REGULATORY - Competition Law/Russia: Russia Gives Go-Ahead to Rosneft’s Acquisition of TNK-BP

by King & Spalding

The Russian Federal Antimonopoly Service (“FAS”) has cleared Rosneft’s US$ 55 billion acquisition of TNK-BP, subject to divestments and conduct remedies. The deal will reduce the number of major oil companies in Russia from four to three and, arguably, will make Rosneft the world’s largest public oil and gas company engaged in the production of liquid hydrocarbons.

Third largest oil deal

The transaction allows Russian state energy company, Rosneft, to take control of TNK-BP, a joint venture between BP and AAR, a consortium of Russian billionaires. TNK-BP produces, refines, and sells oil in Russia and eastern Europe. This is the third-largest oil deal ever, and BP’s largest for some 13 years.

The transaction involves BP selling its 50 percent stake in the joint venture for a reported US$ 27 billion in return for cash and Rosneft shares. Post-transaction, BP will own a 12.84 percent interest in Rosneft. Rosneft pays US$ 28 billion to AAR for the remaining half of TNK-BP shares.

The acquisition represents an end of sorts to what has been a difficult cooperation between BP and AAR, with a history of wrangling between the shareholders on strategic issues. The Russian investors in TNK-BP have also challenged BP in court in the past, alleging that BP was required to conduct all of its new oil exploration in Russia directly through TNK-BP.

Clearance with commitments

The FAS apparently cleared the transaction in December last year, although the approval was not announced until 18 January 2013.

The clearance was expected, with public statements last October that FAS President Igor Artemyev would not block the transaction, chiefly because Rosneft’s domestic share of the oil market would not exceed 50 percent. Russian President Vladimir Putin also supported the deal.

The FAS cleared the transaction imposing divestment and behavioural commitments, including:

  • a prohibition on Rosneft from discriminating between its affiliates and unaffiliated third parties when:
    • selling diesel and petrol at the wholesale level; or
    • providing warehousing (storage) services for oil and gas products at Rosneft’s/ TNK-BP’s facilities if Rosneft has a dominant position in the relevant warehousing market in the relevant region;
  • an obligation on Rosneft to obtain FAS approval for its internal pricing and distribution regulations. Such regulations must be provided to the FAS for clearance within three months upon completion of the acquisition and must be based on the following key principles (this list not exhaustive):
    • an obligation to apply the same pricing mechanism in respect of all third parties;
    • the pricing mechanism must be disclosed to the public;
    • a prohibition on Rosneft from arbitrary refusal to supply third parties;
  • an obligation on Rosneft to sell at least 10 percent of certain products on public exchanges;
  • an obligation on Rosneft to maintain separate accounts for its retail and wholesale businesses and for the sale of different products;
  • an obligation on Rosneft to notify the FAS on completion of the acquisition within ten calendar days;
  • an obligation on Rosneft to sell petrol stations in regions where the transaction would increase its market share above 50 percent.

The stations have to be divested at auctions approximately within 14 months of completion of the acquisition. The FAS clearance suggests that Rosneft may retain all of its own petrol stations irrespective of their market share if such share remains unchanged after the transaction. The disposal requirement, arguably, will affect only the target’s petrol stations. The FAS has not given any indication or estimate of the number of petrol stations that Rosneft will be required to divest. Commentators have speculated that this may be relatively few, since the Russian petrol sector is broadly divided amongst the major suppliers including Lukoil and Gazprom.

The FAS’s use of the 50 percent market share threshold as a condition for divestments appears to be related to the legal threshold for dominance under Russian law. However, the FAS has not articulated how it believes that the merger would exacerbate any pre-existing market position to the detriment of competition. Up to now, the FAS has mostly imposed conduct remedies in merger cases. It will be interesting to see whether the 50 percent market share threshold influences its approach on disposals as the price for future merger clearance.

Ongoing considerations

The FAS’s approach in this case should be contrasted with its competition law scrutiny of the oil and gas sector in the past. Views from observers have been mixed as to the short-term and long-term implications of the FAS’s clearance and competition in the Russian oil and gas market in the future.

The FAS has previously raised concerns related to what it considers to be the oligopolistic structure of the industry. It has also launched investigations into pricing. For example, in November 2010 Rosneft withdrew an appeal against a fine of 5.3 billion roubles for abusing its dominant position in the wholesale petrol, diesel, and aviation fuel markets. The fine was 2.6 percent of Rosneft’s turnover in 2009. Gazprom has also been a target of competition investigations and has lost an appeal against a 6 billion rouble price fixing fine imposed by the FAS.

The transaction reduces the number of major players from four to three; a level of market concentration that traditionally invites further competition law inquiry. However, the FAS has not set out its case why the transaction worsens the status quo. The transaction further allows the Russian state to gain more influence over the world’s largest oil and gas industry. It remains to be seen how active the FAS will be in the sector with now only three major players – the post-merger Rosneft, Gazprom, and Lukoil.

Alexander Kudelin
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