Three of Europe’s biggest oil explorers are among companies being questioned by European antitrust regulators about potential manipulation of prices in the $3.4 trillion-a-year global crude market.
Royal Dutch Shell Plc, BP Plc, Statoil ASA and Platts, the oil-price data collector owned by McGraw Hill Financial Inc., said they’re being investigated after the European Commission conducted raids in three countries to ferret out evidence of collusion. Price fixing in energy markets has the potential to inflate production costs and consumer prices for everything from gasoline to airline tickets to cosmetics.
The probe, which extends to undisclosed crude-derived products and biofuels, underscores how pricing in some energy markets lacks the transparency of financial products such as stocks and U.S. corporate bonds. It also marks the third time global pricing benchmarks have drawn the regulators’ scrutiny in the past year following investigations into bank manipulation of the London interbank offered rate, or Libor, and ISDAFix, the benchmark for the $379 trillion swaps market.
“It is certainly the case that Libor drew attention to financial benchmarks in general and the question of how these agencies report prices,” Timothy McIver, an antitrust lawyer at the London office of Debevoise & Plimpton LLP, said in an e-mailed statement. “This is obviously the latest in a series of such investigations.”
Royal Bank of Scotland Group Plc, UBS AG, and Barclays Plc have been fined about $2.5 billion and other firms remain under investigation in connection with the Libor probes. The U.S. Commodity Futures Trading Commission is investigating allegations that brokers manipulated ISDAFix to inflate bank profits, Bloomberg reported April 8.
Statoil said the suspected violations relate to prices published by Platts.
Platts publishes benchmarks prices that are used to determine the costs refiners pay for crude oil and distributors pay for diesel fuel and gasoline. Traders report transactions to Platts. Those deals, rather than a complete record of all trades, are used to determine the price.
That contrasts with the New York Stock Exchange, where each change is visible to the public and U.S. corporate debt, where Trace, the reporting system of the Financial Industry Regulatory Authority, discloses full bond pricing information.
“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,” the executive arm of the EU said in its statement.
Statoil is taking the investigation “very seriously” and cooperating to the best of its ability, Chief Executive Officer Helge Lund said today in an interview in Harstad, Norway.
Lund said he’s been given “very limited” information about which products and markets are being investigated. It’s “important to underline that this is a suspicion, not a conclusion,” he said.
Total SA, Europe’s third-biggest oil company, estimates that as much as 80 percent of all crude and oil product transactions are linked to reference prices such as those published by Platts, while as much as 20 percent are linked to exchange-traded futures on Nymex and ICE. Platts prices represent as much as 95 percent of crude transactions, 90 percent of oil products and OTC derivative transactions, according to Total’s estimates.
The influence of price reporting agencies stretches beyond crude and oil products. The assessments published by Platts and its competitors including Argus Media Ltd. and Reed Business Information’s ICIS are used to price the raw materials used in everything from plastic bags to car parts in the $2.2 trillion global base chemical industry as well as coal, power, metals, emissions, liquefied natural gas and shipping rates.
Platts’s parent, McGraw Hill, and its Standard & Poor’s credit rating unit were sued by the U.S. Justice Department in February. The complaint alleged the company knowingly downplayed the risks on bonds and derivatives to gain more business from the investment banks that issued them between 2004 and 2007, before the debt markets froze and helped cause the worst financial crisis since the Great Depression. The companies have denied committing any fraud.
Platts said in March it would introduce a quality premium for Ekofisk and Oseberg crudes, two of the four grades that make up the Dated Brent marker used to price more than half the world’s oil. The changes were designed to boost trading liquidity and to take into account their superior quality over the other two grades, Forties and Brent, that make up Dated Brent, Platts said at the time. That came after Shell made adjustments to its trading contract.
Argus and ICIS joined Platts in publishing a self-regulatory code in April 2012 in response to concerns from the International Organization of Security Commissions that their prices were at risk of manipulation.
Price assessments could be vulnerable to manipulation because traders participate voluntarily, meaning they may selectively submit only trades that benefit their positions, according to an October report from Iosco, as the International Organization of Security Commissions is known. Total Oil Trading, an arm of the French oil company Total SA, said in a submission to the forum of global regulators that the published oil price is wrong “several times a year.”
“The actual mechanism of price discovery is suspicious to EU regulators even though I believe it works,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said in an e-mailed response to questions. The probe “sets the precedent for similar investigations.”
While traders of energy commodities such as crude, fuel oil and diesel are willing to be identified by the price reporting services, the companies buying and selling in less transparent markets such as polyethylene, coal, LNG and metals typically provide information on the understanding that their identities and those of their counterparties won’t be published.
Some commodities are not traded or reported every day so the price assessors rely on information such as feedstock costs to determine the price at which trades could take place.
Inspections were also carried out on the commission’s behalf by the EFTA Surveillance Authority in one European Economic Area member state, the Brussels-based commission said.
“The authorities suspect participation by several companies, including Statoil, in anti-competitive agreements and/or concerted practices,” Statoil said in a statement. “In addition, the inspection relates to potential abuse of possible dominant position by another party.”
The suspected violations are related to the Platts’ Market-On-Close price assessment process, used to report prices in particular for crude oil, refined oil products and biofuels, and may have been ongoing since 2002, Statoil said. Platts said the commission undertook a review at its premises in London yesterday and that it’s cooperating.
“It’s a bit like the oil industry version of Libor,” said Iain Reid, an analyst at Jefferies Group LLC in London. “But I’d be very surprised if it comes to anything. I can’t imagine that Shell or Statoil would deliberately be trying to rig the market.”
Oil companies have been the subject of the EU’s antitrust watchdog before. In September 2006, it fined 14 companies 266.7 million euros ($346 million) for fixing the price of bitumen, a petroleum byproduct used to make asphalt, over eight years on the Dutch market. Shell, whose fine was increased for being a repeat offender, received the biggest penalty.
Price-fixing probes haven’t been confined to European markets. BP agreed to pay $303 million in October 2007 to settle U.S. Commodity Futures Trading Commission allegations relating to claims of market manipulation. In January 2009 a BP unit, Houston-based BP America, agreed to pay $52 million to propane buyers who accused it of trying to monopolize the supply of gas flowing through a Texas pipeline.
In April 2012, Optiver Holding BV and three employees agreed to pay $14 million to settle market-manipulation allegations by U.S. regulators. The Dutch proprietary-trading firm used a high-frequency trading program called the “Hammer” in 2007 to affect the settlement prices of crude, heating oil and gasoline traded on the New York Mercantile Exchange. As part of the settlement, Optiver didn’t admit or deny wrongdoing.
Shell, Europe’s biggest oil company, said it’s “currently assisting” the commission in an inquiry into trading activities and that the company is cooperating, without giving further details.
“BP is one of the companies that is subject to an investigation that was announced earlier today by the European Commission,” Robert Wine, a spokesman, said in an e-mail yesterday. “We are cooperating fully with the investigation and unable to comment further at this time.”
Total declined to comment and Eni SpA couldn’t immediately be reached.
Exxon Mobil Corp.’s European offices haven’t been visited by regulators in relation to the inquiry, said Alan Jeffers, a spokesman for the Irving, Texas-based company. Exxon has oil and gas wells from Ireland to the Black Sea, and also refines crude into fuels and operates chemical plants and filling stations across the continent.
Chevron Corp. “has not been subject to any unannounced inspections by the European authorities” in connection with the investigation, Sally Jones, a London-based spokeswoman, said in an e-mailed statement. San Ramon, California-based Chevron, the world’s third-largest energy company by market value, operates oil and gas wells in the North Sea and is exploring shale formations in Poland, Romania, Lithuania and Bulgaria.
Other North American companies with operations in Europe that said they had not been contacted by investigators in the probe include Occidental Petroleum Corp., ConocoPhillips, Marathon Oil Corp. and Apache Corp. in the U.S., and Talisman Energy Inc. in Canada.