In February 2006, the Competition Tribunal effectively put paid to the proposed merger of the country's largest producer of refined fuels (Sasol) with the owner of the largest network for the retail of those products (Engen). The merged entity would have been called Uhambo Oil, and was to have been the culmination of Sasol's strategy to increase its penetration into the petroleum retail market, where it had historically been relegated to the margins.
All the other oil companies (OOCs) familiar to South African consumers vigorously opposed the merger.
Although a merger proposed between competitors, thereby consolidating market share on a horizontal level, the fate of the merger ultimately turned on its vertical character – whereby the significant upstream oil refining capacity of Sasol would be combined with Engen's strength in retail.
A deconstruction of the petroleum market was important for purposes of market definition as well as in analyzing the competitive effects of the merger. In essence, the Tribunal identified an inland market for refined fuels distinct from the coastal markets. This was in part because of the logistical constraints in moving product inland from coastal refineries, but was exacerbated by a government-sanctioned market sharing agreement known as the Main Supply Agreement (MSA). In terms of the MSA, OOCs (with refineries at the coast) agreed to procure most of their inland oil requirements from Sasol. In return, Sasol agreed to limit its participation in the retail market.
Sasol terminated the MSA hoping, reasoned the Tribunal, to use the merger with Engen as a way to accelerate its entry into the retail market without relinquishing its dominance in the inland upstream market for refined products, where its competitors remained beholden to it for supply.
The Tribunal's main concern was that Uhambo would make life very difficult for its competitors in the industrial inland hub, which is a key market for petroleum products by implementing a foreclosure strategy, – i.e. limiting access to supplies of refined fuel to competing retailers. The ability to engage in such a strategy arose primarily from the logistical difficulties in transporting fuel from the coastal refineries inland.
The Tribunal rejected Sasol's entreaties that a prohibition would exclude it from the retail market, pointing out that decades of regulated market sharing had produced, in Sasol, a highly competitive domestic producer of fuels. While Sasol had to date chosen to pass on little of that competitive advantage to consumers in the form of lower retail prices, it might consider foregoing some of its profits in order to compete more robustly.
The Tribunal ultimately saw the merger as negating the promise of competition in a post-deregulation market. In prohibiting the merger, the Tribunal hoped to clear a path for an outcome where Sasol is forced to compete for market share by depressing the retail price of its offering – this will mean passing on the benefits of its technology and favourable geographic position to consumers – which is after all the raison d'être of competition law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.