Did BP, Shell, Statoil, And Others Fix Oil Prices And Behave Anti-Competitively?

Includes: BP, RDS.A, RDS.B, SPGI, STO, TOT
by: Werner Kranenburg

In re North Sea Brent Crude Oil Futures Litigation: Civil action addressing 'inaccurate' oil pricing continues in New York.

In legal proceedings, which may prove critical for both physical oil traders and traders in oil-related financial instruments, who should take note for their own possible action, the focus of attention has of last week firmly shifted to a federal trial court in Manhattan for now. The European Commission stating that "[e]ven small distortions of assessed prices may have a huge impact on the prices of crude oil..." concerns all involved and, besides governmental authorities, market participants have their role to play as well in ensuring the integrity of benchmarks and fairness of competition such as through the courts.

In August last year, a trading arm of French oil major Total SA (TOT) submitted a letter to the International Organization of Securities Commissions ("IOSCO") in which it says that "[s]ometimes the criteria imposed by [Price Reporting Agencies] do not assure an accurate representation of the market and consequently deform the real price levels paid at every level of the price chain..." It also speaks of the direct impact "inaccurate pricing" and "erroneous prices" have on the pricing of over-the-counter contracts and beyond. IOSCO, an assembly of financial markets regulators, published the letter in its final report on Principles for Oil Price Reporting Agencies in October 2012.

Then in May this year, it has been widely reported, three oil majors, namely BP PLC (BP), Royal Dutch Shell PLC (RDS.A, RDS.B) and Statoil ASA (STO), and McGraw Hill Financial Inc.'s (MHFI) Platts, which compiles and publishes Brent Crude oil prices, were the subjects of unannounced inspections, more commonly referred to as 'raids,' by the respective national competition authorities coordinated by the European Commission. As Statoil of Norway reported on the day of the visit, Norwegian "authorities suspect participation by several companies, including Statoil, in anti-competitive agreements and/or concerted practices contrary to [the European Economic Area free trade] Agreement."

Since then, the scope of the European investigations widened (Bloomberg), American authorities such as the Commodity Futures Trading Commission (which is a member of IOSCO), the Department of Justice and the Federal Trade Commission are reported to have taken an interest in the matter and lawsuits have been filed by private parties against the three oil majors in various US courts.

The European Commission's regulatory investigations and the US civil legal proceedings focus on two issues: concerns relating to price reporting and regarding potential violations of competition laws.

Following the raids, the European Commission ("EC") stated that the "Commission has concerns that the companies may have colluded in reporting distorted prices to a Price Reporting Agency to manipulate the published prices for a number of oil and biofuel products. Furthermore, the Commission has concerns that the companies may have prevented others from participating in the price assessment process, with a view to distorting published prices." (As Statoil puts it, "[t]he suspected violations are related to the Platts' Market-On-Close (MOC) price assessment process, used to report prices in particular for crude oil, refined oil products and biofuels, and may have been on-going since 2002.")

The first civil action was filed in New York in the week after the EC's inspections (Financial Times, court filing system), by Prime International Trading Ltd., a Chicago-based proprietary commodity trading company and member of various commodity exchanges. It was the first of several such filings, in New York and elsewhere, based on alleged violations of US federal commodity exchange and competition laws and common laws and the same facts regarding whether defendants conspired to fix, restrain trade in, and manipulate the prices of North Sea Brent Crude oil and Brent Crude oil futures contracts: "Defendants deliberately reported inaccurate, misleading and false information regarding Brent Crude oil prices to Platts... thereby undermin[ing] the entire pricing structure for the Brent Crude oil market."

Notwithstanding the final consumers and the potential harm done to them as Total and the EC point out, the outcome of these civil proceedings may be relevant to anyone trading from 2002 to the present, in North Sea Brent crude oil derivatives traded on the New York Mercantile Exchange ("NYMEX") and Intercontinental Exchange ("ICE"), regardless of characteristics such as the trader's citizenship or location. (Brent Crude oil futures contracts are traded on the NYMEX and on electronic boards of trade and exchanges, such as the ICE, which are accessible in the United States.) The legal remedies sought include restitution of any sums the oil majors received by unjust enrichment, for their alleged unlawful conduct to be adjudged to be in violation of US federal competition law and a measure to prevent such conduct from occurring again in future.

The latest development as of last week is that a judicial Panel ordered for all the relevant cases to be centralised in the federal trial court in Manhattan, the Southern District of New York. In its order, the Panel noted centralisation In re North Sea Brent Crude Oil Futures Litigation there will "promote the just and efficient conduct of the litigation" and cited the Manhattan locations of the NYMEX and that of Platts. It has not been established yet which private party will lead the centralised litigation.

So, did BP, Shell and Statoil and others fix oil prices and behave anti-competitively? They are suspected of doing so based on indications from several market participants which have led to the regulatory investigations into whether they did and allegations in legal proceedings they indeed have done so. The time for civil legal proceedings and investigations, alongside the regulatory initiatives, is now as well. These are cases to be followed by market participants concerned and for those seeking to become involved in the proceedings, who themselves may be located anywhere in the world, there is still time to be heard, exert influence in the conduct of the litigation and lead in this effort affecting the industry globally from the front.

Also read an Open Letter to Commodity Traders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.