Antitrust Law Daily Wrap Up, ANTITRUST NEWS: EC investigates DESFA acquisition of SOCAR, (Nov 6, 2014)

By Linda O’Brien, J.D., LL.M.

The European Commission (EC) announced yesterday that it has opened an in-depth investigation to assess whether the proposed acquisition of the Greek gas transmission system operator National Natural Gas System Operator S.A (DESFA) by State Oil Company of Azerbaijan Republic (SOCAR) is in line with the European Union (EU) Merger Regulation. The Commission was notified of the transaction on October 1, 2014.

SOCAR's activities include the production of natural gas and the upstream wholesale sale of gas in Greece in the context of the Southern Gas Corridor. DESFA owns and operates Greek's sole high-pressure gas transmission and Greece's only LNG terminal and mainly transports gas through its network. The Commission has concerns that the transaction may reduce competition on the upstream wholesale supply market for natural gas in Greece because it could allow the merged entity to hinder SOCAR's competitors in accessing the Greek gas transmission network. The EC aims to ensure that the sale of DESFA, part of the Greek government privatization program with a view to modernize the energy markets, does not result in competitive harm and ultimately higher gas prices for consumers in Greece.

SOCAR is wholly-owned by the Republic of Azerbaijan and is involved in exploring oil and gas fields; producing, processing, and transporting oil, gas, and gas condensate; marketing petroleum and petrochemical products in domestic and international markets; and supplying natural gas to industrial and residential customers in Azerbaijan.

DESFA was established in 2007 with the objective of operating, maintaining, managing, exploiting and developing the Hellenic gas transmission system. The activities of the company are overseen by a special law and subject to government supervision.

The Commission's initial market investigation indicated that the merged entity may have the ability and the incentive to hinder competing upstream gas suppliers from accessing the Greek transmission system, in order to reduce competition on the upstream wholesale gas market in Greece. The merged entity could restrict its competitors' access to the Greek gas transmission network by strategically limiting investments in future expansions of the import capacity including an expansion of the LNG Terminal and an interconnection between TAP and DESFA's network. In addition, the merged entity could restrict inflows of gas into Greece by managing the gas transmission network in a discriminatory way favoring SOCAR's supplies over its competitors.

The preliminary investigation also suggested that SOCAR may have the incentive to block competitors from access to the network, because it would be profitable for SOCAR. Moreover, the Greek regulatory framework would be unlikely to deter the merged entity from doing so. This could reduce the number of current and potential suppliers and the amount of natural gas in Greece and lead to higher gas prices for clients.

Companies: National Natural Gas System Operator S.A; State Oil Company of Azerbaijan Republic

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