Don't rig the market: competition law and the oil and gas industry

Recent news that Tidewater has until 27 January 2017 to conclude its discussions with lenders and key stakeholders about amending its various debt arrangements is a further example of the impact that the changing energy, oil and gas landscape a having on companies within this sector and the steps companies are taking to mitigate losses, write Anthony Woolich, Partner, and Jeremy Kelly, Associate, at Holman Fenwick Willan's London office.

Trump’s shock accession as the next US President and the decision earlier in 2016 for the UK to leave Europe means that 2017 looks set to bring yet more challenges for companies within the sector.

The recent merger of General Electric’s oil and gas business with Baker Hughes was the latest in a string of oil and gas mergers in the latter half of 2016, placing a spotlight on oil and gas companies attempting to avoid bankruptcy and preserve market stability by restructuring, consolidating or creating joint ventures. Indeed, these  types of corporate collaborations are on the rise.

Well publicised reports about various companies' efforts to delay a bankruptcy decision are emblematic of difficulties that players in the oil and gas industry are facing. With no imminent rise in global oil prices forecast further structural changes, for example consolidations or the creation of joint ventures, are likely. Market participants and competition authorities will want to ensure that the market response complies with competition law. 

A key pillar of competition law is the rules against cartels. Competition law takes a 'sink or swim' approach to companies that are operating in difficult market conditions - just as companies are prohibited from sharing benefits in good times, they are prohibited from collectively mitigating losses in bad times. 

For example, agreements between OSV competitors to share layup or scrappage costs are unlikely to be acceptable, even if they help to remove structural overcapacity. The European Commission previously opened an investigation into a scheme involving European feeder vessel owners who had agreed jointly to cover the costs of removing vessels from service (the investigation was closed following the abandonment of the scheme).

State aid rules in the EEA also limit the ability of EEA member states to provide targeted financial assistance to companies in financial difficulties. Temporary recourse to state support is therefore unlikely to be a viable option for a large number of industry players.

Whilst companies facing difficulties will continue to pursue restructuring opportunities, consolidation and joint ventures or pools might be considered an attractive option for companies looking to preserve market stability. 

Companies looking to consolidate will need to take advice on whether they would be required to make merger control filings at the earliest possible opportunity. In many jurisdictions merger control filings are mandatory provided that certain defined thresholds are met, and transactions cannot be completed until clearances have been granted. 

Given that many oil and gas companies operate globally and therefore may be required to make multiple filings, the process of obtaining merger control clearances has the ability to delay deals which may need to be completed as soon as possible in the current climate. Some competition authorities, including the European Commission, occasionally grant derogations - allowing for deals to be completed before approval is given – if one of the merging parties is about to exit the market. However, derogations are rarely granted and strict conditions are usually attached.  Establishing that one of the parties is failing may facilitate obtaining clearance, especially if there is no alternative purchaser.

Joint venture arrangements are often subject to merger control rules, and therefore may require regulatory clearances. Under EU merger control rules 'full function' joint ventures will require clearance if the thresholds set out in the EU merger regulations are met. Such 'full function' joint ventures would perform, on a lasting basis, all the functions of an autonomous economic entity (for example, because it will have its own dedicated day-to-day management team, and access to key resources such as finance, staff and assets). Joint ventures and pools that are not 'full-function' will still be subject to anti-cartel rules.

In uncertain times companies need to plan ahead, and making sure plans are compliant with competition law must be a key consideration.