PRESS RELEASE

FUEL DISTRIBUTION: ANTITRUST, A PUSH FOR PRICE REDUCTIONS AND A NEW COMPETITIVE BALANCE FROM MORE THAN 2,000 WHITE PUMPS AND 82 OMD SALES POINTS

Prices as much as 13 euro-cents per liter lower than those of the oil companies. Oligopolistic structure is breaking up, continue with reforms to prime new competitive pressures.

Over 2000 'white' pumps and 82 sales points for Organized Mass Distribution (OMD): these are the main players in a new phase that the automotive fuel distribution network is going through, with prices as much as 13 euro-cents per liter lower than the stations run by oil companies where competitive pressures are having their greatest impact. This is the main conclusion of the Antitrust's fact-finding study, which took a snapshot of this sector’s structure and asks the legislature for additional legal interventions in order to bolster the potential of new entrants with the capacity to 'break up' the oligopolistic structure of the fuel market.

THE NUMBERS

The investigation, which began in March 2011, provides fresh figures for the sector. The oil companies' sales points continue to enjoy the lion's share: 22 thousand sales points, versus just over 2000 independent operators and 82 OMDs (see table 1, attached). The classification is inverted for the average amount supplied per station: 7.2 million liters by OMD, 1.6 by the white pumps, 1.4 for the 'colored' stations (i.e., those of the oil companies).

In specific, in regard to the estimated figures for the number of independent no-logo stations (white pumps) located on national territory, the total number of white pumps (non OMD) in Italy as of 31^st December 2010 was somewhere between 2,356 and 2,065 units, with a bias towards the lower limit of this interval.

The study drew upon three distinct information sources to determine this figure: i) collaboration with the Guardia di Finanza (Italian Tax Police), who used tax data bases to identify 2,719 initial sales points that could be qualified as non-colored stations located on the territory; ii) the responses to information requests that were distributed to independent operators, resulting in the identification of 755 no-logo stations; iii) the responses to information requests that were sent out to OMD enterprises, resulting in the identification of 82 stations.

The analysis of prices applied at the pumps over the course of roughly two years, for 2010 and 2011 (figures 1 and 2, attached), revealed that OMD stations apply lower prices than independent operators (white pumps), and therefore certainly lower than the colored stations of the oil companies as well. In absolute terms, the OMDs applied prices that ranged from 9 to 13 euro-cents lower than the colored stations, and 1.5 to 5 euro-cents lower than "white" stations.

The effect of the new competitive pressures, however, was not uniform for prices at the territorial level. Broken down by macro-zone (Northeast, Northwest, Center, South), regardless of the type of operator, the South always exhibited the highest prices, the Northeast and Northwest had the lowest prices, and the Center fell in the middle.

More specifically, the lowest prices applied by OMD and independently-managed no-logo stations were found in the Northeast. In the South, alternatively, the prices of no-logo stations were not much different than the 'colored' oil company stations, and it was the OMDs, although in meager numbers, who supplied the scanty level of competition for the independently-managed white pumps. In the Center and Northwest, however, the OMDs showed a closer alignment with the price policies of the independents.

At the territorial level, the differential impact on the prices applied by new entrants (white pumps and OMDs) was associated with structural differences.

THE WHITE PUMPS

IN THE SOUTH, in absolute terms, while over 40% of the all-white pumps in Italy are concentrated, the owners of these stations are typically large-sized operators, who often run stations that have agreements with the primary oil companies as well as "white" stations (aka "mixed" operators), and who in many cases also have “co-branding” stations with the oil companies (gas and diesel sold under a brand name, and LPG sold as "white"). These types of stations are not very efficient where little self-service and non-oil services are provided, and the average amount supplied is very low. These characteristics provide a partial explanation for the prices applied by white pumps in the South, prices which are similar to those applied in the colored networks.

IN THE NORTHEAST the operators are average in size (no more than twenty stations) with highly evolved sales points, with self-service and non-oil services being much more commonplace than in the rest of Italy. This enables them to take full advantage of their competitive leverage, with a high average amount supplied - much higher than for the colored sales points with their particularly aggressive pricing strategies.

IN THE NORTHWEST the network of independent operators is comparable to the Northeast in terms of the development of both self-service and non-oil services, not to mention the pricing strategies being practiced, but their territorial penetration is more limited and the efficiency of the stations is no greater than that of the oil companies network.

IN CENTRAL ITALY the white pumps exhibit average levels of development and efficiency (diffusion of self-service and amounts supplied) more similar to that of white pumps in the Northeast, but experience much less competitive pressure that is more similar to that exerted by no-logo stations in the South.

THE ROLE OF OMD

OMD accounted for 82 stations at the beginning of 2011 - active operators with 10 or more sales points are found in all four macro-regions. The networks of the two largest operators are concentrated in the Northwest, however, where around 45% of the Auchan stations are found and nearly three fourths of the Carrefour sales points. About 40% of the Conad network, on the other hand, is concentrated in the South. A high percentage of stations, however, display the brands of vertically-integrated oil companies alongside the OMD's own company brand.

The pricing at OMD stations is more aggressive (and difficult to replicate) at sales points that only display the brand of the mass distribution operator. The pricing applied by OMD stations engaged in co-branding, alternatively, tends to be less aggressive, which is why vertically-integrated competitors in the context of local markets are able to react to the strategies of this type of OMD stations by coming into alignment with their prices (the average differential is only about -0.16 cents), while the white pumps are capable of applying prices that average 2 euro-cents per liter lower than the OMDs. Generally speaking, therefore, co-branding is associated with less aggressive pricing policies, thus allowing their competitors, including 'colored' ones, to align themselves with the commercial strategies of the OMD operators in the local consumer zones where the latter are active.

THE VERTICALLY-INTEGRATED OIL COMPANIES

The study reveals that 'traditional,' vertically-integrated companies (from refinery to distribution) show strong behavioral similarities in terms of price setting for the network channel (the average range of monthly price variations for the various companies remains under 2%). The prices for automotive fuel sales through non-network channels (exports, outside of the network, supply to other oil companies), on the contrary, have shown less convergent trends. This reflects the highly heterogeneous endowment of refining facilities and logistical infrastructures (which now finds some oil companies opting out of the refinement phase). The study also reveals the strong role played by sales between oil companies for purposes of resupplying their respective networks (aka supply or stock transfer channels), with some enterprises in the system functioning as net sellers and others as net buyers.

Still at the outset of 2011, therefore, what we find is an oligopolistic field of interaction among integrated operators, in which the most efficient players (Eni and Esso, above all) were not pushing competition to the levels that would have clearly distinguished them from their competitors and threatened to force them out of the market.

In 2011, the market presence of the seven oil companies operating in national fuel distribution still seemed to be well aligned in the form of virtually undifferentiated behaviors, and a scenario of this nature clearly has collusive connotations that could, in theory, manifest a form of coordination among the vertically-integrated operators. During the course of this investigation, however, no evidence was acquired in support of such coordination.

THE ROLE OF THE PLATTS INDEX

The study examined the use of the Platts index for finished product quotations as a point of reference for determining the final fuel prices. It was learned that this phenomenon is not unique to our country. An information request distributed to the main national competition Authorities of the EU Member States revealed that most European countries use this international quotation as the reference price that forms the foundation for articulating all of the different prices applied in the wholesale and retail markets.

The study also revealed the absence of any sufficient grounds to suggest that Platts plays an active role as a vehicle for concertation between vertically-integrated national operators. Platts quotations, among other things, do not appear to differ very much from the market values furnished by other competitors whose work is to provide information on the quotations for finished oil products (Argus). This does not, however, rule out the possibility of a more general problem associated with the possibility that the provision of quotations, whether provided by Platts or other journalistic agencies, could be vulnerable to potential manipulation, to the extent that the prices reported by market operators and used by the agencies to formulate such quotations are not fully reliable. On this point, however, it can be observed how the IOSCO (the International Organization of Securities Commissions), based on the results of an industry-wide study, has specified operator guidelines designed to improve the reliability of the quotations being supplied to the market.

THE DISCONTINUITY OF LIBERALIZATIONS

The study acknowledges the discontinuity introduced by the liberalization process (especially the elimination of any type of entry barrier), which was begun in the past and then revitalized in early 2012, in the sense that the increased number of non-integrated subjects in the market has broken down the oligopolistic structure. The same investigatory proceeding, which was concluded by the Antitrust in 2007, had a positive role in the same direction, because of how the commitments undertaken by the companies provided, among other things, to: i) initiate price reduction strategies in the self-service refueling modalities; ii) launch initiatives designed for the entry of OMD. The heavy discounting strategy, as launched by the market's leading operator last summer, also triggered a series of price reactions by other market actors and seems to denote a shift towards more competition in the interactions within the industry.

If initiatives of this nature were to occur again (in accordance with antitrust laws, naturally), the likely winners would be the large refiners with effective downstream integration with distribution (Eni and Esso), the more dynamic white operators and the OMD stations with their own brand. Market shares would be lost, on the other hand, by the operators who hold the five remaining nationwide distribution networks but with an insufficient presence or outright absence in refinement/logistics.

WHAT REMAINS TO DO

In the short term, we could still witness a profound restructuring of the entire industry, with some operators falling behind (or even exiting the market) and others growing stronger. To support competitive dynamics and reach an equilibrium that features numerous operators who provide fuel distribution within an effectively competitive setting and no longer merely an oligopolistic interaction, it is necessary to keep moving ahead with the reform process. In particular, it is necessary to:

- develop a larger number of efficient independent operators, exporting the “Northeast model” to other areas of the Country (most of all the South) where independents do not yet manifest an effective stimulus for competition;

- encourage the development of OMD stations (which are still too few in number and almost absent in certain geographical zones) by favoring the own-brand sales method over the so-called co-branding model;

- incentivize evolution towards the more efficient direction of colored networks whose logistical or refinement infrastructures are not uniform across national territory - for instance, by drawing on regionalization processes to free them as much as possible from resorting to sales between competitors (the so-called supply channel);

- establish an institutional data base that collects and publicizes the prices being applied by individual stations across the entire national territory, so as to heighten consumer awareness of the diversified pricing within their own local markets of reference

- exploit the future establishment of an oil logistics market and a wholesale market for liquid petroleum products for motor vehicles in order to create more space for the development of "pure" white pumps, improve the supply conditions for independent operators, facilitate the development of strong operators operating on a regional or multi-regional basis. Access to organized logistics and product markets would surely be supported by the creation of purchase groups made up of small-sized operators. Such operators could join forces to increase their wholesale purchasing capacity for fuels and storage services and their transport.

- introduce measures to encourage the entry of independent operators in the logistics sector to improve the economic conditions for accessing storage services and to maintain an adequate degree of liquidity in the wholesale market that will be instituted for oil products. The fact-finding study in fact revealed how the adequate availability of logistical structures and/or the presence of independent operators in this link of the supply chain could have a decisive influence on the degree of competitiveness in the downstream markets for fuel distribution. To ensure the development of the "Northeast model" larger numbers of independent operators in the South, where such operators do not currently engender an effective competitive constraint, it appears necessary to identify measures aimed at "exporting" the logistical conditions found in the Northeast to Southern zones of the country. This would entail the adoption of new measures designed to encourage independent operators to enter the logistics field, a link in the supply chain that, in the South, is controlled exclusively by vertically-integrated oil companies. In this field, one could hypothesize, for instance, that these vertically-integrated operators could cede a subgroup of the storage depots to companies who do not operate downstream in the fuel distribution networks. To be more specific, the cession could be applied to the refinery infrastructures affected by restructuring processes (widely publicized of late) that envisage reconversion into deposits for storage. Several of the refineries owned by vertically-integrated companies could be transformed into primary deposits as a way of broadening the availability of such facilities for ownership by independent operators in those very parts of the Country where they are currently absent or sparse.

Rome – 28^th December 2012

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