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1. Notification was made of two loan agreements between Burmah Castrol (Ireland) Ltd. (“Burmah”) and a distributor on 10 April 1996. For each agreement, Burmah requests a certificate under Section 4 (4) of the Competition Act, 1991 or, in the event of a refusal by the Competition Authority to issue a certificate, a licence under Section 4 (2).

2. These notifications concern two separate agreements between Burmah and a distributor for the loan of equipment for use by the distributor with motor diesel, gas oil and kerosene.

3. Burmah is an Irish registered company engaged in importation and distribution in the State of various petroleum products. It is a subsidiary of Castrol Limited, a company registered in the UK, and its ultimate holding company is Burmah Castrol plc. The turnover of Burmah Castrol plc in the year ending 31 December 1994 was Stg£2,934,000,000.

4. The distributor of the agreement notified as CA/14/96 is Cullen Oil of Killeen Upper, Inistioge, Co. Kilkenny. The distributor of the agreement notified as CA/15/96 is R.M.F. (Ireland) Limited of Whitemill Industrial Estate, Wexford.

5. The relevant product market for these notifications is motor diesel, gas oil and kerosene. Commercial derv or diesel, gas oil and kerosene are collectively referred to as “middle distillates”. [1] Although commercial derv (transportation fuel) and gas oil are physically the same product, they cannot in practice be substituted for each other because they attract different excise duties and users may be subject to penalties when one is used in place of the other. While the products differ in their uses and in the levels of excise duty which they attract, there is relatively high supply-side substitutability.

6. In the motor fuels market, sales to retail outlets account for over 95% of total gasoline deliveries into consumption but only approximately 37% of total deliveries of automotive diesel oil. The remaining 63% of automotive diesel oil is supplied by road tanker to transport organisations for industrial companies operating their own fleets [2]. It is the latter sector which is concerned in the notified transaction.

7. The heating gas oil market is divided between three sectors: Domestic - about 20%, Commercial - a little under 40%, and Industrial, including transport and agriculture, accounting for the balance of a little over 40% [3].

8. Kerosene, like gas oil, is used as a heating fuel in domestic and industrial use. Most modern burners can use either without adjustment, though older burners (over seven years old) require adjustment before switching between the two. Kerosene is also used to a limited extent as a raw material in certain industrial processes such as firelighter production.

9. The following table shows total inland deliveries of all refined oil products in Ireland from 1990 to 1994, in millions of tonnes:

10. In its decision on INPC [5], the Authority estimated that the total turnover of the petroleum oil market in Ireland was approximately [ ] excluding excise duty.

11. Wholesaling companies, who are presently all importers, are mainly supplied by refineries. Wholesaling companies in Ireland are dominated by companies integrated upstream to the refining stage, such as Esso, Shell, Texaco, Statoil and Burmah. Approximately 70% of imports into the State are supplied by these companies and the remainder by companies not vertically integrated (e.g. Tedcastles, Campus, Emo, Morris, Estuary, Maxol).

12. The full range of petroleum products is normally imported into the State by these wholesalers. There are a small number of wholesalers who specialise only in heating oils (heating gas oil and kerosene) and limited quantities of diesel fuel, but with no gasoline. This is often because the depot facilities required to import gasoline are more specialised and require higher investment.

13. Derv, gas oil and kerosene sold to final consumers in Ireland are sourced either locally from the state refinery at Whitegate or imported, mainly from the UK. Terminals for imported oil are located all around the Irish Coast. Ownership of these terminals is shown in the table below:

In addition to these there are some inland terminals. Most Wholesalers are party to agreements allowing them to draw from other operators’ terminals.

14. Of the total volumes of products sold in Ireland in 1996 (approx. 668 million litres of commercial derv, 1,130 million litres of gas oil and 382 million litres of kerosene) the estimated respective current shares of the wholesalers in each of the relevant wholesale markets is as follows:

15. Distributors are supplied by a number of wholesalers including five international operators (Shell, Esso, Texaco, Statoil and Burmah) and six Irish brands (Maxol, Tedcastles, Campus, Emo, Estuary and Morris). The distributors draw from the wholesalers’ coastal terminals (or from dry terminals inland) for resale to a range of domestic, industrial, commercial and agricultural customers. This is a bulk-breaking operation.

16. Some of the distributors choose to sell the products under the brand name of the wholesaler (which is identified on tankers and points of sale) whilst others choose to operate under their own name. In each case, final prices are independently set by the distributor.

17. It is estimated that there are some 300 distributors in Ireland, and their number has increased in recent years. The classified telephone directory lists 342 distributors, but this may be a slight over-estimate due to multiple listings. The OPAL report describes the distribution infrastructure as follows:

“Inland distribution is almost exclusively by road transport over a poor road network, which, at present, includes only a minimal amount of motorway-standard road (approximately 50 km in total). With a population density of 50 persons/km ² (the lowest in the EU) the task of supplying the whole country results in an extensive network of storage locations, currently around 200, most of which are operated by local distributors. The main supplying companies have directly operated distribution facilities at Dublin, Cork, Limerick and Galway and some have plants in a few other locations. Some major companies have concluded significant exchange and sharing arrangements in order to reduce distribution costs. Further developments in this area are under consideration. Road delivery from the company-operated plants is generally in trucks up to 36,000 litres capacity, often making up to 5/6 deliveries per trip. In recent years most major companies have negotiated new arrangements, frequently involving contracting out of truck operation, in order to reduce road delivery costs. Large capacity trucks are also used to deliver product to the numerous small plants operated by distributors or resellers from which very small trucks are used for deliveries to customers with whom restricted access is frequently a problem. Overall truck utilisation is low compared to other EU countries and costs are consequently higher.”

18. Retailing is the stage of the industry where products are delivered to the final customer. This stage of the market is dominated by either sales from vertically integrated companies to the consumer (e.g. from petrol stations or wholly-owned marketing subsidiaries) or by independently owned distributors. Most of these distributors operate small inland depots from which they supply the domestic sector and also smaller deliveries to industrial customers in the commercial sector. It is estimated that around 20% [8] of heating gas oil sales are made by independent distributors with product sourced either from direct imports or by purchases from Whitegate refinery.

19. The OPAL report states that practically all of the sales of heating/non-automotive gas oil in the domestic sector (which accounts for approximately 30% of all such sales) are undertaken by branded resellers, supplied by the major international companies mentioned earlier, together with Maxol. It goes on to state that “Many of these resellers are very small, as reflected in the high number of storage locations referred to earlier, and there is additionally a number of local operators selling imported product in a limited area. This localised ‘small-drop’ business is a feature which is consistent with the rural nature of the greater part of the country and is undoubtedly another opportunity for rationalisation and reduction in unit costs, but only when the road system has been significantly improved.”

20. Direct deliveries of motor gasoline (i.e. sales not made through petrol stations) to bulk customers are of very little significance, representing less than 3.5% [9] of retail sales. However, in the automotive diesel oil sector, bulk deliveries to industrial/commercial customers and public transport undertakings together amount to over 60% [10] of total autodiesel deliveries. This segment is predominantly supplied by the major international companies.

21. The notified agreements are standard agreements between Burmah and a distributor whereby Burmah supplies equipment on loan to the distributor for the dispensing of motor diesel, gas oil and kerosene. The equipment is: an overground storage tank with ancillary pipework and fittings (CA/14/96) and two underground storage tanks and two pumps (CA/15/96). The value of the equipment for each agreement is stated to be less than £10,000. Except for the different equipment specified, the agreements notified are the same.

22. The notified agreements contain a provision at Section 4 for the equipment to be used exclusively for products supplied by the Burmah. The period of exclusivity is five years. After that period, the agreements provide for the possibility for the distributor to purchase the equipment from Burmah at its written down value, which at the end of five years, provided that the distributor has made all payments due under the agreement, is nil.

23. The applicant submits “that the arrangements shall not restrict, distort or prevent competition in the Market within the meaning of Section 4” of the Competition Act, 1991.

24. The applicant states that the Authority in Decision number 361, (Burmah Castrol (Ireland) Ltd. - Hire purchase agreement and lubricating equipment loan agreement), “makes assumptions regarding the effect of the agreements the subject of that notification in arriving at its conclusion that the agreements in question contravene Section 4(1). It is accepted that there is no general presumption under the Competition Act either in favour of or against exclusive use of equipment obligations and that each case must be examined on its merits in the light of the prevailing economic circumstances. It remains to be shown whether in any individual case, the agreement does or does not contravene Section 4(1).”

25. The applicant also submitted arguments in support of the notified agreement being granted a licence. As the Authority has decided to grant these agreements a certificate, the arguments are not relevant.

27. In Decision No. 322, CA/901/92 (Burmah Castrol/Distributor Agreement (Loan Agreement)), the Authority granted a licence to an agreement notified by the applicant similar to the one under consideration here. The Loan Equipment Agreement the subject of Decision No. 322 was for the purposes of the distributor securing equipment for the distribution of products in the middle distillate market as well. Conditions of the loan included that the distributor use the equipment exclusively for products supplied by Burmah. The loan contained only a nominal payment obligation for the distributor (£1 yearly rental). The agreement differed in one respect from the agreements notified here, it provided that if the distributor ceases to purchase petroleum products exclusively from Burmah that the distributor must purchase the equipment outright from Burmah according to an agreed schedule.

28. In granting a licence to the Loan Equipment Agreement under notification CA/901/92, (Decision No. 322), the Authority noted that the loan agreement “forms part of the exclusive distribution arrangements (Burmah has with its distributors) and, in some cases, it strengthens those arrangements. In the opinion of the Authority, the agreement contains provisions which offend against Section 4(1), as they effectively amount to an exclusive purchase arrangement.” The Authority concluded that the arrangements notified were entitled to a licence for the reasons set out in the Authority’s Category Licence for Exclusive Distribution Agreements, (Decision No.144).

29. In its submission noted above, the applicant refers to Decision 361, CA/37/92E and CA/38/92, Burmah Castrol (Ireland) Limited in support of its request for a certificate. In Decision No. 361, the Authority refused to issue a certificate or grant a licence to an equipment loan agreement and a hire purchase agreement relating to equipment used by the distributor for the lubricant market. As that decision concerns a different product market, the market for motor vehicle lubricants, the Authority does not consider it relevant for purposes of the agreements subject to this notification.

30. Section 4(1) of the Competition Act, 1991 states that “all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention restriction or distortion of competition in trade in goods or services in the State or in any part of the State are prohibited and void.”

31. Section 3(1) of the Competition Act, 1991 defines an undertaking as “a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.” Burmah and the distributors are persons engaged for gain in the supply and sale of petroleum products in the State and are undertakings. The agreements are agreements between undertakings. The agreements have effect within the State.

32. These notifications concerns two agreements between Burmah and a distributor for the loan of equipment for use by the respective distributors with motor diesel, gas oil and kerosene. The agreements are distinguishable from the agreement which was notified to the Authority by Burmah Decision No. 322, CA/901/92 (Burmah Castrol/Distributor Agreement (Loan Agreement)). The agreements notified here contain no provision preventing or penalising the distributor from dealing with a competitor of Burmah. Under the terms of these agreements, the distributor is free to deal with a competitor of Burmah but may not use the relevant equipment with any products other than those supplied by Burmah. Therefore, the agreement notified here is not ancillary to nor does it strengthen an exclusive distribution arrangement. In these circumstances, based on the analysis of the Authority in Decision No. 322, the agreement does not offend against Section 4(1) of the Competition Act.

33. Furthermore, the Authority has analysed the relevant product market and considered the likely competitive effects of exclusive vertical trading relationships in this market. The middle distillate market is clearly contestable at the level of supply with five substantial national competitors. Burmah itself has a very small share of the relevant market (less than 5%). The market for distribution is unconcentrated (with approximately 300 distributors identified) and has relatively low barriers to entry. In such a market, exclusive arrangements entered into by a firm such as Burmah with its distributors do not raise any competition concerns. Market foreclosure can not be taken as a realistic prospect to arise from such arrangements. The Authority recognises that in other markets, exclusive arrangements may raise complex competition concerns. For example, the Commission has found exclusive equipment arrangements to restrict competition in the impulse ice cream market (See Scholler Lebensmittel, OJL 183, 26 July 1993). In Scholler Lebensmittel, the Commission found that the supplier of the freezers had the largest market share in the relevant market, which was concentrated. The arrangements here are clearly distinguishable from such cases as the market and the firms subject to the arrangements here do not have the characteristics which would make an exclusive trading arrangement (whether it be distribution or purchase) restrictive of competition. Taking into account all the circumstances of the markets concerned, therefore, the Authority considers that the effect of the notified arrangements will not be to reduce competition and the notified agreements do not offend against Section 4(1).

27. In the Authority’s opinion Burmah and the distributors who are parties to the arrangements are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, as amended, and the notified agreements are agreements between undertakings. In the Authority’s opinion, the notified agreements do not prevent, restrict or distort competition and thus do not offend against Section 4(1) of the Competition Act.

The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the agreements between Burmah Castrol (Ireland) Limited and the distributors relating to the loan of equipment for use by the distributors with motor diesel, gas oil and kerosene notified under Section 7 of the Competition Act on 10 April 1996(Notification Nos. CA/14/96 and CA/15/96) does not contravene Section 4(1) of the Competition Act, 1991, as amended.

For the Competition Authority,

William Prasifka

Member

17 June 1998

[1] This market has been the subject of extensive study by the Authority in the course of dealing with the Statoil Conoco Merger referral as well as previous notifications such as INPC Ltd./Purchasers of Petroleum, (Decision No. 487) and a series of recent Decisions on a number of purchases by Statoil of distributors, (Decision Nos. - ). These latter Decisions contained a comprehensive summary of the Authority’s research on these markets and the analysis set out here below draws mainly on the summary contained those Decisions.

[2] Source: Oil Price Assessments Limited (OPAL): Description of the Oil Product Distribution Sector in European Countries (1996) (Volume 2 - Ireland) _ Study prepared for DGXVII of the Commission of the EC.

[3] Source: OPAL report

[4] Source: Dept. of Transport, Energy and Communications, quoted in OPAL report.

[5] Competition Authority: Irish National Petroleum Corporation Ltd/Purchasers of Petroleum, Decision No. 487, 2 June 1997.

[6] Source: Statoil/INPC

[7] Source: Statoil

[8] Source: OPAL report

[9] Source: OPAL report

[10] Source: OPAL report