations are generally available for primary
longhaul fuel transport, and 800 combinations belong to the OOCs as part of
their own fleets for secondary distribution.
358. The merging parties submit that in the event of a foreclosure strategy by
211 Though, once again, we note that Sasol’s privately held views contrast markedly with the more
expansive claims made for the purposes of the merger hearing. See the following citation at page
427 of the transcript, BP19, page 315: “Furthermore, practical issues around fleet financing, loading
capacity and congestion in Durban and environment concerns, would have to be overcome. It is
hence not likely that a significant addition of road capacity could happen in the short term” at page
431 of the transcript: “investing in road infrastructure now would tie the particular oil company up
contractually for 3 to 5 years. Any oil company tied up in such logistics, which would be more
expensive than the pipeline cost, would also be at a competitive disadvantage to Sasol Marketing
or other companies with whom Sasol may swap and would then have to lower transport costs.’ at
page 4312 of the transcript: “we have so far based our strategy on rational behaviour and having
a strategic marketing presence to protect our wholesale price. If we believe in irrational behaviour
and that the oil companies will invest in 1.7 million metres cubed of extra road capacity for a
relatively small reward and high risk, then we must be prepared to use our marketing strategy
against them. We cannot simply accept their irrational actions and not take counter action”.
131
Uhambo, the OOCs would be able to overcome the logistical constraints by:
Increasing tanker capacity through further investment;
Decreasing journey turnaround times;
Utilising chemical tankers to convey petroleum products;
Training additional drivers;
Utilising excess storage capacity and gantry capacity.
359. We will examine each of these in turn:
(a) Increase in tanker capacity
360. Based on a June 2004 investigation into the ‘prospects of manufacturing additional
tanker capacity for road haulage of fuel,’ 212 Mr. Coetzer found that South African
tanker builders had the annual capacity to build 312 combinations for fuel distribution
– and therefore the ability to transport 3,4 billion litres annually.
… tanker builders already had a capacity (if using only single shifts, whereas
most of them indicated that double shifts could be accommodated if the
demand for more tanker units were sufficient) to build at least 62 new tanker
units per month, of which at least 53 (i.e. 26 combinations of 44,000 litres
capacity) were for use in fuel transportation… 213
361. During the hearing, Mr. Coetzer testified that the leadtime between ordering a
tanker and receiving a built tanker from a South African tanker builder was
between 3 to 6 months. The cost of a tanker excluding a tractor was between
R800 000 and R900 000. Including the tractor would double this figure.
362. Assuming a lifespan of 10 years per vehicle and an annual scrapping rate of
about 10%, i.e. 240 combinations, per annum, Mr. Coetzer concludes that 72
new combinations would be available annually for expansion. Mr. Coetzer
states that since 91 combinations have the capacity to transport 1 billion liters
212 Page 434 of the witness statement bundle As part of this investigation Mr. Coetzer conducted
several “telephone interviews” with the “four major road tanker manufacturing companies in the
country.”
country.”
213 Mr. Coetzer’s Witness statement.
132
annually from Durban to the inland, 72 combinations would be able to
transport 0,79 billion litres per annum. This capacity, he reminds us, exceeds
the 15% growth estimates on current road and rail capacity assumed in the
CRA model by a factor greater than two.
363. According to Mr. Coetzer, the estimate of 15% is however reasonable (and indeed
conservative) and it is realistic to expect such increases in tanker capacity up to 2008
if the DJP is expanded in 2010. He assumes that the expansion will stop in 2008 in
anticipation of the new pipeline becoming available in 2010. Furthermore Mr. Coetzer
finds it entirely reasonable to assume that new tankers would continue to come into
use until 2008, or even later, because of the ability of tanker operators (who would
lease these tankers to the OOCs until the DJP expansion) to divert these tankers to
other uses once they are no longer needed for fuel transport. 214
214 In Mr. Coetzer’s view the additional tanker capacity created before the DJP could be diverted to
the chemical industry. Furthermore, the excess long haul tankers could be used for shorter haul i.e.
from the depots to customers.
133
• According to Shell, significant additions have already been made to the
amount of road capacity available for the transportation of oil products, as
oil companies have sought to expand their transportation options
following the termination of the MSA, and further additions, whilst
possible, are likely to be limited.
• Shell further argues that assuming everything else in Mr Coetzer’s favour
(and in particular that South African industry can and will produce new
combinations at the rates alleged), Mr. Coetzer has overlooked the effect
of ordinary economic growth in all the markets served by the existing fleet
of 2 408 combinations. The assumption by Mr Coetzer that all of the 2408
combinations would be used for the transportation of fuel, is patently
unrealistic and overstates the available tanker capacity for fuel
transportation, even on the merging parties own version contained in the
CRA report. Furthermore, he assumes that all tanker capacity will
transport fuel to the inland and makes no allowance for distribution to
KZN, Lesotho and Swaziland. Shell submits that:
Given the GDP and fuel rate projections of the various parties in the present
case, it is not unreasonable to assume that the markets served by the
existing fleet of combinations will grow at 3% per year. At that rate, 72 new
combinations will be needed just to meet the demands of existing markets. It
should be observed that fuel bridging from Durban to the inland market
would seem to be only a small part of the market served by the national fleet
of 2 408 combinations. On Mr Coetzer’s capacity formula, 2 408
combinations could deliver 26.7b of fuel from Durban to the inland market.
Since CRA’s (inflated) base road figure is no higher than 1.67b (2.23b minus
Since CRA’s (inflated) base road figure is no higher than 1.67b (2.23b minus
560m of rail), a maximum of about 6% of the fleet of 2 408 combinations
would serve that particular market). 215
364. Ms. Corrigall, a BP logistics executive, points out that refined oil products are highly
hazardous products which pose significant health, safety and environmental risks. 216
Hence a significant increase in the road transportation of these products is highly
undesirable. Indeed concern has already been expressed about the volume of bulk
product which is currently being moved by road. A further increase in road
215 Page 222 of Shell’s Heads of Argument.
216 Corrigall’s witness statement.
134
transportation increases the risk of additional road fatalities as well as increasing the
wear and tear on the road network. It should be borne in mind that many of the
depots are situated in urban areas, where increased use of road tankers will be
limited by congestion.
(b) Journey turnaround times
365. According to Mr. Coetzer, the turnaround time for an average journey from the
inland to the coast and back is 34 hours:
ADV COCKRELL : You say “when it comes to the number of journeys involved, the
following facts are to be taken into account”….“a slow loading time would be 3
hours. You say Sasol contracts for 2 hours loading, journey time one way of 10
hours, offloading of 3 hours 217 equals 16 hours and with 8 hours rest, one has 34
hours return”. Now the way I understand it is the figure you’ve left out is the 10
hours for taking the truck back.
MR COETZER : Yes.
ADV COCKRELL : So it’s the total of 24 hours plus the 10 hours for the return and that
gives you the estimate of a round trip of 34 hours.
MR COETZER : Correct.
ADV COCKRELL : Have I understood your evidence correctly?
MR COETZER :That’s on a shuttle basis. 218
366. Mr. Coetzer then calculates that on a 34 hours turnaround time each vehicle
does 21 journeys per month (number of hours a month divided by 34) or 0,92
million litres per month (21 journeys multiplied by the 44000 litres in every
vehicle) or 11.1 million litres annually.
367. While TOTAL did not dispute the fact that a round trip could be done in 34 hours, it
did dispute whether such a turnaround time could be achieved consistently. Corrigall
for BP, also states that the average turnaround time for tankers from Island view to
the Pretoria depot is 2,5 to 3 days. 219
368. Milner for Shell testified that based on an analysis of 50 vehicle tacographs, the
217 Mr. Coetzer admitted under crossexamination, that loading times at Secunda can take as long
as 8 hours, but hastened to add that that was not “…definitely not the norm or the average of
[loading] at Secunda under exceptional circumstances” At Page 1234 of the transcript.
218 Page 1224 of the transcript.
219 Paragraph 3.6.2 of Corrigall’s witness statement.
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average trip time was 2,7 days (about 68,4 hours). This would translate to 11 trips per
month, yielding a figure of only 418 million as the deliverable capacity of 72 new
combinations. According to Shell, 220 this means that all (or nearly all) of the new
combinations have to be available for fuel transportation from Durban to the inland
market in order to achieve the expansion assumed by CRA.
369. During the hearing, counsel for TOTAL brought to Mr. Coetzer’s attention a document
submitted by the merging parties to the Commission, 221 in which the merging parties
had indicated that “…each tanker makes 100 sets of 3day round trips from the coast
to the inland area per annum. ” While Mr. Coetzer did not agree with the “3 day round
trip” view, he did acknowledge that the estimate one makes of the turnaround time
would have significant implications for the calculations of how much product can be
moved by road inland. It was demonstrated that if the turnaround time provided by
TOTAL, and indeed the merging parties in their earlier submission to the Commission,
were used this would amount to just over 5,3 million litres annually – significantly less
than Mr. Coetzer’s estimate. Mr Coetzer’s assumption of 34 hours was indeed
surprising given that the figure of 3 days was submitted by both the merging parties
and TOTAL. This does appear to be a further instance of belatedly discovered
logistical capacity.
370. In response to questioning from the Tribunal, Mr. Coetzer conceded that his
34 hours round trip time was based on what could be done in response to a
crisis situation.
CHAIRPERSON: But your numbers for 34 hours, and Mr Snyckers used the word
a few times and you’ve used the word a few times, is in response to crisis.
MR COETZER :Yes.
(c) The dual use of chemical tankers
371. Mr. Coetzer averred that the OOCs experts had overlooked the fact that a
371. Mr. Coetzer averred that the OOCs experts had overlooked the fact that a
truck traveling from the inland to Durban carrying chemicals for Sasol could
return to the inland with petroleum products.
220 At paragraph 221 of its Heads of Argument.
221 Page 2411 of the Commission’s Record.
136
372. However, under crossexamination it was pointed out that in such a case, the
tanker would need to be washed out, a process which would take some 23
hours. It was also pointed out that a certificate of cleanliness would be
required after the tanker had been washed out, and before it could accept
petroleum products. Mr Coetzer confirmed that this was so. Mr Coetzer also
conceded that not every tanker used to convey chemical products could also
carry petroleum products.
(d) Driver capacity
373. Mr. Coetzer testified that there are sufficient numbers of heavy goods drivers that can
be trained to become hazardous goods drivers in order to meet a significant increase
in demand for such drivers. He claimed that a single month’s training is more than
sufficient for the purpose. 222
374. However Shell submits that it has already faced difficulties in finding qualified drivers
and vehicles that meet its safety standards and this is unlikely to get any easier over
the short to medium term. Shell contacted the Road Feight Association to ascertain
the availability of quality long distance drivers within South Africa and was advised
that there is a critical shortage of skilled drivers. South Africa is losing approximately
3000 drivers a year due to incapacity, retirement and HIVAids, the latter being the
biggest cause of attrition. 223
(e) Additional storage facilities
375. According to Mr. Coetzer VOPAK and IVS have, respectively, 0,15 and 0,5 billion
litres additional storage capacity in Durban. IVS also has a facility of some 0,05 bn
222Coetzer however, confirmed under crossexamination by Mr. Norton for BP, that a hazardous
goods driver requires a minimum of 3 years prior experience as a heavy goods vehicle driver before
he’s allowed to drive a hazardous vehicle and also confirmed that this was a requirement of most of
the oil companies. It was put to Mr Coetzer by Mr Norton that Lobtrans, one of the companies Mr
Coetzer had referred to in his evidence in chief, had confirmed that only 1 to 2 out of 50 applicants
are suitable to become a hazardous goods driver. Mr. Coetzer agreed that that was a fair statistic.
Mr Coetzer added that after Lobtrans has employed these drivers they are able to transport fuel
within 2 months.
223 The impact of HIV/Aids on drivers is a key concern both in terms of safety impacts and the
number of available drivers. This problem is expected to exacerbate in the short term until
population infections stabilise.
137
litres in Richards Bay. According to Mr. Coetzer it is also possible to transfer fuel from
either the refinery or the berth at the harbour to the third party storage facilities by
pipe. These additional facilities do not necessarily use the same entry and exit points
as the existing loading facilities, and so their utilization would not entail increased
congestion around Sapview – the loading facility operated by Sapref on behalf of
Shell and BP at Island View, Durban.
376. Shell points out that there is no indication in Mr. Coetzer’s affidavit of the
extent to which this capacity was already being used by others.
(f) Gantry capacity
377. CRA’s report on behalf of the merging parties did not deal with gantry constraints.
However, Mr Baker on behalf of Shell submits that even if the hurdle of tanker
capacity is overcome, there are constraints on the gantry capacityavailable at the
Durban loading facilities. According to Mr. Baker, the eightbay gantry at Island View
used by Shell and BP is already operating at virtually full capacity. Even though the
gantry is already operating around the clock, there is inevitably a queue of tankers
waiting to be loaded. Shell concedes that operational changes at its gantry may
increase capacity but by no more than 5%. Currently, the gantry has a throughput of
1,700 Ml per annum. The best that could therefore be achieved at the Shell gantry
without new investment is a throughput of 1,785 Ml (or 223 Ml per bay). Applying the
same per bay volumes to the Total fourbay gantry at Island view and the Engen
eightbay gantry at Wentworth gives an overall maximum capacity of 4,463 Ml per
annum at the Durban depots. However, even this figure would appear to significantly
overstate the amount of capacity actually available. Companies utilising the gantry
overstate the amount of capacity actually available. Companies utilising the gantry
capacity of their competitors would be required to go through a lengthy documentary
process further reducing capacity. Shell’s estimate for overall gantry capacity in
Durban is 4,016 Ml.
378. This gantry capacity is, however, not available exclusively for the
transportation of product inland. The bulk of the capacity of the gantries at
Durban is used to load road tankers delivering to Kwazulu Natal. Only the
remainder can be used for deliveries into the inland region. Currently,
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therefore, around 860 Ml per year would be available for transportation to the
inland region prior to any new investments.
379. The merger parties, in response to Shell, argue that there was unchallenged evidence
from Mr Coetzer of the availability of gantry capacity of 1.8b (or 0.9b on a
“conservative” approach) at IVS and Vopak in Durban. 224
ADV SNYCKERS : Thank you. I’d like you to say Mr Coetzer, whether there is any
other kind of exaggeration or admission in the treatment of supposed crisis
management logistics in the OOC statements that you’d like to refer the Tribunal
to?
MR COETZER : Ja I think the issue of gantry in congestion and loading facilities could be
addressed by looking at Island view storage and VOPAC, it’s thirdparty storage company
in Durban, based in Durban…. in terms of the possibility in a foreclosure scenario to utilise
their storage and gantry facilities to store fuel and then convey it by road up to the inland
area. …. there is 3 loading points with about 14 rail loading points, which could be
converted in the crisis situation to load road vehicles as well….And in my calculation to
transport … to load one hour per vehicle it would be easy to use the VOPAC and Island
view facility in a region of 1.8 billion litres. If one has a conservative calculation and utilise
2 hours loading, it gives you a number of .9 billion litres. 225
380. In response to this, Shell argues that firstly, Mr. Coetzer assumes that the
loading points would in effect be devoted to the OOCs and secondly, it is not
apparent how Mr. Coetzer arrived at a figure of 1.8b. On Shell’s calculation
and using Mr. Coetzer’s assumption that one could load one vehicle per hour
and do so on a 24 x 7 basis for 365 days a year and that all three road loading
bays would be inclusively available to the OOCs, one would still arrive only at
1.155b (44 000 litres x 24 x 365 x 3).
1.155b (44 000 litres x 24 x 365 x 3).
381. In an attempt to rebut Shell’s assertions, t he merging parties argue that it was
demonstrated during the crossexamination of Milner for Shell that internal
assessments conducted by Shell in 2003 226 (before any expansions of gantries) of
the ability to bridge product inland through the available gantry capacity (in
anticipation of the termination of the MSA) concluded that only four bays at Shell’s
Island view facility had a maximum capacity of over 40 million litres per week (which
224 Page 80 Para 3.2.2 of the merging parties’ heads of argument .
225 Page 1200 of transcript.
226 Exhibit 64 page 72, which contains an exchange of emails between Ken Hands (Distribution
Advisor at Shell South Africa Marketing) and Sydney Dlamini also of Shell during March 2003.
139
exceeds 2 billion litres annually), which would mean that, on the 8 bays to be
immediately available to Shell and the four bays at TOTAL’s facility, there would be
more than 6.6bn litres of gantry capacity available annually. The merging parties
argue that the assessment also showed that all Shell requirements at the time
amounted to some 12.6m litres per week, so that the four bays left a spare net
maximum capacity annually of 1.4bn litres per road alone out of only the 2bn litres
yielded by the 4 bays (i.e. not taking into account the other bays available to the
OOCs).
382. Shell explained that the assessment referred to occurred when Shell was exploring all
logistical possibilities in the light of the impending termination of the MSA. At the time
in question (March 2003) Shell and BP were (because of the MSA) not using the
Island View gantries for inland transportation. Island View was not operating at full
capacity in March 2003, since the facility was only required for loading vehicles for the
KZN coastal market. According to Shell, the assessment suggests a theoretical
loading capacity of 40 320 000 litres per week, leaving “ surplus” capacity of 27 673
275 litres per week (40 320 000 – 12 646 725). A further email contained in Exhibit 64
notes that
this may be a very optimistic view based on a desk top exercise but does at least
give another viewpoint on the IV capacity.
383. Shell submits that Mr. Milner’s evidence of Shell’s actual experience in 2004
and 2005, once the Island View gantries began to be used for loading inland
bridging vehicles as well as the preexisting coastal KZN fleet, shows that
capacity has only been able to be increased from 164m to a current 227m,
which has been further increased (in Mr Baker’s model) to 238m for further
efficiency gains.
140
i.The merging parties also refer to the fact that TOTAL had indicated
that as far back as the fuel crisis in 2001, before any expansion
projects, TOTAL’s four bays had in reality managed to effect
bridging into the inland area of 100m litres per month – i.e. 1.2bn
litres annually. 227 If this were to be applied to 12 bays such as
immediately available to the OOCs at Island view Shell/BP and
TOTAL, it would give in excess of 3.5bn litres annually. Shell
submits that this argument is based on a theoretical projection that
this capacity could be doubled if TOTAL operated 24/7 and
staggered its shifts. Furthermore, TOTAL clearly stated that it
experienced early morning congestion and although there was
space for an additional gantry at a cost estimated to be R1,9
million, TOTAL has no plans to extend its facilities.
384. Shell submits that a further problem arises from the fact that it uses the JD Edwards
computerised information management system inter alia to manage the loading of
product at Island View. The use of a third party’s loading facilities on a continuous
basis would presumably thus involve effectively setting up a permanent infrastructure
(incorporating the JD Edwards system) on the third party’s premises. There are
complexities involved in trying to schedule vehicle arrivals and the availability of
various products and grades across three different facilities, particularly facilities that
are not available to the each of the OOCs exclusively.
385. According to Mr. Baker, even if Shell and BP were prepared to invest in new loading
bays at the Island View gantry, due to severe space constraints, they are likely to only
be able to add one new bay. A ninth loading bay could be added with a leadtime of 3
be able to add one new bay. A ninth loading bay could be added with a leadtime of 3
months to the Island View gantry. Two new bays could plausibly be added to the
TOTAL gantry at Island View within a similar time. Within 3 months a further 625 Ml
of gantry capacity could therefore be added, bringing the total to 4,641 Ml. Any
additional increase in gantry capacity over and above the three further bays referred
to above would involve significant additional investments and would take at least two
yearsto complete an Environmental Impact Assessment and significant additional
227 Page 7475 of Exhibit 64. The information is contained in emails between Colin Alonzo
(Distribution Strategy Manager at TOTAL) to Ken Hands (Distributor Advisor).
141
demolition and building work would be required. However, even then, Shell estimates
that only an additional three bays could be added at Island View.
386. In addition, unloading capacity would need to be made available at the receiving
depots. This would likely involve investment in additional handling facilities that would
probably only be needed until the opening of the new pipeline, which would in turn
significantly increase the cost of these investments. 228
387. The debate over turnaround times at the loading facilities contributed one of the few
comic moments in this lengthy hearing. Mr. Coetzer reported on a study that he
claimed to have supervised into tanker turnaround at the large Island View depot in
Durban. Without recording the gory details here, suffice to say that this piece of
‘research’ was comprehensively and persuasively destroyed in a review conducted by
Shell’s team of experts, in the process, and not for the only time, severely calling into
question Mr. Coetzer’s credibility. 229
Actual usage of Road and Rail Logistics
388. According to Mr. Swart the OOCs actual usage of road and rail logistics for 2004
amounted to 1.95b of which 1.39b was allocated to road and 560m to rail. 230 This
was however derived by Swart using fourth quarter data and then annualised.
389. Shell points out that this methodology is susceptible to considerable error in
that errors in the fourth quarter will, through the annualisation exercise, be
quadrupled.
390. During the hearing, Mr Swart acknowledged an error in his Table 38 namely
the omission of a Petronet swap of 120m which would have to be added to the
DJP utilisation and thus reducing the derived road and rail figure by this
amount. According to Mr Swart, 50m of this swap occurred in the fourth
quarter, thus overstating the annualised road and rail figure by 200m.
228 The cost of these investments may be increased if their useful life is short because assets that
would normally be depreciated over a long period may have to be depreciated over just five years
(i.e. the period until the expanded pipeline becomes available).
229 Page 26092612 of the transcript .
230 Swart Table 38 Witness Statement Bundle (WSB) Page 545.
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According to Shell, Swart’s table also understates Sasol’s sales to Shell.
391. Shell submits on behalf of the OOCs that the actual figure for road and rail usage is
1.085billion litres per annum in total of which 344 million is allocated to road and
741million litres is allocated to rail. 231
392. Below is table showing the OOCs road and rail usage:
Road Rail
Shell 232 390 232
BP 25 249
TOTAL 46 40 233
Caltex234 41 62
344 741
Source: Shell’s Heads of Argument
393. CRA on behalf of the merging parties assumes that rail and road will grow
annually at 15% per annum but would cease after 2008 in view of the
impending commissioning of the new DJP in 2010. According to CRA this
results in the addition of the following further logistics of 340m in 2006, 380m
in 2007 and 440m in 2008, amounting to 1.16b in all.
394. The OOCs, for their part, submit that there are several factors which constrain
growth in road logistics:
• The quantities which can be moved;
• Safety and environmental issues significant amounts of additional road
capacity would raise environmental and safety issues which may well cause
local residents, other road users and safety and government agencies to seek to
limit the amound of road haulage of hazardous oil products;
• Limiting loading and offloading facilities (gantry facilities) even if more tankers
were commissioned, according to the OOCs, there are currently severe
constraints on the gantry capacity available at the ports. According to Mr. Baker,
231 Paragraph 198 of Shell’s Heads of Argument.
232 Page 2 Exhibit 73.
233 Page 3 Exhibit 71.
234 Page 2 Exhibit 70. Caltex hadn’t provided separate figures for rail and road. The table therefore
allocates 82 million of Caltex’s petrol and diesel equally to road and rail.
143
teightbay gantry at Island View used by Shell and BP is already operating at
virtually full capacity. Even though the gantry is already operating aroundthe
clock, there is almost always a queue of tankers waiting to be loaded. 235
• The cost of acquiring additional tankers and expanding gantry capacity; and the
number of tankers which can physically move up and down the N3 and other
routes: Mr. Milner submits that the incentive of road haulage contractors to
invest in new capacity is significantly undermined by the expectation that a new
pipeline will be constructed around 2010;
• According to Mr. Milner, Shell has already faced difficulties in finding
vehicles and qualified drivers that meet its safety standards and this is
unlikely to get any easier over the short to medium term.
• There are limits on the number of road tankers that can be loaded at the Durban
refineries. According to the OOCs this is partly due to the limited capacity of the
access roads, which run through the port to accommodate road tankers. This is
exacerbated by the fact that Island View is a “National Key Point” with strict
access control for safety and security reasons. 236
Growth in Rail
395. Shell submits that there is little prospect of any expansion in rail logistics over the next
few years. According to Mr. Milner, 237 the available rail capacity is almost fully
utilised. Corrigal for BP submits that there is insufficient rail capacity to support a
substantial increase in the volume of product to be conveyed from the coast to the
inland markets.
396. The PriceMetrics report, refers to recent discussions between TOTAL and Spoornet,
during which Spoornet admitted to poor service delivery with a decline in volumes
moved over the last four years. 238 TOTAL reports that Spoornet expects current
inefficiencies in the operation of rail tank cars to persist for at least a year although in
the longerterm increased capacity between Durban and Johannesburg will be
235 Page 10 of Mr. Baker’s report.
236 Page 1674 of the Witness Statement bundle.
237 At page 1673 of the Witness Statement bundle.
238 At page 1284 of the Witness Statement bundle.
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available through reduced turnaround times. Spoornet indicated to TOTAL that its
major priority over the next 35 years is to improve the performance of its locomotives
after which it will focus on rail tank cars.
397. The RBB report notes that Spoornet has indicated to Shell that any significant
increase in rail capacity would take 5 to 6 years to implement as a consequence of
major new investments in track and rolling stock that would be required, including the
feasibility studies and budgetary approvals that would necessary. In May 2004,
Spoornet announced a fiveyear programme in which Spoornet would invest
R14billion in its railway network, 90% of which would “ go to the rehabilitation and
renewal program for infrastructure, locomotives and wagons. ”
398. The OOCs ability to optimize its use of the railway network is, however,
dictated by Spoornet’s operational requirements (including where and when it
is able to make rail tank cars available). Ms. Corrigall, in her witness
statement, cites BP’s experience in trying to increase the amount of product
sent by rail. In 2004, BP’s orders for capacity from Spoornet amounted to 672
million litres whereas Spoornet in fact only loaded 600 million litres. The
primary reason for Spoornet’s inability to satisfy BP’s transportation
requirements was the unavailability of sufficient rail tank cars. Again in mid
2004, BP requested additional transportation services from Durban to
Ladysmith and Kroonstad.
399. In August 2004, Spoornet advised that “due to existing constraints” it would
not be able to meet this additional demand. According to Corrigall, Shell had
also experienced problems in increasing its rail usage. In 2004, Shell was
advised by Spoornet that the commitment which had been made to transport
advised by Spoornet that the commitment which had been made to transport
800 million litres of its products via Spoornet’s railway network could not be
honoured and that the aggregate volumes would have to be reduced to 600
million litres. Spoornet had apparently advised Shell that it had “over
committed” to the various oil companies.
145
Road and Rail Logistics – conclusions
400. What are we to conclude from the welter of detailed evidence submitted on
road and rail?
401. The merging parties have burrowed deep to find additional sources of logistics
in modes of conveyance that are costly under the best of circumstances. The
paths that they choose – whether through the construction of new capacity or
raising the efficiency of existing capacity – are undoubtedly even more costly.
Moreover it is clear that the OOCs have cast significant doubt on each one of
the contentions of the main witness for the merging parties and this alone
must indicate the substantial risk involved in opposing foreclosure on the basis
that additional tanker or gantry capacity or vastly improved driver performance
will enable the conveyance of sufficient alternatively sourced product at
commercial viable rates.
402. We are satisfied that rail capacity is unlikely to substantially increase from
present levels in the near future. It is also clear that Spoornet intends
prioritising the refurbishment and upgrading of existing infrastructure, as
opposed to the acquisition of new locomotives and/or rail tank cars.
Consequently, additional supplies of product from the coast will need to be
transported by road.
403. Under crossexamination, it became manifestly clear, that Mr Coetzer’s
assumptions and calculations on the tanker capacity, journey turnaround
times, dual use of chemical tankers, driver capacity, storage facilities and
gantry capacity were not based on direct experience but consisted of
hypothetical projection in response to a crisis. His assumptions on tanker
capacity clearly overstated the case and his research on loading facilities and
capacity clearly overstated the case and his research on loading facilities and
turnaround times was questionable to say the least. No reasonable
explanation was provided by him for his gantry capacity calculations. Indeed
Mr Coetzer himself conceded that his calculations had been done as an
exercise in “response to a crisis,” Hence we are unable to place much reliance
146
on Mr Coetzer’s evidence. In any event, even if Mr Coetzer’s calculations were
to be found to be credible, none of the increased road capacity could be
achieved without significant investment and over a considerable period of
time.
The expansion of capacity in the DJP – the limits to foreclosure
404. It has been widely asserted – although not rigorously established – that a
foreclosure scheme, to the extent that it is at all feasible, cannot extend
beyond late 2010, the point at which Petronet expects to commission
additional pipeline capacity by way of the replacement of the current 12 inch
diameter pipeline with a 16 inch pipe. The assumption that this would
eliminate the logistics constraint certainly underpinned the condition
recommended by the Commission. However on closer examination this
assumption is called into question.
405. In the era of the MSA, the section of the DJP between Durban (the coast) and
Sasolburg, was historically underutilised and primarily used for supply to depots
south of Sasolburg. Post MSA, however, Petronet recorded a “definite shift in
movement”. While prior to the termination of the MSA, Sasol’s Secunda and Natref
plants supplied the inland (with some 11 billion litres) and the shortfall (approximately
1 billion litres) was transported up the DJP from the coast, according to Mr Moodley,
the Petronet witness at these hearings, the scenario that prevailed once the MSA was
terminated went against its basic assumption that:
“…if you’ve got product in that particular area… you [would] consume that product
first before you bring product from any other area.” 239
406. Petronet found instead that the DJP immediately became oversubscribed, with the
406. Petronet found instead that the DJP immediately became oversubscribed, with the
coastal oil companies wanting to bring as much product as possible from their coastal
refineries into the inland area. Petronet saw that the DJP would be close to full
capacity (transporting an average of 64 million litres per week or 3,328 billion litres a
239 Page 207 of the transcript.
147
year).240
407. Although the validity of its assumption of ‘rationality’ was tested by the
behaviour of the OOCs, the decision to expand the DJP was predicated on a
study conducted in 2002, which revealed that the inland would soon become
supply constrained. That is, Petronet’s ‘business principles’ – essentially the
assumption of ‘rationality’ – dictated the decision to expand the DJP and the
extent of that expansion:
The process that we follow in doing the studies is we have an independent person
visiting the different clients of ours to get a view of their production capabilities
going forward and what their projection would be, to get a view of what the market
demand would be and to do a supply balance and look at what the capacity
constraints of the network would be and what would hamper the movement of
product to the inland area. 241
408. On an assumption that demand in the inland would exceed 14.5 billion litres in
2014, Petronet’s 2002 study revealed, firstly that the section between Durban
and Sasolburg – ‘the southern DJP’ would be constrained in 2014 and
secondly that the section of the DJP running between Sasolburg and Alrode –
the ‘northern DJP’ would be constrained in 2005. A further round of
discussions between Petronet and its clients confirmed that while the
constraint in the northern DJP would indeed kickin in 2005, the southern DJP
– DurbanSasolburg – would be constrained by 2010, some 4 years earlier
than originally anticipated.
409. Petronet had to evaluate how it could deal with the constraints. According to
Mr Moodley, their evaluation was done from a purely “business opportunity”
perspective:
From our perspective if we analyse this and we look at it, it becomes a
business opportunity to invest in debottlenecking. There is an opportunity to
business opportunity to invest in debottlenecking. There is an opportunity to
get more volumes into the network and therefore it is a business decision now
to go forward. And in terms of this, this study indicates the risks are now low in
240 Page 207 of the transcript.
241 Page 208 of the transcript.
148
term of investment of capital into the network. So we then take decisions based
on these scenarios, whether we invest in the network and what kind of returns
we can then get from the network, purely again based on business
decisions.242
410. We will firstly deal with the constraint in the southern section of the DJP.
Expanding the DJP
411. With regard to the looming constraints in the DurbanSasolburg section of the
DJP, that is the southern DJP, Petronet considered various options including
reconfiguring the DWP or Lilly line for refined product usage as well as the
possibility of replacing the DJP with a wider diameter pipe.
412. Recall that the DWP had originally been commissioned in 1978 in response to the
growing inland product demand. It was envisaged that the DWP would augment the
DJP and facilitate the movement of refined product from Durban. However, when the
Secunda plants came onstream and the MSA was extended to cover the Secunda
output, the DWP (and indeed the DJP) were underutilised. In 1995 Petronet decided
to reconfigure the DWP and the crude oil pipeline (COP) in order to improve
utilisation. The southern portion of the DWP was connected to the northern portion of
the old COP at Ingogo to supply crude oil to the Natref refinery at Sasolburg. The
southern portion of the COP was coupled to the northern portion of the DWP and
converted into a methane rich gas pipeline, dedicated to the sole conveyance of
Sasol gas from Secunda to Durban. 243
413. Recall too, that this decision reduced, in one fell swoop, white fuel pipeline
capacity in the DJP and DWP from to 68 and 115 million litres per week
respectively to the DJP’s capacity of 68 million litres per week. Opposition from
the OOCs to this decision to convert the DWP into a gas pipeline was met by
an assurance from Petronet that additional pipeline capacity would be
an assurance from Petronet that additional pipeline capacity would be
provided when circumstances demanded it.
242 Page 209 of the transcript.
243 This made the old crude oil pipeline from Coalbrook to Kendal redundant.
149
414. The obstacles in the way of converting the DWP back to its originally intended
function as a conveyor of white fuel ran into immediate and predictable obstacles.
Firstly, the notice period in Petronet’s agreement with Sasol meant that the DWP
would only become available to Petronet in 2011. And once it became available, it
would have taken Petronet a further two years to reconvert the line back to a refined
product line. In other words, the Lilly line would only be available for use in 2013, and
that as Mr Moodley put it, would be ” hopelessly too late”. 244 Recall that Petronet has
recently concluded an agreement with Sasol that effectively reserves the DWP for gas
for the rest of the pipeline’s useful life.
415. Petronet then decided to replace the DJP. This not only offered Petronet the
opportunity to convey more product from the coast to the inland area, it also allowed
them to replace a line that, technical studies indicated, was approaching the end of its
useful life. 245 After examining a range of options Petronet decided to replace the
current 12inch DJP with a 16inch pipeline in its current format and configuration.
The Transnet board approved the construction of a new 16inch line for completion by
2010.
416. In terms of the project, the diameter of certain sections of the DJP will be expanded.
The diagram below illustrates the option chosen: 246
417. Petronet
has
completed
“pre
feasibility”
studies, is
currently in
the routing
and
environmental impact phase, and will, in due course, move into the feasibility
244 Page 227 of the transcript.
245 Page 212 of the transcript.
246 Mr. Moodley’s presentation.
150
stage. We will proceed on the basis that all the necessary regulatory
approvals have been obtained, that the feasibility has been proven, and that
the line will actually be commissioned in the latter half of 2010, although
experience with large engineering and construction projects would probably
view these assumptions as heroic in the extreme.
418. According to Mr Moodley, on the assumption of 2% annual growth in inland demand,
the capacity of the new line would be fully utilised by 20192020. If 3% annual growth
was predicted, the 16inch line’s capacity will be fully utilised by 2013 –2014. 247
419. Mr Moodley confirmed under crossexamination that Petronet was also looking
at possibilities ranging from 16 inches to 20 inches:
ADV SNYCKERS : And we know that currently you have approval for a 16inch
pipe, but you are looking also at the possibility of using a 20inch pipe.
MR MOODLEY : I think there are various possibilities. It ranges from a 16inch to a 20
inch. So it’s 16, 18 and 20. Those are the options at the moment.
ADV SNYCKERS : Yes. So if you have a high demand such as 3% on the pool and you
have a 16inch line or an 18inch line, that will be constrained earlier than if you have a
low demand with a 20inch pipe.
MR MOODLEY : That’s correct.
420. Mr. Moodley emphasized that Petronet was under no legal obligation to
increase the size of the pipeline above the 16inch diameter already approved
by the Transnet. If there was to be a reevaluation of the capacity required on
the line, it would be dictated by purely business considerations, that is, the
assessment would cover an evaluation of the returns to be earned from
investing in increased capacity and the risk incurred in preinvesting in
capacity.
421. Shell argues there is no reason to believe that even an 18inch pipeline will be
built.248 Mr Moodley confirmed that the additional capex would be of the order of
R500 million, and that the question of expanding beyond the boardapproved 16
inches had not yet been considered.
247 Page 215 of the transcript
248 Para 131 of Shell’s Heads of Argument.
151
422. The considerable additional expenditure aside, Mr. Moodley also alluded to a
number of uncertainties that would have to be resolved in deciding whether or
not to expand the DJP beyond 16 inches. A new pipeline regulator has just
been established and its attitude to further expansion would have to be
considered. Mr. Moodley also acknowledged that the possibility of a pipeline
being constructed from Maputo into South Africa might also potentially affect
the commercial viability of Petronet’s new pipeline. However, all of these
concerns are a function of the overriding commercial criteria that Mr. Moodley
insisted would be applied in deciding on further expansion, in other words the
commercial risk inherent in preinvesting in assets which would, for lengthy
periods into the future, be underutilised.
423. In our view no reliance can be placed on the prospect of an expansion of the
DJP beyond the 16inch line already approved by the Transnet board.
424. We must then ask how long it will be before the expanded southern DJP
becomes constrained again. Projections as to precisely when the OOCs will
again become logistically constrained naturally differ depending on the
assumptions made.
425. Shell submits that in assessing this question it is crucial to bear in mind that logistical
constraints post2010 are vitally affected by whether or not there has been
foreclosure in the period 2006 – 2010. If such foreclosure has taken place, then on Mr
Baker's base case and on his assumption of an irreversible loss of retail market
share, Shell argues that the OOCs' logistical requirements post2010 are significantly
less than they would have been without foreclosure. Mr Baker’s base case also
shows that the OOCs again revert to being logistically constrained as from 2014, their
shows that the OOCs again revert to being logistically constrained as from 2014, their
absolute dependence on Uhambo in 20142015 being 460m and 1.04b. 249
However, if one assumes that there is no foreclosure (because of an imposed supply
condition or a voluntary fiveyear supply agreement) over the period 2006 – 2010, the
OOCs' inland requirements over the period 2011 – 2015 (and thus their absolute
249 See annexure to Shell’s supplementary heads of argument.
152
logistical deficit) are greater. From Mr Baker's base case model if there is no initial
foreclosure, the OOCs' absolute dependence on Uhambo over this period will be as
follows: 400m (2011); 790m (2012); 1.14b (2013); 1.6b (2014); and 2.11 b (2015).
426. In other words, Shell argues:
“…if the new supply condition is imposed and precludes foreclosure until the end
of 2010, the OOCs will as from January 2011, be immediately constrained and
immediately dependent on Uhambo for substantial volumes. It is no answer to say
that if this be so Petronet would build a bigger pipeline. Petronet's business
approach is to focus on total inland deficit rather than the constraints of particular
oil companies. And the simple fact is that Petronet has neither resolved nor
budgeted to build a bigger pipeline and the termination of the new condition is not
dependent on the construction of a bigger pipeline (cf clause 17.1 Sasol heads p
292). It is also no answer to contend that the OOCs will have enough time to plan
for and overcome the logistical constraints. Mr Baker's model already makes
unrealistically generous assumptions about gantry capacity and annual road tanker
expansion of 250m per year.
It is not within the OOCs' power to build their own new pipeline since the pipeline
would need to be licensed and Petronet would be adversely affected by a new
pipeline which diverted volumes from its infrastructure (Moodley T280281). It is
thus not readily apparent that any amount of longterm planning would resolve the
logistical constraint, and it is doubtful in any event whether, from a competitionlaw
perspective, it is acceptable to expect rivals to ward off foreclosure by costly
capital investment.” 250
427. During the hearing, Mr. Moodley stated that Petronet had commissioned a
further study in 2005. The preliminary results from that study showed that
when Petronet considered the realities of the period (20022005) viz. a 2,6%
growth in demand as well as the restrictions in supply from Secunda and
Natref, the constraint in the pipeline moved from 2010 to 2007. 251
MR MOODLEY : What I indicated was, the summary of evidence was based on the
2002 study. And in the interest of looking at what has happened in the industry
from 2002 to 2005, we commissioned a new study and that’s the preliminary
results. And that has indicated that that date changes when a physical requirement
for capacity to move product from the coast to the inland area, moves now from
2010 to 2007, putting all the realities into place. The more bullish growth use and
250 Paragraph 6061 of Shell’s supplementary Heads of Argument
251 In the 2002 study, Petronet had used a 2% growth in demand for petrol, diesel and jet.
According to Mr Moodley, if one looks at when a 20inch pipeline will become constrained using a
2,6% demand growth, the pipeline only becomes constrained in 2023. However, his model is very
sensitive to changes and if demand is increased by 1%, the pipeline becomes constrained in 2018.
153
the restriction in terms of supply from Secunda and NatRef, that moves into
2007.252
428. However, it would appear that this would not cause Petronet to hasten the
completion of the new pipeline:
MR MOODLEY : …That, however, doesn’t [alter] our planning horizon and our
ability to commission the new pipeline anymore. That planning horizon is fixed in
terms of that 5year. It is not much more one can do in terms of the program as we
see it now. We’ve factored issues such as environmental studies and approval
and… already quite an accelerated program. But however going forward, one
might look at the issue of saying, is there an opportunity of accelerating the
program further? But at this point in time, we do not see that opportunity doing
that. And again I think what I need to again say is that from our point of view it
becomes a business opportunity and not an obligation to provide capacity by
2007.253
429. During his examinationinchief, Mr Natha talks about when the DJP will
become constrained again,
Well I noted with interest that previous documentation and Mr Moodley’s what we
are talking about is replacing the 12 inch line with a 16 inch line. So the
incremental capacity that you’re going to get out of it is only the difference between
115 million litres, which they say is the operational capacity of the 16inch line and
the 68 million litres, which is the current. So say 70, 47 million litres of week extra
capacity. The question to me when I look at that and I look at the supply demand
balances across the base and the need for pipeline capacity in the region for
NatRef to put their product in, I believe it will be a very short period, maybe 2 to 3
years when this capacity runs out. 254
430. And then under crossexamination,
years when this capacity runs out. 254
430. And then under crossexamination,
ADV VAN DER NEST : You also said that upon questioning from Mr Gotz on the
capacity of the new DJP when it is expanded to 18 inches. You said that after a
year or 2 about 2012 or 2013 looking at supply/demand balances, it would again
be full. Correct?
MR NATHA : Yes and just let me add, that’s based on the growth rates. 255
431. We will now deal with the alleviation of the second constraint, namely in the
northern section of the DJP.
252 Page 207 of the transcript.
253 Page 225 of the transcript.
254 Page 22802281 transcript.
255 Page 22992300 transcript.
154
Debottlenecking the northern DJP
432. The northern DJP feeds depots in the inland region. It operates on the basis of the
same “common carrier” principles as the southern DJP but has a somewhat larger
capacity of 80 million litres per week. At Sasolburg white fuel product destined for the
inland market is injected into the northern DJP by Sasol and TOTAL from the Natref
refinery. It is at this point that the OOCs must then remove some of their product to
allow Natref to inject its allocated share. A “bottleneck” is caused by the insufficient
capacity of the pipeline at Sasolburg to accept all produced volume injections by
TOTAL and Sasol as well as from the southern section of the DJP for supplies to the
northern depots. 256
433. A further problem is the unavailability of the capacity in the socalled “components
pipeline” which conveys components from Secunda for blending at the Natref refinery.
The existence of the components pipeline is another consequence of the 1995
reconfiguration which was that the old crude oil pipeline from Coalbrook to Kendal
had became redundant. In order to avoid leaving the line unutilised, Petronet came to
an agreement with Sasol to use the line. Petronet connected that section to Secunda
to facilitate the blending of Sasol’s Secunda product components with Natref product
components at the Natref refinery. The section is governed by an agreement with
Sasol in terms of which Petronet transported components from Secunda to Natref in a
downward direction. According to Natha, the flow of components in the reconfigured
pipeline from Secunda to Natref in Sasolburg had the effect of limiting the capacity to
move products from Durban to the inland market via Sasolburg, as the OOCs were
unable to make use of this stretch of the pipeline network. 257 With the scheduled
termination of the MSA, the OOCs sought to maximise the movement of product from
termination of the MSA, the OOCs sought to maximise the movement of product from
their coastal refineries to meet their inland market demand and approached Petronet
with the request that the components pipeline be reintegrated into the general
pipeline network.
434. Petronet decided to alleviate the constraint by debottlenecking that section and
moving refined product upwards. However Petronet’s attempts to open the
components pipeline up for use by the OOCs, immediately ran into stern opposition
256 Mr. Swart, page 41 of the Witness statement bundle.
257 See Mr. Natha and Mr. Kramer’s witness statements.
155
from Sasol. Mr Moodley testified that it is not feasible to move products in both
directions – components ‘downwards’ and refined product ‘upwards’ in that line.
Petronet therefore had to give Sasol notice on the existing agreement. Sasol did not
accept the notice and launched interdict proceedings against Petronet to prevent it
from terminating Sasol’s rights of exclusivity to the components pipeline. 258 Petronet
and Sasol eventually came to a settlement based upon a “ technical solution
agreeable to both parties. ” Petronet and Sasol agreed on the bidirectional movement
of products: for four days of each week it would transport Sasol’s components from
Secunda to Sasolburg and for the other three days of each week it will transport
products in the other direction. According to Moodley, this debottlenecking exercise
increased the capacity for conveying products from the Natref refinery northwards to
Johannesburg from 80 million litres per week to 95 million litres per week. The section
would still transport 20 million litres of component to Natref per week. The additional
capacity has been available since October 2005. The revised allocations to the oil
companies was as follows:
Oil Company August 2005 October 2005
Millions of litres per week
Shell 16.70 19.8
BP 15.9 18.8
Caltex 14.1 16.7
Engen 13 15.4
Total 17.9 21.2
Sasol 2.4 2.8
Source: Mr. Natha’s witness statement
435. Mr. Kramer, a witness for BP who furnished a witness statement but who was
not called upon to provide oral testimony, avers that the inland refiners and
Engen will consume slightly under 40 million litres of the available capacity.
The remaining capacity of some 55 million litres will be shared between the
other coastal refiners.
436. However, according to Mr. Natha, the increased capacity created by the de
bottlenecking does not immediately improve the ability of the coastal refiners
bottlenecking does not immediately improve the ability of the coastal refiners
258 According to Swart, Petronet had given very short notice of termination on this agreement,
which did not give Sasol Oil sufficient time to plan and readjust its logistics in order to deal with the
loss of the components transport capacity. See page 45 of the witness statement bundle.
156
to supply their inland marketing arms because the southern DJP – that is, the
section from Durban to Sasolburg is still constrained.
It should be noted that the allocated pipeline capacity in the Northern DJP can only
be fully utilised by those oil companies with coastal refineries if they purchase
additional product from Sasol’s share of Natref production at Sasolburg. The
principle reason for having to purchase product from Sasol is the capacity
constraint in the southern section of the DJP pipeline, which is limited to 68 million
litres per week. 259
437. Mr Natha confirmed his position under crossexamination:
even though the capacity is there, they can’t utilise it and even when the proposed
debottlenecking of the line, I think it is now in operation from the 1st of October,
the additional capacity that gets allocated to the companies, they can’t use it
because they don’t have the product coming out from the Southern line. So, any
efforts to debottleneck the Northern line has minimal or no benefit to the people
bringing product up from Durban. 260
438. Mr Moodley confirmed the OOCs predicament:
ADV SNYCKERS : Now there is a suggestion in some of the documents that
expanding the capacity north of Sasolburg by way of this debottlenecking doesn’t
actually assist those coastal companies that want to bring in further product,
because they still have only the 68 million a week that they can bring in from the
south. But isn’t it the case that the more you expand the northern capacity, the
more of your product you can push further north, because pipeline is the cheapest
and most competitive method of transporting the product?
MR MOODLEY : That’s true, but I think one’s got to be wary of what the scenario is. I think
what you state is a possibility. If you take two different scenarios, if you take one of the
what you state is a possibility. If you take two different scenarios, if you take one of the
clients that does drop off product in the southern section, say between Durban and
Sasolburg … let’s take Ladysmith as an example. So, in his current logistics plan, if he is
dropping off product at Ladysmith, if he gets more capacity in the north, he can optimise
that by saying he will not drop off product at Ladysmith. He can take that product through
to the north. But let’s assume you have a player that already optimising his logistics. He is
not dropping off a significant amount of product in the south. Then by giving him any more
capacity in the north doesn’t help him, because he cannot get any more product into the
southern section. So it just depends on what scenario the person you are talking about
finds himself. 261
439. Therefore while the debottlenecking creates additional capacity north of Sasolburg,
until the OOCs are able to inject more product into the southern DJP, this section will
259 Page 39 of Mr. Natha’s witness statement.
260 Page 2280 of the transcript.
261 Page 231 of the transcript.
157
be somewhat underutilised by the OOCs. 262
440. And when the coastal refiners have, as a result of the expansion predicted to
become available in 2010, increased access to the southern DJP, their ability
to transport products in the pipeline would remain constrained by the available
capacity of the allimportant northern pipeline. The OOCs argue that post
merger Sasol will seek to utilise a considerable proportion of the Natref
refinery’s production to supply Engen’s downstream marketing requirements
and that the bottleneck at the Natref refinery will emerge once again.
Strategic Responses to Foreclosure – prioritisation and retaliation
441. The merging parties make much of the contention that, in the event of
foreclosure, there are obvious strategic responses available to the OOCs that
would serve to render the foreclosure unprofitable or, in the formulation that
we prefer, diminish the credibility of a threatened foreclosure. These relate,
firstly, to the opportunity to prioritise their customer base so as to minimise the
reputational damage arising from an inability to supply all customers, and, in
particular, to ensure that, once new logistical capacity becomes available,
losses in market share occasioned by the foreclosure will be immediately
reversed.
442. Secondly, the merging parties insist that the capacity of the OOCs to retaliate
will significantly raise the costs that the foreclosing entity will have to bear
further reducing the profitability of foreclosure.
262 We note too that the merging parties have also speculated on the volume of road logistics that
will be freed up by the debottlenecking of the northern DJP – the merging parties assert that trucks
that were previously utilised to convey product from Durban to areas north of Sasolburg. Dr
Stillman submits that this change in logistics will therefore reduce the average distance that trucks
out of Durban will have to travel in a foreclosure scenario, which will allow these trucks to make
more trips and to transport more volumes. We raise this, not because we think that it remotely
figures in a decision regarding the efficacy or otherwise of foreclosure but because it illustrates the
speculative lengths to which merging parties were prepared to go in order to construct their
foreclosure balance sheet.
158
Prioritisation
443. The merging parties lay much store by their contention that any gains – in the
form of increased market share – that accrue to the foreclosing entity will be
swiftly reversed once the logistical constraint is relaxed – as they assume it will
be by the commissioning of the extended DJP. They claim that
…central to the foreclosure strategy there put forward is the concept of a dramatic
and irreversible gain of retail market share by Uhambo in 2006. This concept is
central to the models of Bishop and Baker, which extend the period of the alleged
profitability of foreclosure beyond 2010 up to and including 2015. This serves to
introduce the concept of a ‘lockin’ or irreversibility of the gain in retail market
share, so that the arrival of the expanded DJP (which would otherwise solve the
OOCs logistical constraints and put an end to any foreclosure strategy in 2010)
becomes irrelevant (in the Bishop model) or less relevant (in the Baker model). 263
444. The merging parties cite with approval a passage from an earlier OOC expert
report submitted on behalf of Shell by Professor Ordover who argues that
…of course for a [foreclosure scenario] to be a realistic possibility, it has to be the
case that Uhambo’s rivals cannot either enter the retail market with new stations or
that they cannot hold on to their existing stations until such time that new supplies
become available because of the DJP expansion. 264
445. The merging parties contend that, in the event of foreclosure, careful
prioritisation of their customer base will ensure that any gains in market share
that accrue from foreclosure will be immediately reversed once the logistical
constraints are relaxed.
446. ‘Prioritisation’ essentially refers to the selective provision of supplies to inland
service stations and commercial customers in the event of foreclosure. The
merging parties contend that the rational response to foreclosure would be for
merging parties contend that the rational response to foreclosure would be for
the foreclosed entities to ensure that, at the very least, petrol supplies were
maintained at core retail sites. They contend that, first, retail service station
customers would be preferred over commercial customers and, second, that
core retail sites would be preferred over noncore sites. We also understand
263 Merging Parties Heads of Argument pagfe 767.
264 Cited Merging Parties Heads of Argument page 82.
159
the merging parties to be arguing that petrol will be prioritised over diesel
although this may simply arise as a result of the prioritisation of retail service
station customers (overwhelmingly petrol customers) over customers in the
commercial and industrial market (predominantly diesel). They note that the
inland commercial market of the OOCs amounts to 2,9 billion litres and the
KZN commercial market amounts to approximately 1 billion litres so only a part
of these commercial markets would absorb the whole of the short fall of
approximately 2,4 billion litres.
447. The merging parties claim that because the Baker model only incorporated
prioritisation in respect of the incremental capacity available to the OOCs – which
claim is denied by Shell – incorporation of prioritisation in respect of all transport
capacity would reduceMr. ’s projected profit from foreclosure from R3,3 billion to R1,7
billion.265
448. BP and Shell acknowledge that a certain degree of prioritisation would
rationally take place in the face of constrained supplies although they suggest
that the bald categories proposed by the merging parties – service stations v.
commercial, core service stations v. noncore service stations – do not
accurately reflect the complexities entailed in the selection of priorities. And,
more important, the OOCs do not believe that prioritisation will materially
enhance their ability to reclaim lost market share. They rather view
prioritisation as the nearpermanent drawing in of the boundaries of their
operations, a selection, as it were, of their future competitive terrain.
265 Merging Parties Heads of Argument page 100. Shell explains that the Baker model
incorporates the prioritisation of all transport capacity and not merely incremental capacity. This
contrasts with the Stillman model that assumes incremental prioritisation. Baker does however
argue that it would make no sense for the OOCs to prioritise beyond the point at which the inland
becomes structurally short of diesel. Were this to happen, Uhambo would have an undeniable
claim on logistical capacity to bring diesel in from Enref. In this event, prioritisation would not only
cost the OOCs diesel sales in the commercial market but would also reduce the quantum of
logistical capacity available to them because a certain amount of this capacity would be used for
the Uhambo diesel conveyed from the coast. This appears to be an eminently sensible argument
although the parties reason, in somewhat Machiavellian fashion, that the OOCs may want to
engineer a structural shortfall because this would arouse public opinion and lend credence to a
demand for government intervention.
160
449. The merging parties insist that retail service stations will be preferred over
commercial customers principally because the investment in an individual
service station site is significantly greater than that in a commercial site and
because the margin on retail sales is significantly higher – approximately 42c
per litre v. 16c per litre – on service station sales than on commercial sales.
Also mentioned is the imperative of brand protection – it is stressed that the
damage to the brand will be greater in the event of a failure to maintain supply
to service stations than in the case of less visible commercial sites. They also
appear to contend that lost share of the commercial market is easier to
retrieve than lost share of the retail service station market.
450. Each of these contentions is persuasively countered by the OOCs.
451. Both Mr. Fienberg for BP and Mr. Milner for Shell reject the notion that commercial
customers could be jettisoned at will. 266 Both point out that they are subject to
contractual commitments to their commercial customers certain of whom are global
customers. In BP’s case, its commercial and industrial business is conducted by
Masana whom they are obliged to supply. Failure to do so would – and this was
confirmed by Mr. Mncwango of Masana – severely damage and likely destroy their
empowerment partner with the consequential reputational damage that would ensue.
They accordingly question the merging parties contention that there is limited
reputational damage arising from a prioritisation strategy that neglects commercial
customers. The problem confronting all the OOCs is clearly expressed by Mr.
Fienberg:
The other issue is that when you are focussed on 500 core or 400 core customer
groups, you are dealing largely with national accounts and in many cases global
groups, you are dealing largely with national accounts and in many cases global
accounts, the Rio Tintos, Billiton, Anglo American, etc. The other phenomenon is
that you are dealing with very informed buyers and it is obvious that fuel is an
absolute essential commodity and without access to fuel, these businesses,
commercial businesses can’t operate. If a company like BP or any other company
starts failing in its obligation to provide reliable, and when I say reliable, sort of well
above 99% reliability of access to supply for these customers, you start running
into big problems…So I think that as far as prioritisation is concerned, I think to just
glibly say we prioritise away from commercial would create significant problems for
266 This is conceded by Mr. Oberholster. Page 568 of the transcript.
161
us.267
452. Nor is there any apparent basis for the assertion that lost commercial sales will
be easily recaptured. Commercial customers who are forced to turn to an
alternative supplier – and this will be Uhambo – will inevitably enter into a
supply contract which cannot simply be abrogated when the original source of
supply presents itself again. And nor is there any reason why a commercial
purchaser, provided that it has been well serviced by its new supplier, should
revert to its original supplier, one that had once proved incapable of meeting
its requirements for a product as vital as fuel.
453. We should add that if it does indeed prove difficult to reclaim lost market share
in the commercial market, then the prioritisation thesis effectively concedes
that this market, at a minimum, is subject to successful foreclosure . This was, in
fact, conceded by the merging parties.
ADV CILLIERS : And the reason I say one of two is because either with the
prioritise existing inland incremental and existing inland transportations, or whether
you’ll prioritise your KwaZulu Natal commercial market and you subject that to
taking petrol inland. Either of them will keep the inland retail market wet.
CHAIRPERSON: An alternative way of expressing that prioritisation is to concede that
they will have successfully foreclosed the commercial market. Not only in the inland area
but in KwaZulu Natal as well, there will be a successful foreclosure there.
ADV CILLIERS : That’s exactly so.
CHAIRPERSON: Well that’s quite a concession (inaudible). 268
454. Prioritisation of core over noncore service stations is also fraught with difficulty,
particularly if a key objective is relatively easy reversibility. Here the merging parties
suggested that relative brand damage would be the key criterion. Mr. Milner of Shell
suggested that relative brand damage would be the key criterion. Mr. Milner of Shell
appeared to acknowledge the salience of this consideration. That is, he
acknowledged that the foreclosed entity would prioritise core over noncore sites.
Milner distinguished the noncore sites on the basis of the ownership of the sites. He
testified that the dealerowneddealeroperated (DODO) sites would be allowed to run
dry before the noncore company controlled sites. However if a DODO site was
allowed to run dry, it would not be retained because the dealerowner would be
267 Page 2974 of the transcript.
268 Page 2693 of the transcript.
162
entitled to enter into a supply and branding arrangement with an alternative supplier.
In this instance the new supply contract could only be concluded with Uhambo, the
foreclosing entity. 269 It could only be retained by the OOC if the latter agreed to
maintain the owner of the foreclosed site in the same financial situation that would
pertain were the dealerowned site fully operational until such time that petrol supplies
were restored. Milner also pointed out that the retention of even a companycontrolled
site would entail considerable expense – rental, insurance, security, etc. The cost of
retaining a site is potentially increased by the prospective introduction of ‘use or lose’
regulation which would provide that a license to operate a site would be removed
were it not utilised. Under this sort of regulatory regime, the foreclosed company may
find that it had incurred the considerable cost of maintaining a foreclosed site, only to
lose the license to continue operating it.
455. Milner also points that a site that is noncore is, per definition, a site in which
volumes and profitability are relatively low. Accordingly the rewards for
retaining it are concomitantly low and may not justify the risk or the cost
entailed in retention. If deregulation of the pump price of petrol were to occur
in the closure period, then the rewards from retention will decline with the
decline of margins that are predicted to follow deregulation.
456. Finally, Milner notes that, given the homogeneity of the competing petrol
products there is no reason to expect that brand loyalty would ensure the
return of a customer after several years of foreclosure.
457. The contention that assumed irreversibility is a critical underpinning of Mr. ’s finding of
profitable foreclosure because it prolongs profitability beyond the expansion of the
DJP is also denied. Because . predicts a substantial decline in postderegulation
margins, the profits of the 201115 period are relatively low.
458. What are we to conclude from this?
269 Shell notes that in order to capture the market share of the foreclosed service stations,
Uhambo need not take of every noncore station relinquished. If there was an Uhambo site already
established in the local market – and the size of the Engen footprint would ensure that this would be
so in most local markets – the market share will simply transfer to the Uhambo facility.
163
459. Certainly it appears that the foreclosed OOCs would respond by prioritising amongst
their various customers and, in general outline, the prioritisation would be along the
lines suggested by the merging parties. This is particularly so where the distinction
between core and noncore service stations is concerned, though less so where the
prioritisation of commercial customers visavis service station customers is
concerned. However prioritisation is more likely to be a retrenchmentstrategy than a
retentionstrategy. And the multinational status of the oil companies is likely to pre
dispose in favour of retrenchment over retention.
460. This is persuasively explained by Mr. Fienberg:
Sure. You see, I think the issue here, if in whatever way, whether it was a letter
from Uhambo, which says next week we are going to foreclose on you, so get your
banners ready or whatever or whether it was the scenario that I outlined with
regard to the LSD, I don’t know. Whichever way it comes about, I think the first
instance is whether you have 20, 30, 40, 50 dealers or more who are no longer
accessing reliable supply, so maybe it’s just well there is a shortage of product at
the depot and you can’t get it. For three days they don’t have product, so they
don’t trade. So instead of sales of 20, 15 000 litres a day that they are selling half
of that or whatever. I mean I’ve stood in front of disaffected dealer groups and like
any small businessperson, when they face an inability to trade, it’s a survival issue
for them. There it is a survival issue, and that’s not a pleasant place to be at all.
I think that’s the reality that you face and I think the situation that any oil company would
face in that scenario is not a legal one of well we’ve got you tied in by a contract, but
actually you’ve got 50 people or more or whatever, you have a group, you have a dealer
actually you’ve got 50 people or more or whatever, you have a group, you have a dealer
body, and you have an issue on your hands in terms of their livelihoods, in terms of them
seeking security of just having been able to find a way in which they can earn a secure
living. I think you go down that route. I think practically it’s what happens. I think the
reality from a shareholder’s intervention, so help from London for us comes in many
forms, but I think in this case there would be a very hard look. So what is your competitive
position here? What would the strategic considerations be? What is your competitive
position? What is your ability to reliably service the market demand in the market? To
what extent have you got access to competitive supply? To what extent can you keep this
business going?
I think that the problem we have here, which is why I keep coming back to the
structural issues, is that if you look at it through those lenses, we wouldn’t have
very good answers for our shareholders. I think that where it takes them or where
it would take us when the strategic analysis, whatever experience I have in this
business, I think it says we would be coming increasingly less competitively
positioned. Our access to competitive advantage or competitive supply becomes
threatened and post 2010 longterm it doesn’t look much better and I think that the
hard business answer is well rationalise your portfolio to a position where you can
compete, you can compete effectively and where you have longterm access to
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supply.270
461. This is precisely what we mean when we conclude that the strategic response
to foreclosure is more likely to be retrenchment than retention. And it reflects
again much that is wrong with the merging parties’ arguments in respect of the
profitability or otherwise of foreclosure. Without decrying the importance of the
numbers, the strategic choices facing the OOCs are ultimately not resolved by
the minutiae inserted into an economic model. They are resolved by an
overarching consideration of the credibility of foreclosure and an assessment
of the intensity of the battle before them and a judgement on whether the
spoils are worth fighting for. Consider the following:
Uhambo forecloses on a group of multinational oil companies. In the
greater scheme of things this market is not of significant consequence for
any of these multinationals, while for Uhambo this is home base and far and
away their most significant market. The oil companies who, possibly for
good reason, the public love to hate, are invited to engage in a highly public
foreclosure battle with a powerful and wellconnected domestic firm. In
order for them to believe that it may be possible to prevail in this battle, they
have to take a wager on future growth rates, they have to believe that they
will be able to transport diesel in a crude oil pipeline despite numerous
technical obstacles and the resolute opposition of the foreclosing entity who
enjoys a statutory firstcall on the pipeline, and they have to believe – and
this would be an act of pure faith – that the market share lost now will be
rapidly regained 4 years hence.
462. Is it any wonder that the threat of foreclosure is considered credible? And is it
any wonder that at this stage the OOCs may pragmatically consider running
any wonder that at this stage the OOCs may pragmatically consider running
up the white flag, or, in Mr. Fienberg’s businessspeak, ‘rationalising (their)
portfolios’? They do not, after all, have a lot to lose a few percentage points
share each of a small market and acceptance of Uhambo as the price leader
in this market. This is the real strategic choice faced by the OOCs.
270 Page 30302 of the transcript.
165
463. It is our view, then, that the possibility of prioritisation does not dent the
credibility of the threat of foreclosure.
Retaliation
464. The merging parties aver that a foreclosure strategy would cause irreparable damage
to their relationship with the OOCs and would invite retaliation from them. They would
refuse to grant hospitality agreements to Uhambo at their storage depots. Even
though Uhambo would own the Sasol depots and Engen depots, the merging parties
argue that Uhambo would still need hospitality at a substantial number of guest
depots. Furthermore Uhambo would forego Caltex swaps in the Western Cape, where
Sasol’s requirements were minimal but Uhambo’s would exceed 1 billion litres per
annum.271
Hospitality at Storage depots
STORAGE DEPOTS 272
Company Owned Guest
BP 11 14
Caltex 20 11
Engen 13 9
Sasol 2 23
Shell 13 17
TOTAL 13 13
Source: TOTAL
465. As is evident from the table above, Sasol is currently highly dependent on hospitality
agreements with other oil companies. It owns only two depots and is therefore
dependent on hospitality arrangements for its downstream expansion strategy. Shell
concedes that were Sasol to pursue a foreclosure strategy in the premerger
scenario, it would be highly vulnerable to retaliation at the depot level. However Shell
submits that any retaliation against Uhambo at depot level would not pose a
significant deterrent to a foreclosure strategy on the part of Uhambo. Uhambo could
simply decide to increase its secondary distribution costs (while decreasing primary
271 From page 63 of the Merging parties’ Heads of argument.
272 Page 1199 Witness Statement Bundle, Page 17 Pricemetrics report.
166
distribution costs) to service its service stations from Engen’s depot network. 273
Retaliation by Caltex
466. Dr Stillman also argues that Uhambo would suffer loss of access to the Western Cape
market where it is dependent upon Caltex for meeting its marketing requirements. 274
However, the OOCs argue that in the event that Caltex refuses to supply Uhambo, it
(Uhambo) would have the Enref refinery in its arsenal and could therefore ship
product along the coast to service the Western Cape market. Furthermore, the
evidence of Mr. Wright suggests that Engen already imports product into the Western
Cape. Mr Wright further admits that they may have in their base case overstated the
costs of importing further product into that region.
ADV ROGERS : Isn’t the position now that Caltex cannot supply the Western Cape
demands of all the other oil companies.
MR WRIGHT : Correct.
ADV ROGERS : So each of them are required including Engen to ship in some portion of
their product?
MR WRIGHT : Correct.….. Ja, I think what we are doing is moving product out of
Petro SA to the Cape.
ADV ROGERS : So on your base case Engen stops doing what it currently does,
which is shipping from Durban?
MR WRIGHT : No not shipping from Durban, Mosselbay.
ADV ROGERS : You say Engen no longer ships from Mosselbay in your base case?
MR WRIGHT : Ja.
ADV ROGERS : Why is that?
MR WRIGHT : I can’t answer that question, I don’t know.
ADV ROGERS : I mean it doesn’t seem a logical…
MR WRIGHT : No I agree. Your point is a valid point.
ADV ROGERS : So the base case cost is almost certainly significantly above R18 million.
MR WRIGHT : I don’t think it is significantly above. 275
467. The OOCs submit that the true costs of shipping product to the Western Cape
are materially less than the profits that Uhambo would enjoy from foreclosure.
468. Shell submits that:
…however much Caltex might wish to retaliate by refusing to supply Uhambo in the
…however much Caltex might wish to retaliate by refusing to supply Uhambo in the
273 Paragraph 74 of Shell’s Heads of argument.
274 See page 352 of the transcript where Mr. Oberholster deals with the alleged ability of the
OOCs to retaliate in the face of an Uhambo foreclosure in the inland.
275 From page 16391640 of the transcript.
167
Western Cape, Caltex’s commercial interests would probably be best served by
continuing to supply Uhambo into the Western Cape in return for supply and gantry
hospitality with Enref in Durban. And since Uhambo could import product into the
Western Cape if necessary, this would be an added reason for Caltex not to
embark on a costly and ultimately unsuccessful retaliation. 276
469. Regarding the resulting shortage of supply for Caltex in Durban, Shell submits
that Mr Wright incorrectly assumes that BP and Shell would in a foreclosure
scenario assist Caltex by supplying it with the product it requires and sharing
their gantry capacity. If BP and Shell were unable to assist Caltex, it (Caltex)
would be dependent on Uhambo (as Caltex currently is on Engen) for product
in the KwaZulu Natal coastal area. It would not be profitable for Caltex to stop
supplying Uhambo in Cape Town because Caltex would be required to replace
valuable upstream sales to Uhambo with less profitable exports, while still
being obliged to purchase product at the higher prices from Uhambo in the
KZN region.
ADV ROGERS : Of course quite what could be done from Durban will depend on
decisions on other matters of logistic, gantry constraints and so forth, but certainly
on the Shell and BP or on the Shell figures, if there are significant constraints,
Caltex may well find that BP and Shell are forced to favour their own inland
operations out of their gantry facilities and logistical capacity and that a significant
portion of the lost volume will in fact be Caltex’s as Caltex may be in that sense
frosted out.
MR WRIGHT : You’re alluding to the fact that Caltex can deload at Wentworth.
ADV ROGERS : Well yes.
MR WRIGHT : Yes.
ADV ROGERS : And in a foreclosure they might require significant further gantry capacity
and logistical capacity if they’re going to source their inland demand out of Durban.
and logistical capacity if they’re going to source their inland demand out of Durban.
MR WRIGHT : Yes, but again the assumption is made that the oil companies will co
operate under these unusual circumstances.
ADV ROGERS : Although, well I have the highest regard for my client, I imagine
that in a foreclosure scenario if it is between itself and Caltex, it would make sure
that its own requirements are met first. 277
470. Caltex itself submits that the merging parties are incorrect in their proposition that
postmerger Uhambo will be more dependent on Caltex for supply in the western
Cape than Sasol is currently since Uhambo will also need supplies for Engen’s
276 Paragraph 66.6 of Shell’s Heads of Argument.
277 Page 1641 of the transcript.
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downstream markets. 278
471. Caltex argues that, firstly, insofar as Uhambo may have an increased need for
product in Cape Town, it will control product in two areas in which Caltex must obtain
product – Durban and Inland. Caltex’s dependency on Uhambo will therefore also
increase as against its dependency on Sasol or Engen alone. Secondly, Caltex would
be unlikely to retaliate against a price rise by Sasol by foreclosing supply in Cape
Town, since by doing so it would lose upstream sales and would be obliged to replace
those sales with less profitable exports while still being obliged to purchase product at
the higher prices in Durban and Inland. 279
472. Whereas Sasol does nothave a coastal refinery, Uhambo will have the benefit of
Engen’s Durban refinery. Furthermore whereas Sasol is heavily dependent on the
OOCs for depot hospitality, the extensive Engen depot network, which would be
brought into the deal, is significant and would mitigate any loss resulting from such a
retaliation. The merging parties argument that a foreclosure strategy would invite
retaliation from Caltex in the Western Cape has no merit. Caltex will, post merger, be
in a weaker bargaining position as it would be dependent on Uhambo for product in
the two areas in which Uhambo will be dominant, i.e. Durban and the inland.
Foreclosure – summary and conclusions
473. The merging parties insist that foreclosure will be an unprofitable and self
defeating strategy, a contention that hinges on argument and voluminous
evidence that purports to demonstrate that there is sufficient logistical capacity
available to enable the OOCs to convey fuel from their coastal refineries to the
inland market and so to overcome any foreclosure scheme. They also argue
that in the event of foreclosure the OOCs have, at their command, a number of
that in the event of foreclosure the OOCs have, at their command, a number of
strategic responses that would enable them to swiftly recapture market share
lost to a foreclosing Uhambo, particularly because the planned expansion of
the DJP will eventually relax any logistics constraint that may exist. Finally,
they argue that the OOCs would respond to a foreclosure of the inland market
278 Para 96 of Caltex Heads of Argument.
279 Para 97 of Caltex’s Heads of argument.
169
with retaliatory action, principally directed at the market of the western Cape in
which Uhambo does not possess refining capacity, further raising the costs of
foreclosure.
474. The merging parties’ case is anchored in an economic model prepared by their
economics expert which purports to demonstrate that foreclosure will indeed
be an unprofitable enterprise.
475. The OOCs have argued, and have submitted equally voluminous evidence to
bolster their contention, that the merged entity is capable of successfully
foreclosing the inland market. They insist that after all available logistical
capacity is exhausted, they will remain dependent for a significant proportion
of their inland requirement on the inland refinery monopolist, Uhambo. While
they readily acknowledge that they would respond to foreclosure in a manner
designed to limit their long term loss of market share, they insist that ultimately
there is no strategic response capable of blunting the merged entity’s exercise
of market power, and certainly not to the extent that they are capable of
reversing the gains realised by the foreclosing entity. In the face of
foreclosure they would, argue the OOCs, ultimately have to cut their losses by
accepting a smaller market share and Uhambo price leadership. They reject
the contention that they have the capacity to retaliate in the manner suggested
by the merging parties.
476. The OOCs have also marshalled their own economics experts who have
presented models that purport to demonstrate the profitability of foreclosure.
477. We have focussed our examination of the evidence and argument on those
elements of the models, that, it is common cause, are decisive in determining
the question of profitability – the rate of growth for fuel in the inland region; the
availability of transport logistics, in particular, the contention that the crude oil
availability of transport logistics, in particular, the contention that the crude oil
pipeline will, in the event of foreclosure, be utilised for the conveyance of
diesel; and the availability of strategic responses that may ameliorate the
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consequences of foreclosure. We have also examined the contention that the
logistics constraint will be lifted with the expansion, planned to come on
stream in 2010, of the DJP.
478. We have already indicated that many of the key issues in dispute are not
susceptible to mathematically precise findings. The uncertainty surrounding
certain of the variables is inherent – noone can claim to ‘know’ in advance the
rate of growth of demand – while in other instances (for example, the
conveyance of diesel in the COP) we have heard the untested opinions of
technical experts, all of whom acknowledge that costly and time consuming
trials are yet to be undertaken in order to rigorously evaluate their contending
viewpoints.
479. However, while on balance neither we nor anyone else can claim to know with
absolute certainty whether or not foreclosure will be profitable, we are
confident that the evidence demonstrates conclusively that the merger
presents a credible threat of foreclosure. This finding – a credible threat rather
than a finding of definite profitability – is not the acceptance of a lower
standard. It merely acknowledges that the outcomes of great campaigns,
military or commercial, cannot be known in advance with absolute certainty. If
that were so, battle would never be joined. However, there are circumstances
where the armoury at the disposal of the aggressor and the attractiveness of
the potential spoils combine to ensure that the campaign will be launched and
that the damage will be considerable. Under these circumstances, the target
of the foreclosure must – faced with the certainty of a fierce, costly battle and
the very real prospect of defeat – decide whether to sue for peace and retain
part of what is desired by the opposing force or to engage in battle and risk
part of what is desired by the opposing force or to engage in battle and risk
losing all, or, at least, a significant part of the desired booty.
480. It is, in fact, our firm view that the battle in this instance – as in many other
similar and dissimilar engagements – is unlikely to take the form of a full
blooded foreclosure. Instead it is likely to take the form of wellplanned
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guerrillalike skirmishes designed by each of the contestants in order to
demonstrate their respective strengths and to expose the weaknesses of their
counterparts.
481. This is, to a considerable extent, already taking place. We are persuaded by Mr.
Fienberg’s contention that the timing of the very decision to terminate the MSA
expressed Sasol’s assessment that available logistical capacity was insufficient to
overcome, to any significant extent, Sasol’s monopoly of the inland supply of refined
product. Sasol’s attempt to obtain a statutory reserve of the COP for crude oil, is one
likely example of an early skirmish in the foreclosure campaign and the litigious
response to Petronet’s efforts to debottleneck the northern DJP is probably another.
And they are merely a foretaste of how the merged entity, Uhambo, will respond
should the OOCs attempt to acquire significant logistics capacity – for example, we
are in no doubt whatsoever that the industrywide cooperation needed to test the
capacity of the COP to convey diesel would be reluctantly given, if at all, and, it goes
without saying, that, should the tests prove affirmative, the cooperation required to
actually convey the diesel would never be forthcoming in the time frame required. 280
482. Mr. Fienberg testified that his company had experienced difficulties obtaining supplies
of low sulphur diesel from Sasol – indeed the supply problems proved so intractable
that BP was compelled to exit that particular market in the inland because it was not
able to guarantee supplies to its affiliated retailers through whom this particular variety
of fuel was being marketed. He conceded that he did not know whether BP’s inability
to obtain the necessary supplies from Sasol, had been an instance of foreclosure in
to obtain the necessary supplies from Sasol, had been an instance of foreclosure in
action or whether it had been the result of genuine operational difficulties. 281 And
that is precisely the point of the sort of guerrillatype skirmishes that we have referred
to – the company on the receiving end (and certainly the public and even the
regulators) may never be quite certain whether it is the victim of poor service, of
280 Mr. Oberholster says as much at page 444 of the transcript ‘ I’ve got all the product in the inland
today. I would love to sell to the oil companies. I would love to sell at their alternative above a
certain baseline volume. If the oil companies do not purchase the from Sasol, if they are able to use
the crude oil pipeline, it would in fact further diminish the amount of volumes that they would want
to purchase, as it were, from Sasol. So, if I can make it technical difficult from my point of view to
do that at this stage, saying that I will not … well, not saying that I will not supply my technical
knowledge to do this, but at least not being participative in that. It again helps me to try and balance
the level of power in the negotiation situation.’
281 Page 296871 of the transcript.
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technical problems or of active foreclosure. However the executive of an oil company
with whom Sasol has contemplated, in print, ‘war’ and a total refusal to supply, 282 is
entitled to his paranoia, if that is all that it be, and to contemplate the very real
likelihood of a massive battle to come.
483. These preliminary skirmishes are initiated by Sasol acting on its own. Uhambo
is, as we have elaborated at length, significantly better placed to engage in
these forms of attrition, or, if necessary, to mount a fullscale foreclosure
campaign.
484. We conclude then that the formation of Uhambo presents a highly credible
threat of foreclosure. We are persuaded that, should the merged entity be
compelled to engage in a fullscale foreclosure campaign, it will prevail, and
that it will, as a result of the foreclosure, capture significant downstream
market share. We are equally persuaded, however, that victory for Uhambo
will require little more than several concrete demonstrations of its willingness
and capacity to foreclose. This will persuade the OOCs to sue for peace,
effectively to forebear from competition with Uhambo in both the upstream and
downstream markets.
A Substantial Lessening of Competition – our findings
485. In their heads of argument the merging parties identify the two determinants of
retail pricing when they urge us to
..retain the distinction between potential price effects downstream arising out of
horizontal concentration downstream, on the one hand, and the potential
downstream effect of bulk pricing, on the other. 283
486. This formulation suggests – and correctly so – that prices in a downstream
market will be determined, firstly, by the extent of competition in the upstream
market which will determine output prices in that market or, what is the same
282 From page 384 of the transcript.
282 From page 384 of the transcript.
283 Page 153 of the Merging parties’ Heads of Argument.
173
thing, the input costs in the downstream market. The merging parties use the
term ‘bulk pricing’ in respect of the product in the upstream market. This is the
term used by Professor Scheffman, the Caltex expert, and this then becomes
the platform for the merging parties’ attack on Scheffman’s identification of the
relevant upstream geographic market and on the concept of divertible
capacity. However, for our purpose, whether Scheffman is correct or not, is
beside the point. What is obviously true is that input costs determine the floor
price of the product utilising the input in question. In our formulation the price
is referred to as the wholesale price which in the era of the MSA was derived
from the import parity price or BFP to which was added a wholesale margin
and other wholesale distribution costs. The inland marketing arms of the
OOCs were obliged to procure product from the inland refineries at BFP and
then passed it on the retailers at the stipulated wholesale price.
487. Secondly, the formulation of the parties referred to above, recognises that another
determinant of downstream prices is ‘ horizontal concentration downstream’.
A substantial lessening of competition in the downstream market
488. We begin by examining the impact that the merger will have on the second of these
determinants, namely, ‘ horizontal concentration downstream’. parties assert that
Sasol’s limited penetration of the downstream market ensures that the merger
specific accretion to Engen’s large downstream market share is minimal.
489. We refer back to our analysis of the relevant markets and note that the Sasol
contribution to downstream market share should not be underestimated. In the North
West province Sasol contributes a 14% market share of the petrol retail (service
stations) market; in the Free State, Limpopo and Mpumalanga provinces Sasol
contributes 12%; and in the allimportant Gauteng market Sasol’s contribution is 11%.
When these are added to the Engen share, the portion of the market accounted for by
the largest retailer rises from the mid to high twenty percentage points for Engen to
the high thirties and forties for Uhambo. In the commercial and industrial segment of
the retail market, Sasol contributes 21% in Gauteng, 16% in the Western Cape, 14%
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in the Free State and 12% in Limpopo. These are by no means insignificant
accretions.
490. The merging parties draw on evidence presented by the various experts to
bolster the benign conclusion they derive from an examination of the market
shares, which, they rightly insist, is an insufficient basis for drawing
conclusions regarding competition impact.
491. Much of the evidence on the downstream markets relates to attempts to assess
competition effects in local downstream geographic markets. It is asserted that the
retail link in the supply chain is composed of a large number of small local markets
which are bounded by the distance that a consumer would be willing to travel in order
to substitute away from a service station that has increased its price. The leap from
this calculation – viz. the distance that a disaffected consumer would travel in order to
substitute – to the relevant market is significantly complicated by the ‘chain of
substitution’ that would clearly be pertinent in this market. Accordingly, a proxy for
local markets has to be selected and, as in many retail cases, the proxy selected is
the magisterial district. Further investigation is hampered by the paucity of market
share data at this level. Hence a further proxy for measuring market share has to be
selected, and that is the number of service stations in the magisterial district.
492. The merging parties argue that, because Sasol’s retail service station footprint is still
relatively small, the number of magisterial districts in which there is an overlap with an
Engen station is limited. Nevertheless, the intervenors – notably BP – have
presented evidence that purports to identify a number of local markets in which Sasol
and Engen control more than 50% of the service stations, a degree of concentration
and Engen control more than 50% of the service stations, a degree of concentration
which the merging parties’ expert conceded would be ‘a potential area of concern’.
owever, the evidence is scrappy and inconclusive. It possibly bears out the merging
parties’ contention that the downstream horizontal effects, on their own, is, when
abstracted from the vertical aspect of the merger, do not portend competition
problems. That is to say, the data suggest that there are indeed a relatively small
number of downstream markets in which the concentration levels rise, as a result of
the merger, to levels that ring competition alarm bells. However we note again that
the market share that Sasol brings to the certain of the provincial markets suggests
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caution before jumping to any overly benign conclusion on the basis of allegedly
limited additions to market share.
493. There is also reference to an attempted study of the ‘Sasol effect’ on the diesel
market, a market in which retail prices are no longer regulated. The study
does not reveal a Sasol effect. We do however note BP’s argument to the
effect that the consuming public is generally unaware that diesel prices are
unregulated.
494. However, as we have already noted in our discussion of the relevant
geographic markets, the critical decisions that drive competition in fuel retailing
are clearly made by the oil companies whose brands the respective retail
networks carry and not by the individual service station ‘operators’ who strike
us as being little more than glorified branch managers. The selection of sites
and the level of investment in the sites, are all oil company decisions. We
understand that advertising and promotion are all the responsibility of the
brand owners, the marketing arms of the various fuel companies. And so too
are pricing decisions largely in consequence of the fuel companies control of
the wholesale price, the most important element in the make up of the retail
price. This is elaborated below.
495. Thus although when viewed from the perspective of the individual consumer,
substitution between competing retail service stations will occur only within limited
geographic boundaries, the extent and nature of competition in these local markets
will be driven by competition between the national brands. In our view then the
national and provincial market shares and the size of the footprint of the various
brands are the appropriate indices of concentration that should be examined when
assessing the downstream effect of the merger. 284
assessing the downstream effect of the merger. 284
496. However, the horizontal dimensions of the merger do not end with the
aggregation of Engen and Sasol’s respective market shares because we have
284 We have taken this view in a number of other mergers in which competition was clearly
orchestrated by national chains even though substitution could only take place within narrower
geographic limits. See JD GroupEllerines merger, Tribunal Case No.: 78/LM/Jul00 .
176
to place these market shares in the context of the likely impact of foreclosure.
Our finding is that there is a credible likelihood of foreclosure. We have little
doubt that a full blooded foreclosure of the downstream market will lead to a
significant increase in the Uhambo’s retail market share – even if foreclosure
only results in the OOCs giving up the commercial and industrial market and
their noncore sites (the prioritisation option), the impact on the overall
downstream market share of Uhambo will be significant. We cannot predict the
extent to which a foreclosure strategy will actually be implemented. This, as
we have already elaborated, will largely be determined by the strategic
response of the OOCs. Should they elect to ‘sit out’ a fullblooded foreclosure
the change in downstream market shares is likely to be significant. However
they may elect to sue for peace after a short, sharp demonstration of
Uhambo’s ability to foreclose. The likely terms of the peace treaty will be an
agreement between Uhambo and the OOCs to forebear from competition in
the upstream and downstream markets.
497. Uhambo is able to enforce peace – an agreement not to compete in the downstream
market because, in the event that the OOCs step out of line, it has the power to
foreclose the inland market and thus increase its market share. And because of
Uhambo’s downstream market share, which, even if it is not obliged to foreclose at all,
will be double that of its nearest competitor, it is, comes deregulation of the retail
petrol price, also able to threaten a price war in the industry. 285
285 Note the following extracts from Sasol document BP19 page 12 cited at transcript page 4301
“the incentive to an oil company to bust the logistics constraint is about 7c a litre, attract BFP minus
16 while transporting the product inland at 19c a litre would attract BFP plus 10 minus 19c a litre. If
the pipe tariff falls to 7, the incentive reduces to 4c a litre. The risk to them by doing them is that
Sasol will retaliate in the market”. “investing in road infrastructure now would tie the particular oil
company up contractually for 3 to 5 years. Any oil company tied up in such logistics, which would
be more expensive than the pipeline cost, would also be at a competitive disadvantage to Sasol
Marketing or other companies with whom Sasol may swap and would then have to lower transport
costs. Sasol could also embark on attacking the wholesale price to place larger volumes to the
detriment of all the oil companies ”. And at pages 4312 “we have so far based our strategy on
rational behaviour and having a strategic marketing presence to protect our wholesale price. If we
believe in irrational behaviour and that the oil companies will invest in 1.7 million metres cubed of
extra road capacity or a relatively small reward and high risk, then we must be prepared to use our
marketing strategy against them. We cannot simply accept their irrational actions and not take
counter action ”. (our emphases).
177
498. This latter argument was emphasised by Mr. Reid, the former BP executive, who
insisted that the acquisition of marketing infrastructure was key precisely because of
the power it accorded the merged entity to act as a price leader, in particular to both
lead prices down in a price war and then subsequently to lead them up again. He
argued that while a 10% share sufficed to lead prices down, a significantly higher
share was required to be sure of being able to lead prices up again. 286 These
conclusions were based entirely on his own considerable personal experience of the
fuel industry. He comments:
This [slide] shows the inland retail market shares post the merger, which, as you
can see, would lead to Uhambo as one player having a dominant market share of
nearly 40% and only 4 competitors, each with around 15 or 16%.
In the markets I’ve dealt with, both as a marketer and also as merger and
acquisitions practitioner, this is the most concentrated retail market that I can
recall. Based on my US retail experience when price stickiness can develop at
market shares greater than 25%, given this collective dominance in South African
that this merger creates, I believe that the 40% market share position will give
Uhambo real pricing power.’ 287
499. Reid’s thesis is intuitively persuasive. It finds echo in Scherer and Ross’s analysis of
price leadership in the 3 rdedition of their classic text ‘Industrial Market Structure and
Economic Performance’. They note that
‘Dominant price leadership occurs when the leader has a large market share, with
other sellers being too small to have a perceptible influence on price, or when one
firm is recognised as having a sufficient cost advantage over rivals, and sufficient
available capacity, to impose its pricing preferences on the industry.’ 288
available capacity, to impose its pricing preferences on the industry.’ 288
500. Scherer and Ross examine the market conditions that must pertain for the
successful exercise of price leadership. These are much the same as the
standard list of features – based on the work of George Stigler – that underpin
cartelisation, namely, an oligopolistic market structure, homogenous products,
286 See from page 2131 of the transcript. Mr. Reid notes on page 2132 that ‘..from my experience,
influencing prices in the retail market upwards, not downwards, is highly dependent on market
structure and critical mass’.
287 Page 213940 of the transcript.
288 FM Scherer and David Ross – Industrial Market Structure and Economic Performance
(Houghton Mifflin) 3d Edition, 1990, page 249.
178
similar cost curves, barriers to entry and inelastic demand. In their
examination of a number of industries evidence of price leadership was
particularly evident in the steel and gasoline markets:
‘As the Standard Oil of Ohio statement quoted previously indicates, even when
market conditions are firm, producers with weak market positions might be unable
to increase prices successfully. An accepted price leader like Sohio can lead the
way to prices higher than those attainable if no such firm existed. This price may
not be much higher, but there is no guarantee that it will not exceed the competitive
level by at least a small amount on the average’ 289
501. However, this matter is put to rest by Sasol’s own assessment of the dynamics of the
downstream market. Mr. Norton, for BP, put to Mr. Oberholster a 2002 Sasol
document entitled ‘South African Liquid Fuels Assumptions – Sasol Group Planning:
January 2002.’ relevant extracts are enlightening and read as follows:
“Should the oil industry demand a discount below IPP on the volume, which they
are constrained to buy due to the inland logistics, Sasol will have a credible threat
to use to discipline the market”. 290
502. And then further:
“Sasol will pass the demanded discount on to the motorist, to the high volume retail
outlets, thus initiating a price war. The discounts so offered will draw demand away
from surrounding retail outlets, dramatically reducing their income and driving them
below sustainable volumes. The oil industry will then have a choice of competing
on price, thus reduced margins, of allowing the closure of retail outlets with loss of
market share or of accepting the Sasol price aspiration and avoiding a price
war”.291
503. And finally:
“the assumption is made that the oil industry will be successful in raising prices in
the affected areas after the resolution of the price war” 292
the affected areas after the resolution of the price war” 292
504. Mr. Oberholster attempts, implausibly to cast this as merely one of a number
289 ibid page 261. It’s interesting to note that one of Mr. Reid’s examples is based on his
experience in the same geographic market as that investigated by Scherer and Ross, though some
30 years later.
290 BP2 page 116.
291 BP2 page 116 (Our emphasis).
292 BP2 page 116.
179
of scenarios that were tested. However, he confirms that this squares with his
own understanding of the characteristic dynamics of the retail fuel market
when, under crossexamination, he states:
The assumption is made that the oil industry will be successful in raising prices in
the affected areas after the resolution of a price war. That’s always the case sir.
You will see in Australia, for 10 years after there was tremendous deregulation, oil
companies were in the red and recently prices are at more sustainable, higher
levels. So, after any price war, prices tend to go back, never to where they were,
but certainly at the lower level, but they stabilise out. On our side we also said …
let’s go back to the Sasol strategy. We always said it is not appropriate to grow into
the market organically. It is expensive. It is difficult. It is for us not feasible. Our first
choice, and if you were to read those documents and hopefully our counsel will
highlight – I don’t know – you will see that our first and foremost strategy always
was during the first instance to a merger with Engen or then preferably another oil
company.293
505. This is neatly tied up in the following exchange between Mr. Oberholster and
Mr. Norton:
MR NORTON : I want to put it to you, Mr Oberholster, that one of the other reasons
that you want a retail network and a sizeable retail network at that, is you also want
to be in a position to be able to influence the retail pump price. Correct?
MR OBERHOLSTER : We would like to be, when the market is deregulated, in a position
to influence the pump price, should we so require. That was our view. How practicable it
is, well that we have to see when the time comes.
MR NORTON : But that’s certainly part of your strategy going forward, isn’t it?
MR OBERHOLSTER : That is. And if I could just ask, when you say sizeable retail
network, just give me an indication of what you consider sizeable?
network, just give me an indication of what you consider sizeable?
MR NORTON : Well if you inherit through this acquisition the largest retail network in the
country through Engen, presumably that equates to a sizeable…
MR OBERHOLSTER : That’s sizeable. I agree with you sir, absolutely. 294
506. So much for the impact on downstream competition. In summary, abstracted
from the effects of foreclosure and calculated simply by adding Engen’s
downstream share to Sasol’s downstream share, the impact is by no means
trivial. Moreover this is a static approach. When a dynamic approach is taken,
when the impact of the vertical aspects of the merger with the consequential
likelihood of foreclosure is factored in, the likely horizontal consequences in
the downstream market loom much larger.
293 Page 549 of the transcript.
294 Page 5523 of the transcript.
180
507. We note however, that if the OOCs, fearful of a successful foreclosure, sue for
an early peace, Uhambo may well forebear from taking additional market
share downstream in exchange for an undertaking from the OOCs to forebear
from competition downstream, or what is the same thing, for acceptance of
Uhambo’s price leadership in the downstream market. Uhambo’s ability to
foreclose – and thus gain additional downstream market share – and its ability
to initiate a price war in the downstream market will be the disciplining
instruments that will maintain an agreement not to compete in the downstream
market.
508. Cartelisation – under Uhambo’s leadership – of the downstream market will
limit the downstream pressure that the deregulation of that market will impose
on the retail price of petrol, an avowed concern of Sasol, and, of course, of
Engen, the country’s largest retailer. It will also ensure that the wholesale
price (and its BFP basis) is not put under pressure by the feedback from
competition in the downstream market. This, as we have seen, is, from the
premerger perspective of Sasol, the merchant refiner, arguably the most
important objective of the merger.
A substantial lessening of competition in the upstream market
509. What of the merger’s impact on the wholesale price? How does this impact on
competition in the downstream market? The merging parties aver that the
‘…the way in which prices might be affected in a deregulated petrol market
(whenever that might eventuate) is a matter of complexity and opacity. This is a
function of the complexity and opacity of the manner in which prices will be set
downstream, given, inter alia, the complexities of interaction between the
autonomous actions of retail dealers and the pricing policies of oil companies at the
wholesale downstream level.’ 295
wholesale downstream level.’ 295
510. We have little difficulty agreeing with the contention that price formation in the industry
is ‘complex and opaque’. However, not for the reasons cited above. We do not
295 Page 128 of the Merging Parties’ heads of argument.
181
foresee that strategic price competition will be driven by the socalled ‘autonomous …
retail dealers’. Sasol’s agreements with its franchisees actually provide for resale
price maintenance, that is they provide that the franchisee shall sell at the franchisor’s
prescribed retail selling price’ .296 Mr. Fienberg confirmed that price competition will
be driven by the brand owners. It is conceivable that the retail station operators may
be given a limited amount of discretion over prices. However the decision to initiate an
aggressive price war or the decisions regarding the strategic responses to price wars
initiated by a competitor will be taken by the national brand managers. It is not difficult
to see why this should be so – a small business person does not easily take the
initiative from the company who is not only the supplier of his most important input,
but who also owns the branding of his outlet and the property on which he operates
and most of the assets.
511. But more than that the oil company has in its hands the price of the most
important retail input. If an oil company wishes to enable retail price
competition, then it simply discounts the wholesale price. If it wants to rein in
price competition, it simply reduces the discount. There is nothing opaque or
complex about this at all. And Sasol should appreciate this because, as the
evidence shows, it reflects precisely the manner in which Sasol has won
market share from its opponents in the period before it decided to merge with
Engen.
512. Sasol, in its many candid reflections on the purpose of the merger, made it clear that
the maintenance of BFP and the protection of the wholesale price was its principal
objective. Foreclosure – which, we have found, is enabled by the merger – is the
principal instrument through which BFP will be maintained. 297 That is to say,
Uhambo has the supply; the inland OOCs have the demand. They will meet – the
market will clear but only, insist the merging parties, if the price is ‘fair’, by which it
means is based on BFP. If the OOCs do not pay BFP then supply will be withheld
and the ability of the OOCs to mobilise sufficient logistical capacity to convey product
at commercially viable rates from the coastal refineries will be tested. The evidence
296 Page 5556 of the transcript citation from Commission’s Record page 3009.
297 As we just seen, the avoidance of competition in the retail market and the consequent pressure
that this may impose on wholesale prices is another mechanism for protecting the wholesale price.
182
reveals that a significant proportion of the product presently purchased from Sasol
cannot be conveyed at commercially viable rates from the coastal areas. The OOCs
will then either agree to relinquish the downstream retail outlets that require this
output or they will pay BFP for these ‘musthave’ volumes.
513. The merging parties insist that the OOCs’ intervention is rooted in
‘fear of durable price competition from a low cost efficient competitor who has
excess supply to put to market, and the incentive and ability to compete vigorously
for retail market share in the long run.’ 298
514. This is precisely the prospect that is portended by a Sasol that attempts to
enter the downstream market on its own. It appears, though, that the OOCs
are willing to countenance this prospect because, as we have outlined above,
as Sasol gradually expands on its own its power balance with the OOCs and
their coastal refineries will alter only gradually if at all.
515. However, in combination with Engen, the frontiers of Sasol’s strategic
possibilities are considerably expanded. With the large guaranteed market
that is bestowed by Engen’s premier position in the inland downstream
market, its excess supply position in the inland is significantly reduced and,
with the Enref refinery in its armoury, the vulnerability of its coastal marketing
arm is largely eliminated.
516. We have seen in our analysis of the downstream markets, that if the OOCs
elect, in the face of foreclosure, to sue for peace, the terms of the peace
agreement will effectively be a retail cartel under the leadership of Uhambo.
The terms of the peace agreement in the upstream market will be a return to
‘rationality’ – the acceptance of Uhambo as the sole supplier of refined product
in the inland market at the BFP price. In short, the reinstatement of the MSA
in the inland market at the BFP price. In short, the reinstatement of the MSA
with one critical difference: where the MSA explicitly guaranteed the OOCs
security of supply in the inland area in exchange for their acceptance of Sasol
as sole supplier and BFPbased pricing, the terms of the peace will only
298 Page 131 of the Merging Parties’ Heads of Argument.
183
guarantee the OOCs their inland supply as long as they accept Uhambo’s
terms. It is well put by Mr. Fienberg:
‘Effectively you go back to an MSA arrangement regarding price but without the
commitments around volume. So from an OOC point of view the market demand
exists. There will be a net ….what volume has to be bought from Uhambo will
have to be bought at BFP or whatever price prevails at that time, but it would be
the maximum price and there isn’t the underpinning, if you like, or the security of
supply in order to service the market that goes with it.
So, in a sense, it’s a full circle back to the MSA without the security of supply
aspect.’299
517. Mr. Fienberg adds:
So we have that sequence of events and the only piece that’s missing here is the
retail marketing side of it and what Uhambo allows, the final piece that falls into
place for Uhambo is that the market can then be managed and prices can then be
maintained in the market. So if you step back, you have a sequence of events,
which to our mind don’t appear random. With the merger being effectively the final
move in the long run, in a chess game, and what one has, again in our view, is a
transition from government regulation to Uhambo regulation where prices can be
managed right through the chain from refinery production right through to the
marketplace. 300
518. We should also put in proper perspective the claim that Uhambo be characterised as
‘a low cost efficient competitor’. ’s principal competitive advantage is, in periods of
high crude oil prices, to be found in the application of the oilfromcoal technology and
the cost of this feedstock relative to the cost of crude. However, the byzantine
Components Supply Agreement ensures that this substantial cost advantage is ring
fenced in Sasol Synfuels, which is expressly excluded from the Uhambo JV and
which thus remains a wholly owned subsidiary of Sasol Ltd. As we have explained,
all that Uhambo is guaranteed is a ‘virtual refining margin’, that is, the synfuel
components are transferred to Uhambo at crude oil import parity prices plus the
notional cost of conveying the crude oil equivalent from the coast less the margin
earned by a coastal refiner. That is neither the technology nor the locational
advantage is extended to Uhambo. In order to maintain the margin on its sales to the
299 Page 2964 of the transcript. This is strikingly similar to Sasol’s own assessment viz. “the
termination of the MSA marks the transition from a contractual to a logistical inland supply
constraint. The base volume for which Sasol has a secure and attractive outlet, will shrink from 7.7
million metres cubed under the MSA to around 7.3 million metres cubed in 2004”. page 318.
300 Page 2959 of the transcript.
184
wholesalers, Uhambo mustsell its product at BFP. If it fails to achieve BFP it will take
all the downside. That is, the entity in which Sasol Ltd owns a 37,5% share will take
the downside; and the entity in which Sasol Ltd owns a 100% share will retain the
advantages of its low cost feedstock and all the upside of a rising crude oil price.
519. But this is the precise point of the merger: that Uhambo should secure supra
competitive prices by exploiting the market power, the lessening of
competition, bestowed by the merger between Sasol and Engen. It is not
intended that Sasol should pass its locational and technological rents
downstream. Sasol has as little interest as its competitor OOCs in utilising its
competitive advantages to bring down the wholesale and retail prices of petrol
and diesel, although the advantages that Sasol possesses are a useful
disciplinary threat. The merger will allow the merged entity to maintain
dominant positions in both the upstream and downstream markets that are
spanned by it without the expedient of competing on the merits.
Cartelisation and the fuel markets
520. In our view, then, this merger is likely to result in the recartelisation, under
Uhambo’s leadership, of the oil industry. Sasol’s decision to terminate the
MSA, the cartel agreement that dominated fuel markets for so long, has led,
inevitably, to an outbreak of competition in the oil markets, circumscribed, of
course, by continuing regulation of the pump price of petrol. Government is
however committed to deregulating this vital market as well and so, all things
being equal, the competition that has broken out upstream will extend to the
downstream as well. And competition in the retail markets will feed back to the
wholesale markets as is already evidenced by Sasol’s discounting of the
wholesale markets as is already evidenced by Sasol’s discounting of the
wholesale price to its Exel retail outlets.
521. The merger is Sasol’s attempt to put the genie back in the bottle, to
reconstitute the cartel but under Uhambo leadership. For Engen, the merger
is an opportunity to defend its retail margins and extend its retail market share.
185
There can be little question that the OOCs will rationally calculate that if they
are unable to beat Uhambo – and it is our firm view that they will not prevail in
a foreclosure battle with Uhambo – then they must join it. The OOCs may
have to accept a somewhat reduced market share – precisely by how much
will depend upon when precisely they decide to throw in the towel in the
foreclosure battle. At the very least, they will accept their present market
shares, their inability, that is, to compete away Uhambo’s significantly larger
share. There is, of course, much that is attractive about membership of a
cartel under Uhambo leadership. Not the least of the advantages of cartel
membership is that a cartel under the leadership of an extremely well
connected Uhambo (bolstered by its wellconnected empowerment partners)
is extremely favourably placed to represent the interests of the oil industry in
the many battles – with, for example, common opponents such as government
and consumers – that are yet to come.
522. The fuel markets lend themselves to the formation and maintenance of cartels.
This is elaborated at some considerable length in the BP heads of argument
which, on this score, are highly persuasive. We do not intend reproducing
these arguments in detail here. Suffice to note that all the conditions for cartel
formation and maintenance pertain: the structure of the markets is
oligopolistic; the products are homogenous and technologically mature; entry
barriers are very high; cost structures of the various oil companies are similar
and the acquisition will narrow the differences because approximately 50% of
Uhambo’s output is from its two crude refineries and the CSA places the
Secunda refinery on the same basis as a coastal crude refinery; the rate of
Secunda refinery on the same basis as a coastal crude refinery; the rate of
growth in demand is moderate and demand is highly inelastic; there is no
countervailing buyer power to speak of; the markets are highly transparent;
there is an extensive history of cooperation both at the level of the MSA and
also in a range of joint ventures and ubiquitous swap and hospitality
arrangements; and Uhambo will have clearly established its capacity to
discipline any wouldbe detractors.
186
523. Several of the key factors that lend themselves to cartelisation are notably
absent in the counterfactual, that is, in a market in which Sasol is attempting,
on its own, to enter the market. Mr. Reid testified that Sasol’s imbalance
portended well for the future of competition in South Africa’s fuel market.
Rapid expansion in the retail sector will prove difficult and will rely, the
Components Supply Agreement notwithstanding, on the willingness of Sasol
Ltd to pass some of the considerable cost and locational advantage enjoyed
by its Synfuels subsidiary down to its customer, Uhambo’s refining arm, and
from there to its wholesale and retail arms. In short, Sasol on its own is a
maverick, a lone and hungry, and, as Engen would have it, a ‘big, bad’ wolf,
fighting the pack for its share of the spoils. Uhambo, the combination of Sasol
and Engen, is the likely leader of the pack, whose natural prey is the South
African consumer.
524. We find then that the merger is likely to lead to a substantial lessening of
competition in both the upstream and downstream markets relevant to
this transaction.
Efficiencies
525. Once we have concluded that a merger will substantially lessen or prevent
competition, the Act requires us to determine:
“whether or not the merger is likely to result in any technological, efficiency or other
procompetitive gain which will be greater than, and offset, the effects of any
prevention or lessening of competition, that may result or is likely to result from the
merger, and would not likely be obtained if the merger is prevented…”
526. This is generally referred to as the ‘efficiency defence’.
527. In the present merger, the merging parties indicated in their filing that they would rely
on an efficiency defence and filed a report by their expert economists, Genesis, dated
on an efficiency defence and filed a report by their expert economists, Genesis, dated
November 2004. Later, according to the Commission, Genesis made a second set of
efficiency claims, which they appear to have presented to the Commission on 26 April
187
2005.301The Commission states that due to time constraints it did not have sufficient
time to adequately evaluate this new set of claims and so in its recommendation it
only evaluates the original, that is, the November 2004, set of claims. The
Commission recommended that we find that the efficiency claims had not been
established, concluding that they were flawed because they were, variously,
‘overstated’, ‘ not merger specific ’, ‘ ordinary efficiencies ’ or ‘ ambiguous’.302
528. When hearings commenced, Mr. Cilliers, counsel for the merging parties, did
not touch on this issue in his opening address so the status of the efficiency
defence was not clear.
529. However in the course of their case the parties led the evidence of Mr
Malherbe, an economist from Genesis, whose testimony in other respects we
have referred to earlier in this decision. Mr Malherbe was the witness upon
whom the parties relied for the evidence that the merger would bring about
efficiencies and had been responsible for the team that had prepared the
Genesis reports.
530. It emerged during the course of his evidence that the parties had submitted a
third document on efficiencies, dated 25 August 2005, and this was the one on
which they now sought to rely. Thus like other evidence submitted by the
merging parties during the course of this merger on logistics, the efficiency
claims have during the course of the process gone through a number of
iterations.
531. An examination of the evolution of the efficiency claims appears below in the following
table which compiled by the attorneys of Shell and which summarises what
efficiencies were claimed, when, in the three successive reports, they were claimed,
and how they differed between the amounts claimed in respect of the net present
and how they differed between the amounts claimed in respect of the net present
value (NPV) of operational and capital efficiencies. 303
301 See Commission’s recommendation, page 37 paragraph 8. Malherbe describes the 26 April
2005 document as a presentation for the Commission not a report. (See transcript page 1304).
302 See Commission’s recommendation, page 41 paragraph 8.2.
303 Exhibit 39, page 1.
188
Genesis 1
(Nov 2004)
Genesis 2
(Apr 2005)
Genesis 3
(Aug 2005)
NPV for
operational
efficiencies (Rm)
1500 2522 1072
NPV for capital
efficiencies (Rm) 1101 1101 1236
Total NPV (Rm) 2601 3623 2308
532. What emerges from this table is that total efficiencies claimed rose between
the first and second reports but then diminished in the final report. The NPV
for operational efficiencies shows the same pattern but the NPV for capital
efficiencies rises all the time.
533. Sensitive to this fact, the merging parties led Mr Malherbe on why the efficiencies
claims had undergone a “wild gyration.” 304 . Malherbe attempts to explain this on the
basis that he was given greater access to information only as the process wound on
and could, as a result, only later work on a more reliable set of figures. He explains
that this would be a normal feature of efficiency evidence as at the beginning of a
merger process neither of the merging firms is fully acquainted with the others figures.
The other discrepancy is due to fluctuations in the crude oil prices. Shell, for its part,
is sceptical of this excuse. It maintains that he would have had access to both sides’
records for over a year and that the crude oil price recalculation had already taken
place in the second report. Not much turns on this as we see later, but it is indicative
of the fact that despite Malherbe’s claims to the contrary, efficiencies were not at top
of mind of the merging parties when they consummated the merger, and the fact that
he had to rummage through the collective drawers of the merging entities to find them
much later, in three varying if not gyrating reports, is an indication of this. Having said
that, this is not a criticism of his work, which is painstaking and thorough, but rather of
the merging parties claims in this area.
534. Most of Malherbe’s testimony was then addressed as to what the alleged efficiencies
were, how he calculated them and what significance he attributed to them. During the
were, how he calculated them and what significance he attributed to them. During the
course of his oral testimony, he made a candid and dramatic concession, to the effect
that if the Tribunal accepted that the merger would make foreclosure more likely, then
304 See transcript, pages 13034.
189
the efficiencies would not outweigh the anticompetitive effect. put it as follows :
“If the big risk in this case is foreclosure and it is difficult to imagine that any
reasonable spectra of foreclosure would have damage that is so small that R2
billion in their present value could resolve it and my response to that would be the
following. I would accept that. I would accept that an ongoing risk of foreclosure
would in all probability given the size of these markets, be greater than the
efficiencies that we are discussing here.” 305
535. This raised the obvious question as to what purpose the merging parties were
leading evidence on efficiencies?
536. Malherbe answers this by offering three reasons. Firstly, since foreclosure is
not the only theory of competitive harm being advanced by the intervenors, the
efficiency defence may prevail in relation to some others, such as the
horizontal effects. What Malherbe seems to be alluding to here are horizontal
impacts in respect of local markets where a R 2,2 billion efficiency claim may
countervail the anticompetitive effect. In other words he is addressing a
horizontal finding in a limited number of local markets as opposed to a broader
finding of a horizontal effect.
537. As he put it:
“In some small markets to a modest or intense degree and there you may well find
that there is some kind of a tradeoff.” 306
538. His second reason for tendering this evidence is that the Tribunal is interested
in the motivation for a merger and that while efficiencies are not the only
motivation for the merger, his testimony is to show how important they are to
the merger.
539. The third reason is that if the Tribunal is considering a remedy then it needs to
bear in mind that the remedy should be one that preserves the efficiencies for
it to be considered appropriate.
it to be considered appropriate.
305 Page 1444 of the transcript.
306 Page 1445 of the transcript.
190
540. In closing argument Mr Van Der Nest for the merging parties confirmed that
they had endorsed the approach taken by Malherbe. This emerges from the
following exchange between the Tribunal and Mr Van der Nest.
“ MR MANOIM : Just to cut through this, because I think we’ve read this and we
know the numbers. I just want to assess the relevance of the efficiencies and
where it leaves us. Shell have said that Mr Malherbe had conceded in relation to if
there’s a foreclosure effect, we will define that. Then the efficiencies don’t offset
that.
ADV VAN DER NEST : Yes.
MR MANOIM : So the efficiencies are therefore now being addressed just to the
horizontal concerns.
ADV VAN DER NEST : That’s absolutely right. Mr Malherbe said, and there is a particular
page, 1444, and he said that in the offset analysis he says he would accept that an
ongoing risk of foreclosure would in all probably, given the size of these markets, be
greater than the efficiencies that we are discussing here. He says that is so. So in terms of
purely looking at it from the point of view of Section 12, does it offset? Mr Malherbe says it
doesn’t offset, but he did say that there are essentially 3 issues that flow from the analysis,
even though in his view the 2.2 billion, having regard to the size of the markets, doesn’t
offset it.” 307
541. Given our finding that the merger will lead to a substantial lessening of competition in
both the upstream and downstream markets, that is, we find both a vertical
anticompetitive effect as a result of a credible threat of foreclosure, and a national, as
opposed to local, horizontal impact in the downstream market, it is not necessary for
us to consider the countervailing effects of the efficiencies, as given the merging
parties concession on this point the trade off would not prevail. Note that we have
previously found in Trident that the onus of proving an efficiencies defence is on the
previously found in Trident that the onus of proving an efficiencies defence is on the
merging parties. 308
542. We find therefore that the efficiencies realised by the merger, even if they
could be proved in the amount claimed by the merging parties, would not be
greater than and offset the anticompetitive effects of the merger.
543. As we have not considered the imposition of conditions, as emerges later in this
decision, the second reason for considering the evidence on efficiencies becomes
academic. As to the third that the efficiencies contribute to the rationale for the
307 See pages 32543255 of the transcript.
308 See the Tribunal’s case, Trident Steel (Pty) Ltd and Dorbyl Limited , Case No.: 89/LM/Oct00 at
paragraph 51.
191
merger we find that this is, despite Malherbe’s protestations to the contrary, a post
hoc justification to put some respectable gloss on the essentially anticompetitive
rationale for this merger, a feature we have discussed at length earlier. The
attainment of efficiencies, even if they are as large as Malherbe contends for, and we
need not determine this, does not alter this conclusion. 309
Public Interest
544. The only public interest claim made related to the BEE opportunities presented
by the transaction. We note however that Engen is already empowered and
Sasol conceded that its decision to introduce empowerment partners into its
fuels business was not merger specific. That is, regardless of whether or not
the merger takes place, Sasol Oil will, as required by the empowerment
charter applicable to the industry, sell the requisite portion of its equity to
historically disadvantaged persons.
309 In fairness to Malherbe he does seek to rely on some merchant bankers documents prepared
by the merging parties for the purpose of the merger that refer to the existence of synergies. These
commentators however do not do the exercise he has exhaustively done nor does he seem to have
had access to the documents yielded from discovery which we have quoted earlier which suggest
the anticompetitive rationale in unambiguous terms. Although Malherbe’s efficiencies, on the face
of it yielding an NPV of approximately R 2,2 billion, may seem tantalisingly large, on closer
examination they may be less compelling. A large part of this figure is realised from service station
rationalisation. In a nutshell if the parties merge they will need to build less service stations than
they would otherwise have built if they were to proceed as separate firms in the market. This means
that the greater the difference between the aggregate number of stations that they intended building
as Sasol Oil and Engen, compared with the lesser number they intend to build as Uhambo, the
greater the capital saving brought about as a result of the merger. Malherbe calculated that this
would result in what he termed ‘capital savings’ over five years. Calculated on a five year NPV, this
amounts to a R1,2 billion saving, slightly more than half of the total efficiencies claimed. During
cross examination Shell challenged whether his evidence on this point was not seriously flawed, as
he based his calculations on a heroic assumption of what Sasol would have rolled out if the merger
would not have proceeded and thus made the difference between the merger roll out and the
separate firms roll out seem larger than past history of rollouts suggests it would be. We need not
resolve this issue. Shell also challenged whether this capital saving is a cognisable efficiency at all.
It represents the difference between a competitive allocation of stations, between separate and
competing firms, and a cooperative single firm strategy. As Professor Scheffman remarked
“Without the deal each company was likely to invest in more new stations and enhance competition
downstream, particularly Sasol as it attempted to better balance its upstream and downstream
supplier. Now with the JV, these investments will no longer be necessary. While this is a benefit for
the company it is not a benefit to consumers who will lose that competition.” See LECG report Para
211, page 1481). Finally they are, taken as a whole, as the Commission put it, fairly ordinary. There
emerge no major innovations or higher order production gains as we identified them in Trident.
Whilst Malherbe was careful to excise what he termed pure synergies that were not cognisable as
merger efficiencies, what remains qualitatively are those on the lower order of the spectrum of
efficiencies that we refer to in Trident.
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545. We note too that the anticompetitive impact of the merger will weigh heavily
on the retail arms of the OOCs, precisely where most empowerment has, to
date, occurred. This was eloquently attested to by Mr. Mncwango of Masana,
who averred that the merger, particularly if it led to the prioritisation against the
OOCs commercial and industrial customers for which the merging parties
contended, would lead to the demise of Masana.
546. Beyond the fact of empowerment it was suggested that the attainment,
through the merger, of a better balanced company would enhance the future
prospects of the company and thus lower the cost of capital and better enable
the empowerment partners to fund the acquisition of their stake. No attempt
was made to quantify this alleged benefit and we are hard pressed to accept
that it could ever countervail the impact of a likely lessening of competition in
the markets relevant to this transaction. Needless to add, because we have
found that the ‘better balance’ or, as we prefer to term it, vertical integration, is
at the centre of our finding of a substantial lessening of competition, we are
effectively being asked to accept a direct trade off between our competition
finding, on the one hand, and the cost of empowerment financing, on the
other. We have no doubt that the ‘balance’ wrought by the transaction
enhances the future prospects of the merged entity – market power always
has this effect.
Remedies
547. As already noted, the Commission concluded that this transaction would likely
give rise to a substantial lessening of competition because it would enable and
incentivise the merged entity to foreclose the inland market. It recommended
that these competition concerns be addressed by the imposition of a
behavioural condition that, in essence, obliged the merged entity to meet the
behavioural condition that, in essence, obliged the merged entity to meet the
OOCs inland shortfall at a price no greater than BFP plus the cost of
conveyance from the coast, the condition to apply until the commissioning of
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the expanded DJP which, in the Commission’s view, would relax the logistics
constraint that enabled foreclosure.
548. We have already noted that in the course of its closing address the
Commission announced that it had revised its recommendation of a
conditional approval in favour of outright prohibition. However, the condition
initially put up by the Commission was fully debated and is accepted by the
merging parties. Despite the Commission’s withdrawal of its recommendation
for conditional approval of the transaction, we nevertheless examine the merits
of the proposed condition as well as the attempts by the parties to reformulate
it.
549. Shell correctly identifies the proposed condition’s two main aspects as
incorporating, first, an obligation on the merged entity to supply a certain
volume of product to the OOCs, and, secondly, a time frame bounded by an
event – the commissioning of additional logistical capacity in the form of the
expanded DJP – that would eliminate the dependence of the inland marketing
arm of the OOCs on the merged entity and so end the requirement for the
condition.
550. Although the merging parties did not concede that the merger enabled
foreclosure, they nevertheless indicated that they were willing to accede to the
imposition of the condition recommended by the Commission. Note too that
the merging parties, while not conceding the feasibility of foreclosure, did
nevertheless hold that, should it be found that the merger would indeed enable
foreclosure, this prospect would be eliminated by the imposition of the
Commission’s recommended condition.
551. We should state at the outset that we concur with the contention advanced by
Shell that, having found a likelihood of a substantial lessening of competition, it
is incumbent upon us to be particularly confident, to be as certain as possible,
is incumbent upon us to be particularly confident, to be as certain as possible,
that a condition imposed would indeed eliminate that prospect.
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552. There is no doubt that the requisite degree of certainty is better secured by a
structural than a behavioural condition. Foreclosure is enabled by the structure
of the two markets that are implicated in this transaction – an upstream market
monopolised by the merged entity and a downstream market in which the
merged entity is, by some considerable margin, the largest participant.
553. In these circumstances competition authorities generally favour – and the
Competition Commission adheres to this general view focused structural
remedies, involving a divestiture of assets in one or both markets in order to
secure a structural realignment capable of generating competitive outcomes.
These structural remedies are favoured because they eliminate the root cause
of the competition problem and there is thus no requirement for postmerger
regulation or monitoring of the conduct of the merged entity by the competition
authority or some other adjudicative agency. This implies then that a conduct
or behavioural remedy would only be entertained when potentially
transgressive conduct can be clearly specified and easily detected and
remedied. The alternative implies ongoing dispute and litigation and the
likelihood of ongoing competitive harm while the attendant uncertainties are
being addressed.
554. The Commission does not appear to have given much consideration to the
possible imposition of structural remedies:
CHAIRPERSON: Do I take it then that the alternative structural remedies, and they
involve a divestiture, as I’ve said, of EnRef and/or NatRef, in whole or in part, has
not been canvassed in much detail?
MR PARR : Correct. 310
555. The testimony of Mr. Oberholster suggests that Sasol viewed the construction
of the expanded DJP and the prospect of TOTAL taking its shareholding in
of the expanded DJP and the prospect of TOTAL taking its shareholding in
Natref to 50% a prospect that has come to naught because of the inability of
Sasol and TOTAL to agree price – as the structural solutions that were to be
introduced. For the rest however, Mr. Oberholster testified as to his scepticism
310 Page 147 of the transcript.
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of the feasibility of other structural conditions. When crossexamined by Mr.
Bonakele for the Commission, Mr. Oberholster revealed that there had been
some discussion of the possibility of selling a stake in the Enref refinery, or of
selling part of Sasol’s stake in Natref to a third OOC (that is, other than
TOTAL), or even selling a stake in Secunda, but these structural options were
not considered feasible. In Mr. Oberholster’s own words:
In the end I think we all came to the conclusion that other structural remedies were
not applicable in this situation. 311
556. However, the behavioural remedy recommended by the Commission in this
transaction dismally fails to meet the test of clarity in specification and ease of
implementation. Conversely, the condition is likely to be the subject of
constant dispute and will require constant monitoring. This much is, indeed,
common cause. The transcript of Mr. Rogers’ crossexamination of Mr. Parr,
the Commission’s witness, is characterised by the number of occasions on
which the witness conceded that the condition required, at the very least,
significant reformulation. Parr concluded:
that some of these clauses may need some tweaking or even major redrafting 312
557. Mr. Oberholster’s position is, as always, illuminating. He too expressed scepticism
regarding the uncertainty inherent in the wording of the condition. Phraseology such
as ‘commercially reasonable terms’ presented Mr. Oberholster with understandable
interpretative difficulties, because, as he put it, ‘commercial terms are actually in the
eye of the beholder’. what is most revealing in Mr. Oberholster’s testimony regarding
the condition is his view that it will ultimately be workable because the terms of the
condition effectively coincide with Uhambo’s principal objective, the maintenance of
BFP. That is, as long as the OOCs are willing to pay BFP there is effectively no need
BFP. That is, as long as the OOCs are willing to pay BFP there is effectively no need
for a condition obliging the merged entity to supply their inland needs – at this price
Uhambo will be a perfectly willing seller. And, depending, presumably, on the size of
the logistics constraint or, expressed otherwise, the ‘must have’ volumes, Uhambo
would be prepared to negotiate discounts with the OOCs providing that the base price
311 Page 732 of the transcript.
312 Page 131 of the transcript.
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for the ‘must have’ volumes and from which any other volumes were discounted was
BFP:
I think as I have listened to the gentlemen from the oil companies, to implement
[the condition] exactly like that, I must be honest, I guess will be pretty tough. But
what it says is any volumes required we must supply the oil companies. And I
know I am talking against my better, what I probably should not say, but it is so.
When I looked at them analysing this situation, but the bottom line is the following.
Any volumes that they request from us we must supply. I must in any case supply
that, I am a dominant supplier, I have to supply those volumes. Price is the issue .
The price is being capped here at BFP, I believe that to be an appropriate price so
we can look at the condition, sir, and I know what you are asking me but certainly
again, we will negotiate with the oil companies. I am compelled from this
agreement, if I understand it, to supply any volumes that they require from me but
the price is capped. And that protects me, on the capped price. So the oil
companies can’t say I must supply on at export parity, there must be negotiation
on what that price must be, below BFP as is the case today . So I think it can work,
sir. But there are difficulties in the wording and we could tighten up with the
wording, yes. Have I got a suggestion for you now? I haven’t, sir. 313
558. This articulates a principle reason why competition authorities hesitate before
imposing obligations to supply. Price, as Mr. Oberholster well understands, is
always the issue and this obliges the competition authority to impose not
merely the obligation to supply but also the price of the product so supplied. In
this instance the price specified is a maximum price but that price is the BFP.
Even if the condition does not stipulate an actual price it does establish, as Mr.
Even if the condition does not stipulate an actual price it does establish, as Mr.
Oberholster is clearly comforted to note, the import parity rather than the
export parity as the industry’s base price.
559. Little is served by an elaborate reexamination of the recommended condition
when its major protagonists – the Commission and the merging parties –
concede that it is unworkable, at least in the absence of major reformulation.
And if this does not persuade then certainly the witness statement of Mr.
Milner for Shell and the crossexamination of Mr. Parr clearly establishes that
the condition will serve as little more than a feeding trough for the law
profession. Just as the voluminous evidence and the lengthy hearings that
have characterised these proceedings have struggled with establishing, for
313 Page 738 of the transcript.
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example, the size of shortfall volumes and of available road and rail logistics –
two factual determinations at the heart of the proposed condition so too will
these complex factual disputes bedevil expeditious arbitration of the disputes
that are bound to arise from the imposition of the proposed condition.
560. Hence, as the Shell heads of argument point out, the obligation to supply imposed by
the condition will terminate with the construction of a new pipeline ‘ capable of carrying
[the OOCs] shortfall volumes’. This necessitates determination of the requirements of
each of the OOC. If the determination were ‘forward looking’ the same problems
involved in projecting, for example, rates of growth in demand, that have emerged in
these hearings will have to be adjudicated by the arbitrator. And if the determination
of the OOCs requirements were made on the basis of a backward look, then there
can be no certainty that the requirements of the OOCs, even if adequately met on the
day of the commissioning of the new pipeline, would be satisfied into the future. The
condition proposed by the Commission gives no indication of the period in respect of
which the new pipeline must satisfy the OOC requirements. Certainly our
understanding is that the condition would remain in force if, at the time of the
commissioning of the pipeline, it could not be shown – to whom is uncertain – that it
was capable of carrying the OOCs shortfall volumes. This portends the prospect of
the condition pertaining in perpetuity. 314
561. Nor does the Commission’s condition confine the available logistics required to satisfy
the OOCs inland requirement to the pipeline. The condition appears to specify that
the OOCs shortfall volumes at the time of the commissioning of the new pipeline must
be assessed with reference to the quantum of available road and rail logistics at the
be assessed with reference to the quantum of available road and rail logistics at the
time of the merger. The pipeline volumes and the road and rail volumes will then be
set against the OOCs requirement and this will determine whether or not the pipeline
does in fact satisfy the OOCs shortfall and thus terminate the operation of the
314 At page 133 of the transcript: ADV ROGERS : If there is a new pipeline, but it doesn’t meet
what you attempted to capture in the wording of your condition, namely a new pipeline capable of
carrying shortfall volumes. If you do that enquiry when the new pipeline is commissioned and you
say well it’s not capable of carrying shortfall volumes, however they are defined, assuming you’ve
overcome the other difficulty that we have mentioned, if that leads to a negative answer then it
must inevitably also follow the condition be perpetuate in nature? MR PARR : I don’t know. You
know I haven’t really applied my mind to exactly what would be the case, because I think the
pipeline does amount to a structural remedy and does then terminate the need for the condition to
continue.
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condition. Apart from the difficulty – with which participants in this merger should be
only too familiar – of specifying road and rail usage in any given period (and this will
be a period at least four years earlier than the commissioning of the pipeline), there
can be no certainty that this backward looking assessment will accurately reflect road
and rail logistics availability at the commissioning of the pipeline. 315 Moreover this
conceptualisation of road and rail logistics abstracts, as characterises the parties’
entire case on logistical capacity, from the price of road and rail logistics. The road
and rail logistical capacity may be technically available but it may nevertheless not
constitute a commercially viable option.
562. As to the supply obligation itself, we have already indicated the difficulty
inherent in terms like ‘commercially, financially and technical reasonable’. The
best that the merging parties can offer in defence of these terms is the
contention that they are widely used and are capable of adjudication. While
this may be correct, the greater certainties are that these terms do offer ample
room for litigation and, given the strong incentive to foreclose, they will be
litigated. Consumers will then bear the consequences of the likely lessening
of competition while argument continues.
563. We could go further but this brief overview of the proposed condition clearly
establishes its gross shortcomings. In short, the condition lacks clarity and will
be extremely difficult to implement and monitor. The competition authorities
will have simply abdicated their responsibility to an arbitrator who will
effectively become the standing regulator of the fuel industry. This is, to put it
mildly, a highly undesirable outcome.
564. The parties have belatedly attempted to tighten up the condition. The revised
condition was submitted after the taking of evidence had been concluded – no
request was made to reopen the hearings – and shortly before final argument
commenced and this despite the fact that the inadequacies of the original condition
315 At page 118 of the transcript: ADV ROGERS : As you stand there now or sit there now, the
question is to how much rail and road infrastructure any one of the OOC’s uses, is at least in your
mind a matter of total confusion. Is that correct? MR PARR : I wouldn’t put it so strongly, but it’s
certainly not readily ascertainable in terms of the position required by that clause.
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were conceded by the Commission on the first day of the hearings. The revised
supply condition that is proposed runs to some 15 pages and 35 clauses. 316 We
share Shell’s concern that evidence has not been led in support of some farreaching
proposed amendments. And they remain predicated on the contention that the only
period with which the supply condition need be concerned is the period between the
consummation of the merger and the commissioning of the expanded DJP with little
effort made to evaluate critically the proposition that the expansion of the DJP will
eliminate the prospect of foreclosure.
565. The parties essentially offer to remedy the uncertainties implicit in the wording
of the original recommended condition by extending the existing supply
contracts between Sasol and the OOCs or by making their terms applicable to
new contracts. Again Shell’s supplementary heads of argument persuasively
outline the capacity for dispute implicit in this offer particularly when regard is
had to the introduction of clean fuels regulation. Essentially this means that
the basket of fuels provided for in the existing supply contracts cannot meet
the OOCs existing and future requirements. Given that we have found that
there is an incentive to foreclose we must assume that the merged entity will
use whatever means that it has at its disposal in order to respond to this
incentive. This will include lengthy and contentious litigation and arbitration.
As might be expected in circumstances of such considerable complexity, the
revised supply condition leaves considerable room for dispute and thus fails to
meet the threshold requirements that, in our view, must be met if we are to
accept a behavioural solution to a structural problem: clarity in specification
and ease in implementation.
566. At the time that the merging parties presented the revised supply condition – that is,
566. At the time that the merging parties presented the revised supply condition – that is,
316 The merging parties concede that their proposed supply remedy ‘is detailed and probably more
so than international remedy precedents’ but remark, somewhat enigmatically: ‘However, it is to be
expected that ingenious lawyers will always find arguments to create potential for dispute whilst
businessmen seeking products would rather look for ways to secure supply.’ Page 215 of Merging
Parties’ Heads of Argument. We agree with this observation which is precisely why we cannot
preclude the possibility that embodied in the lengthy and complex proposed supply provision –
drawn up by ‘ingenious lawyers’ is the potential for dispute that would render nugatory the
operation of the condition and is precisely why we would prefer the proposal to be subject to the
scrutiny of opposing ‘ingenious lawyers’ and technical experts. See Page 213 of the Merging
parties’ Heads of Argument.
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after the taking of evidence had been concluded and immediately before the
commencement of final argument they also submitted six other conditions. Certain
of these – a proposed condition on employment and one on the proposed divestment
of the Engen chemicals marketing business – have no bearing on the question of
foreclosure. The other four conditions are intended to address foreclosure. These
are a proposal for the divestment of 13,64% of Sasol’s Natref shares, 317 a proposal
with respect to the allocation of the merging parties’ DJP capacity, a proposal to
divest an unspecified number of service stations, and, finally a 10 page, 40 clause
proposal relating to the purchase of components from Sasol Synfuels and a toll
blending arrangement with Uhambo that would have to accompany the acquisition by
the OOCs of synfuel components. We note that certain of these conditions were
interrelated to the extent that we were advised by the merging parties that were we
minded to accept certain of the proffered conditions, then their tender of certain other
conditions would fall away.
567. We note again that the parties did not request to lead evidence in support of
these proposals nor did they tender an opportunity for the Commission and the
intervenors to do so. The proposals were, accordingly, not subjected to cross
examination, and the intervenors’ and the Commission’s technical and
economic experts were not given the opportunity to scrutinise them. It is not
clear whether the parties’ motivation in presenting these complex proposals in
this manner reflects sheer desperation or a deliberate attempt to shelter them
from rigorous scrutiny. Given that these conditions entail logistical proposals
they required expert comment but they were revealed at the stage when the
only adverse comment could be made by the opposing lawyers. Talented as
only adverse comment could be made by the opposing lawyers. Talented as
these counsel may be they are not industry experts and could not be expected
to make more than lawyerish comments from the bar. Indeed such was the
conduct of the merging parties that an amendment to a condition already
proposed was only made in reply during final argument, that is, at a time when
not even the intervenors’ counsel, let alone their witnesses, could scrutinise
them. This conduct was criticised by Mr Wilson, one of the few intervenors’
317 This despite Mr. Oberholster’s identification of the difficulties that would confront a threeway
division of Natref’s assets and output.
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counsel still in the room at that late stage of the proceedings, and rightly so.
568. It needs to be pointed out that there was no reason why this suite of new
conditions could not have been tendered at an earlier stage of these
proceedings or at the very latest, when the oral hearings commenced. There
were no surprises emerging during the oral evidence. All witnesses who
testified had given witness statements which were available to the merging
parties at least three weeks before the hearings commenced. None of the
intervenors’ witnesses who gave oral testimony can be accused of emerging
with any surprises or departing from the themes in their witness statements.
569. In this context, the merging parties, if they were serious about tendering
conditions that they consider to meaningfully alter the competitive outcomes of
the merger, should have tendered them at the advance of the proceedings or,
at the very least, applied to reopen evidence to have them considered with
due seriousness by those best placed to subject them to scrutiny. They chose
to do neither. While the Tribunal is loathe to adopt so rigid an approach that
parties feel they cannot respond to changes in circumstances, if they feel they
can constructively respond to criticism of a merger, we also cannot permit a
situation where merger proceedings become an endless moving target, where
merging parties once they feel backed into a corner throw out everchanging
undertakings that masquerade as concessions until their critics are either too
exhausted or mesmerised to respond.
570. Whilst we offer flexibility to merging parties, we also owe procedural fairness to
the intervenors and the Commission, all of whom, and in this case in
particular, have brought enormous resources to bear to meet the case that
was initially before us and not one that, like Proteus, kept changing shape at
was initially before us and not one that, like Proteus, kept changing shape at
the whim of the merging parties. To do so would be to invite our procedures to
be abused. Whilst we have considered, to the extent possible, the conditions
tendered by the merging parties, we have taken into account that they have
not been subject to proper scrutiny and to a fair and proper process.
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A brief summary and conclusion
571. South Africa’s fuel markets have long been regulated by a government
sanctioned private market sharing agreement – the Main Supply Agreement or
the MSA – which provided for Sasol’s domination of the upstream inland
market for refined product, in exchange for the narrow circumscription of
Sasol’s right to participate in the downstream retail markets. The price
stipulated for refined product was the Basic Fuel Price – BFP – which was
based on the import parity price and which was used to build up, by the
addition of marketing costs including the requisite marketing margins, to the
wholesale and retail prices of refined fuel products.
572. 1994 ushered in a government determined to reregulate these vital markets,
including a commitment to deregulate pricing in the market. Sasol pre
empted the promised era of re and deregulation by giving, in 1998, the
requisite fiveyear notice of its intention to terminate the MSA, which then duly
terminated in late 2003. In so doing Sasol allowed the genie of competition to
escape, and escape it did though constrained in its flight by continuing
regulation of many aspects of the fuel markets, including a fixed price for retail
petrol.
573. But Sasol had taken a calculated risk. It had gambled that a combination of,
firstly, logistical constraints that prevented the easy conveyance of refined
product from its competitors’ coastal refineries and, secondly, a merger with
Engen, the country’s largest retailer, would swiftly return the genie to
acceptable confines. It would ensure that the merged entity enjoyed
downstream pricing power, the better to protect retail margins, and the better
downstream pricing power, the better to protect retail margins, and the better
to mute feedback from competition in the retail markets to prices in the
upstream markets.
574. This then is a merger between the country’s largest producer of refined white
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fuels – Sasol – and its largest retailer of these products, Engen. The
implications for competition of this structural rearrangement of the relationship
between the relevant upstream and downstream product markets are
exacerbated by logistical constraints that inhibit the conveyance of fuel from
the coastal refineries to the country’s largest retail market in the inland. These
logistical constraints set the boundaries of the geographic markets as the
inland, a market in which the merged entity will enjoy a near monopoly of
refinery capacity and in which it will enjoy a retail market share that is
considerable on any measure, including in comparison to that of any of its
competitors.
575. A market structured in this manner immediately portends the prospect of input
foreclosure on the part of the merged entity. That is, the prospect of the
merged entity withholding supplies of the critical input – refined product –
required by the retail arms of inland fuel marketers. By so doing, the merged
entity may expand its own downstream market share, the better to attain
pricing power in that market and the better to protect, through the muting of
downstream competition, any pressure on the price of its upstream product. It
is quite conceivable, and highly likely, that the merged entity may forbear from
an allout foreclosure campaign, provided that its competitors forbear from
robust competition in the downstream market and accept the merged entity’s
pricing aspirations in the upstream market. These pricing aspirations are
clearly stated to be the maintenance of the import parity price base that
underpins wholesale and retail prices.
576. However, the inland marketers are themselves all vertically integrated, that is
576. However, the inland marketers are themselves all vertically integrated, that is
they have access to upstream product out of their own refineries. But these
are all based at the coast, some considerable distance from the inland market.
The weapon then in this foreclosure battle is logistical capacity, the capacity to
convey refined product from the coast to the inland. The other oil companies –
the OOCs have opposed this merger and the core of their opposition rests on
their contention that available logistical capacity is insufficient to prevent the
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merged entity from foreclosing the inland market.
577. All agree that a certain amount of logistical capacity is available, although, as
with most factual averments in this transaction, even the precise amount of
logistics currently utilised has been the subject of dispute. All equally agree
that currently utilised logistical capacity leaves a large volume of refined
product that the inland marketers of the other oil companies are obliged to
purchase from the merged entity. The dispute, which has focused much of the
voluminous factual evidence presented in this transaction, surrounds the
merging parties contention that there is sufficient additional logistical capacity
to successfully challenge foreclosure, a contention vehemently denied by the
OOCs.
578. We have conducted an exhaustive examination of this evidence. Our
examination has focused on those elements that materially impact on the
prospects for foreclosure, on rates of growth in demand, on additional
significant logistical infrastructure such as the possibility of conveying refined
product in the underutlised crude oil pipeline, and on the strategic responses
available to the OOCs should the merged entity attempt to foreclose. We
have also examined many of the other logistical possibilities that the merging
parties have presented despite our strong scepticism that many of these
impact materially on a strategic decision to foreclose, or, indeed, to fight
against or succumb to foreclosure.
579. While we have been candid in acknowledging that, the best efforts of learned
economists and technical experts notwithstanding, few of these factual
disputes can be resolved with mathematical precision the evidence clearly
points to the credibility of the threat of foreclosure. The merging parties’
contentions regarding additional logistical capacity are unpersuasive, as are
their arguments which seek to establish the ability of the OOCs to respond to
foreclosure in a manner that would materially ameliorate its intended
consequences. Certainly, the ability of the coastal refiners to retaliate to the
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threatened foreclosure of the inland by foreclosing the coastal markets is
severely blunted by the presence of Engen’s Enref refinery in the armoury of
the merged entity.
580. The pipeline operator, Petronet, has committed itself to a planned expansion
of the pipeline capacity, significantly the most cost efficient form of logistics.
However, the evidence shows clearly that this will still leave the merged entity
with, at least, a fouryear window of opportunity to foreclose. In any event, the
expanded logistics that will be commissioned by no earlier than late 2010, will
only relieve the logistical constraints for a limited period whereupon they will
reassert themselves in the face of reasonably projected growth rates in inland
demand.
581. We have examined, as the Act requires, the public interest and efficiency
implications of this merger. Neither compensate for the negative impact that
the merger will have on competition.
582. We have also considered the possibility of the approval of the merger subject
to a condition that would ameliorate the transaction’s anticompetitive
consequences. Behavioural conditions are generally considered inadequate
responses to structural problems and, in this instance, the behavioural
condition initially proposed by the Commission has been found to be grossly
inadequate. The parties belatedly made a play of suggesting alternative
conditions but these, though highly complex, were not subject to rigorous
scrutiny and nor do we believe that the merging parties intended them to be so
scrutinised.
583. Sasol complains that in the absence of the merger it is condemned to
permanent exclusion from the country’s retail markets. But this averment is
clearly at odds with the facts. In the few years since the termination of the
clearly at odds with the facts. In the few years since the termination of the
MSA, Sasol has already made considerable inroads into both segments of the
retail market, in the service station segment and in the commercial and
industrial segment. And it has achieved this by means of robust competition
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on the merits, including the discounting of the wholesale price.
584. Critically, Sasol has the means to compete even more vigorously. Its wholly
owned Synfuels division controls a highly competitive feedstock particularly in
these days of massively inflated crude oil prices. And it enjoys the
considerable advantage of the inland location of its Synfuels plant which
stands astride its own critical feedstock, South Africa’s abundant resources of
coal. That Sasol Ltd has chosen to retain all of this competitive advantage –
through as we have seen the instrumentality of the Components Supply
Agreement – is a strategic choice. If the exigencies of competition compel it to
make available these advantages to its downstream wholesale and retail
divisions, then it is capable of reconsidering the strategic decision to hold on to
all of the monopoly rents that are bestowed by its oilfromcoal technology and
its inland location.
585. It is our strongly held view that Uhambo’s power to foreclose will end, not
necessarily in a massively increased retail market share over that that will be
enjoyed immediately upon merger. Rather it will end in a reconstituted cartel,
though, unlike the MSA, this cartel will be under the clear leadership of
Uhambo. This new cartel will eliminate the competition already ushered in by
the termination of the MSA and it will destroy the promise contained in further
planned deregulation.
586. In this vein we should note that we are deeply cognisant of the fact that this
merger has been bitterly opposed by all of the merging parties’ competitors
who have devoted enormous resources to persuading us to reject the merger.
The merging parties entreat us to view the intervenors’ motives with deep
suspicion, born of the knowledge that the OOCs are no more likely friends of
suspicion, born of the knowledge that the OOCs are no more likely friends of
competition than are the merging parties, and that their true concern is to
weaken the emergence of a more powerful competitor in the shape of
Uhambo. This is wise counsel the merging parties are quite correct in their
assertion that promoting competition is the least of the OOCs concerns.
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587. In the postMSA world the OOCs first prize, is one that allows a 1015% retail
share to Sasol, and gives to them an ‘equitable’ share of the rents that Sasol
earns from supracompetitive pricing of its refined product in the inland. The
OOCs calculate that by preventing this merger Sasol will be forced into a cartel
similar in structure and power distribution to the MSA, but in which Sasol is
granted a share of the retail rents and they, the OOCs, are accorded a share
of the rents from BFP pricing in the inland. But this, the preferred outcome for
the OOCs, would be Sasol and Engen’s second prize.
588. For Sasol and Engen, first prize is a cartel where they have significant retail
share (and thus the lion’s share of the retail rents) and in which they earn all
the rents that are to be derived from their monopoly of inland supply. This is a
postMSA cartel in which they are the leading force and the principal
beneficiary. And so they have decided to merge in pursuit of this handsome
prize. But this, the preferred outcome for the merging parties, is decidedly the
second prize for the OOCs.
589. Dr. Stillman, the merging parties’ economist, is right then in his insistence that
a bargaining dispute is at the centre of the differences between the merging
parties and intervenors. But it is not simply a price bargain, not, as he would
have us believe, simply a disputatious moment in the process of settling on a
price for a product – this is the outer form that the dispute takes. In substance
it is a bargaining dispute between recently colluding (in the shape of the MSA)
oligopolists over new rules for distributing monopoly rents.
590. As tough, wellresourced business institutions each of Uhambo and the OOCs
will fight for their preferred outcomes. It is our view that the merged entity will
have its way and the outcome will be a reconstituted cartel under the firm
have its way and the outcome will be a reconstituted cartel under the firm
leadership of Uhambo. But as pragmatic business people the OOCs (and the
merged entity if it was forced to) will also settle for second prize if necessary, if
only because there is a third prospect that each of them seeks to avoid.
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591. The least desirable outcome for both the OOCs and the merging parties, is a world in
which Sasol is forced to compete for market share, in which it is forced to depress the
retail price of its offering, something which can only be sustained if Sasol Synfuels is
prepared to pass on some of the rents that it derives from its technology and its
favoured location to the consumer. This is a competitive struggle in which Sasol is
well placed to compete with the OOCs. It will, to be sure, depress both its wholesale
and retail margins, but, like any wholesaler and retailer in competitive markets, it will
seek to compensate for thinner margins through increased volumes. The well
resourced, firmly entrenched OOCs will have to meet this competition and we are
confident of their ability to make a fight of it.
592. This – the least desirable option prize for the OOCs and Sasol alike is the
possibility that has been left open by Sasol’s termination of the MSA and this is
why we have chosen to prohibit a merger which is destined only to secure a
less competitive outcome than the one that is now promised, that is indeed
already showing distinct signs of life.
Order
593. The proposed joint venture / merger between Sasol Limited, Engen Limited,
Petronas International Corporation Limited and Sasol Oil (Pty) Ltd is
prohibited.
23 February 2006
D. Lewis Date
Concurring: N. Manoim, Y. Carrim
For the Merging parties:
Advocate S Cilliers SC, Advocate M Van der Nest SC, Advocate H Maenetje,
Advocate P McNally, Advocate H Shozi and Advocate F Snyckers instructed by
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Edward Nathan Corporate Law Advisors.
For the Commission:
Mr. T Bonakele (Legal Services) and Ms. L Khumalo (Mergers & Acquisitions).
For the Intervening parties:
For BPSA: Advocate V. Maleka SC, Advocate A. Gotz and Advocate R Pearse instructed
by Webber Wentzel Bowens and MNMR Attorneys.
For Shell : Advocate O Rogers SC and Advocate J. Wilson instructed by Cliffe Dekker Inc.
For Masana: Advocate E Fagan instructed by Webber Wentzel Bowens
For Caltex: Advocate D. Unterhalter SC and Advocate M. Wesley instructed by Deneys
Reitz Inc.
For TOTAL: Advocate J Gauntlett SC and Advocate A Cockrell instructed by Werksmans
Attorneys.
ம
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APPENDIX A
Competition Commission’s Conditions 318
The following conditions shall apply until a new petroleum products pipeline from
Durban to Johannesburg to Tshwane has been constructed and makes available to
OOCs a transportation infrastructure capable of carrying their shortfall volumes:
1. Subject to 3 below, the merged entity shall, on written request by any
OOC, and on terms that are commercially, financially and technically
reasonable, supply such OOC with such shortfall volumes or part thereof as
may be requested.
2. Without derogating from 1 above, the selling price to be charged by
the merged entity for any such supply shall not—
2.1 exceed a price determined according to the formula which is used to
determine BFP at the relevant time plus the prevailing transport price
determined for inland locations;
2.2 discriminate against any OOC or in favour of any business within the
merged entity or any of its subsidiary or associated entities.
318 From page 44 of the Commission’s Report.
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3. In the event of the merged entity being unable to supply the full
volumes of refined petroleum products requested by the OOCs as
contemplated in 1 above, as well as the volumes required by itself and its
subsidiaries and associated entities, the merged entity shall reduce its
supply of each affected product to each such OOC and to itself and its
subsidiaries and associated entities pro rata to the volumes of such product
supplied to each such OOC and to itself and its subsidiary and associated
entities during the preceding three months.
4. Upon the written request of any OOC aggrieved by any alleged
specific failure or refusal of the merged entity to comply with the above
conditions, the merged entity — in the event that it does not admit the
alleged failure or refusal and remedy the same forthwith — shall, within ten
days of the request, offer to that OOC in writing an expeditious arbitration
procedure on reasonable terms for the determination of the dispute, and for
the making of any consequent award to ensure compliance, which
procedure shall be binding on the merged entity and on that OOC upon
acceptance of the offer of arbitration in writing by the latter. While any
dispute remains subject to arbitration as above, the merged entity shall, if
the aggrieved OOC so requires, and subject to any necessary pro rata
adjustment in volumes provided for in 3 above, continue to supply any
refined petroleum products affected by the dispute on the same terms as
such products were supplied to that OOC immediately before the dispute
arose.
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5. The provisions of 4 above are not intended to affect in any way the
powers and duties of the Competition Commission or the Competition
Tribunal, in terms of the Competition Act and the Rules in force thereunder,
in dealing with any alleged noncompliance by the merged entity with the
above conditions.
6. Reports to the Commission:
6.1 The merged entity shall provide a quarterly written report to the
Competition Commission, signed by a responsible person, indicating the
volumes and prices at which refined petroleum products have been supplied
to businesses within the merged entity and any of its subsidiary or
associated entities and supplied to OOCs pursuant to the above conditions.
Each such report shall be due not later than one month after the end of the
quarter to which it applies. The first such report shall be due not later than
one month after the first full quarter following approval of the merger and
shall include information for the period between the approval of the merger
and the commencement of the first quarter.
6.2 The merged entity shall provide annually to the Competition Commission an
auditor’s certificate confirming the correctness of, or qualifying, as the case may
be, the information contained in the quarterly reports referred to in 6.1 above.
6.3 In the event of the merged entity reducing its supply of any refined petroleum
product under circumstances contemplated in 3 above, it shall, within ten days of
such reduction, notify the Competition in writing accordingly.
In these conditions, the following expressions shall have the following meanings:
(a) “shortfall volume”, in relation to any OOC, shall mean the volume of
refined petroleum products, in combination or individually as the case
may be, required by that OOC for the inland market, and inland for the
export market, at the relevant time in excess of the volume that can
export market, at the relevant time in excess of the volume that can
reasonably be transported through the then existing pipeline
infrastructure together with such utilisation of the rail and road
transportation infrastructure as is used by the OOC concerned at the
time the merger is approved;
(b)“OOC” shall mean oil companies and their subsidiary and associated
entities which, at the time the merger is approved, have been obtaining
supplies of refined petroleum products from any of the merging parties, and
shall include new entrants requiring refined petroleum products for the
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inland market, or inland for the export market (provided that “OOC” shall not
include any of the merging parties or their subsidiary and associated
entities).
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