In this transaction INA and PPD jointly acquire indirect control (majority interest) over Petrokemija through a special purpose vehicle (SPV) Terra mineral fertiliser company (TMG).
Given the aggregate turnover worldwide and the EU dimension the proposed concentration was subject to obligatory notification to the European Commission.
The European Commission complied with the request of the participants to the concentration for case referral and transmitted the submission to the Croatian Competition Agency (CCA) as the best placed national competition authority to investigate the matter concerned.
The CCA decided to agree with the referral respecting the argument of the notifying party that in this concrete case the territory of the Republic of Croatia presents all the characteristics of a distinct market. The Commission informed the participants to the concentration about the referral of the case to the CCA at the end of July 2018. In that sense, the participants to the concentration were obliged to submit to the CCA the pre-notification of the concentration concerned within the meaning of the Croatian Competition Act and its ancillary provisions within a prescribed time period of 30 days.
The complete notification of the concentration was received by the CCA on 10 September 2018.
In the course of the investigation procedure the CCA found that the transaction involves joint investment of INA and PPD in the recapitalisation of Petrokemija through a SPV – TMG company, in which each of the founders (INA and PPD) holds a 50 per cent share. After the implementation of the proposed transaction TMG will hold a minimum 50 per cent plus one share in Petrokemija, thereby ensuring the notification parties to jointly confer indirect control over Petrokemija.
At the same time INA and PPD (through TMG) will not operate in the gas supply market to any big industrial customers – buyers of natural gas in the Republic of Croatia.
As acquirers and suppliers of Petrokemija INA and PPD are vertically integrated undertakings that are engaged in several activities in the energy sector. Apart from that, they are important gas suppliers both in the aggregate gas supply retail market and in the gas supply retail market for big industrial customers in the Republic of Croatia.
On the other hand, due to its characteristics the mineral fertiliser production market expands the national borders given the fact that there are also manufacturers from other Member States who compete in this market and who buy natural gas from different international suppliers.
Petrokemija is the biggest industrial gas buyer in Croatia. At the same time, this undertaking is the only Croatian manufacturer of mineral fertiliser that sells some 30 per cent of the produced volume in Croatia, whereas it exports the rest. There is no other fertiliser manufacturer that would be excluded from the market after the implementation of the concentration concerned.
Therefore, in this concrete case the proposed implementation of the vertical concentration internalises the existing relationship between the supplier and the buyer between the participants to the concentration.
In a broader sense, the gas market in the Republic of Croatia is liberalised and open and therefore there are no entry barriers. This is confirmed by the Croatian Energy Regulatory Agency (HERA) as the specific regulator in this sector that the CCA closely cooperated with in the course of the procedure in question. According to the data obtained from the HERA there are 54 gas suppliers that have been licensed to carry out the activities in the gas market.
The gas supply market is fragmented and dynamic. There are new competitors entering this market and there has been a significant number of buyers who have switched to other suppliers. This indicates that the market is still not mature, however, the effects of developing competition in this market is present.
In the narrow segment of the market in gas supply to big industrial buyers that are connected directly to the transmission system and that are substantial gas users from the point of volumes that they purchase, the suppliers of these buyers, taking into account the big purchase volumes that have to be agreed in advance so as to ensure the safety of gas supply to big buyers, in other words, considering the nature of the operation provided by this gas supply segment, must dispose of significant resources and maintain capacities to ensure supply to these buyers. However, neither in this segment of the market there are no significant regulatory or other entry barriers for undertakings that would have the necessary resources and capacities to ensure supply to big industrial buyers.
First, when an industrial buyer wants to be supplied with natural gas from a transmission system, it must be connected to the transmission system. The terms and the procedures are stipulated by the Network Code of the Transmission System, establishing the requirements for grid connection, energy approval for connection to the transmission system, minimum technical design and operational requirements for the connection to the system, connection agreement and construction of the grid connection.
In addition, the industrial buyer must conclude the Gas Supply Agreement with any gas transmission system operator (TSO) of its choice that has been validly licensed for discharging the gas supply activity. The TSO puts the grid connection into operation after the selected gas supplier has concluded the gas transmission agreement with the TSO.
The natural gas supply agreement identifies arrangements, under the market conditions, between the industrial buyer and the gas supplier about the dynamics (depending on the production process), deadlines (monthly, annual, multiannual contract) and necessary supply volumes, so as to enable the gas supplier to define the capacity at the grid connection of the industrial buyer concerned with the TSO. In order to be able to agree upon the capacity in the transmission system it is necessary for the selected gas supplier to register as the balance group leader (BGL) or to be a member of a balance group, in other words, it must conclude an agreement with one of the registered BGLs.
Taking everything said above into account it may be concluded that the observed narrow segment market is more concentrated than the overall gas supply market in Croatia. The HERA confirms the presence of a total of 10 competing undertakings in this narrower segment of the market, increased by one more operator in 2017 compared with 2016.
The market shares held by INA and PPD in the relevant market – gas supply to big industrial buyers show a falling trend from 2015 to 2017. In 2017 INA and PPD held each an individual market share under 30 per cent. Their joint market share was [50-60] per cent. The analysed data correspond to the data submitted by the HERA. The HERA confirms that there are no formal barriers for other gar suppliers to take over the gas supply to big industrial buyers that are directly connected to the transmission system from the existing suppliers of these buyers.
Due to the specific features of the gas supply market the decisive factor for industrial buyers when they choose the gas supplier is not loyalty but the price of the delivered gas.
Under the Gas Market Act and the General terms for gas supply the end users in the distribution system may change the gas supplier without any extra charges.
The exit of Petrokemija from the market due to the long lasting financial difficulties of this company lead to the withdrawal from the market of this important fertiliser manufacturer and user of natural gas in Croatia, which could finally have adverse effects on consumers due to the likely increase in the price of agricultural products and potential rise in the price of gas attributable to the increase in transportation tariffs that directly affect the final price of gas (as a result of the decrease in the total volumes of gas traded in the market).
Therefore it can be reasonably assumed that the capital injection in Petrokemija would lower the price of products, improve production, shorten the trading and/or distribution and enhance the performance of Petrokemija.
In the assessment of possible effects of the implementation of the concentration concerned the CCA took into account the economic analysis of potential effects of the concentration worked out by KPMG. The CCA concluded that the implementation of the concentration will not limit supply, in other words, it will not lead to the risk of vertical restriction in natural gas supply in Croatia. This was also confirmed by the finding of the HERA indicating the presence of other competitors in the market concerned and the absence of any formal barriers for other suppliers to take over the gas supply for big industrial buyers that are directly connected to the transmission system from the existing suppliers of these buyers.
There are no indicators that the concentration concerned would limit demand given the fact that in 2017 there was a total of 20 big industrial buyers that are directly connected to the transmission system. The market in gas supply to big industrial buyers rose in 2017 by 25 per cent whereas the purchase of gas by Petrokemija made some 20 per cent in the total consumption of natural gas in Croatia in 2017.
Taking everything into account it can be concluded that by the implementation of the concentration concerned the structure of all relevant markets will remain de facto the same, in other words, by the implementation of the concentration the market position and the market shares of INA and PPD will not change in the gas supply markets in Croatia. They will continue to operate independently as competitors and will be encouraged to supply with gas other industrial buyers as they used to do it before the implementation of the concentration concerned.
In the downstream market in fertiliser manufacturing there will also be no structural changes. This due to the fact that Petrokemija has no competitors in fertiliser production in Croatia, meaning that there is no competitor to Petrokemija that would be denied gas supply by INA and PPD. Petrokemija with its products will continue to participate in the international fertiliser production market.
INA and PPD replied that they intended to continue the trading with Petrokemija under market conditions and that Petrokemija would continue to publish invitation to tender for the supply of natural gas. All interested third parties – natural gas suppliers could take part in the competitive bidding.
Nor replies to the request for information that was published on the web site of the CCA with respect to the concentration concerned and its possible effects on competition have been received.
In adopting its decision the CCA concluded that the concentration concerned will not have any anticompetitive effects given the fact that its implementation will not create or strengthen a dominant position of the participants to the concentration in the relevant market.