A Closer Look At The Turkish Competition Authority's Recent Report On The Fuel Sector

In January 2024, the Turkish Competition Authority shared a comprehensive report (available only in Turkish for now) on the fuel sector, specifically focusing on automotive fuels, which form a significant part of the market due to their consumption share compared to other fuel types. The sector analysis, excluding liquefied petroleum gas (LPG) produced during the distillation of crude oil at refineries, is detailed over seven main chapters:

1. Introduction and Methodology: This section outlines the scope of the study and the methodologies used, including literature reviews and market structure analyses.
2. Global and National Oil Markets: The report examines the global oil market to contextualize the Turkish oil market. It discusses global oil production and demand, factors influencing crude oil prices, benchmark pricing, and refining activities. Subsequently, it presents an overview of Turkey's oil market, including domestic production, consumption, imports, exports, and market size, as well as historical market changes, privatization processes, and pricing systems.
3. Legal Framework and Market Structure: This chapter reviews the basic legal regulations concerning refinery, distribution, storage, and dealership licenses, which are pivotal for understanding market competition. It also provides information about the main distributors and their market shares and discusses historical instances of illegal activities in the market. Furthermore, the chapter covers pricing regulations and public disclosures by the Energy Market Regulatory Authority (EPDK).
4. Past Decisions and Reports: Insights from previous Council decisions, the 2008 Fuel Sector Report by the Authority, and various opinion pieces issued by the Institution are compiled in this chapter.
5. OECD Roundtable and Competition Law Discussions: Findings from the 2013 OECD roundtable on fuel market dynamics and related competition law discussions are shared. This section also explores problems and proposed solutions in selected countries, drawing on information from national competition authorities and various reports.
6. Competition Analysis in the Turkish Fuel Sector: An in-depth competition analysis in the Turkish fuel sector is presented, assessing the competitive conditions and pricing structures in each activity area. This chapter also offers alternative solutions to identified market issues.
7. Conclusion and Recommendations: The final chapter summarizes the key findings from the competition analysis and proposes comprehensive recommendations to foster a competitive market structure.

In this article, we unfortunately are not able to provide a comprehensive summary of the extensive 560-page report including the above-mentioned 7 main chapters regarding the fuel sector. However, we highlight key points that we believe are of significant interest, presented in a concise format below. We hope that this overview proves to be informative and beneficial for stakeholders in the sector and those interested in the topic.

General Information on the Oil Market

Under this heading , the report provides an overview of the oil industry, which is characterized by a multi-stage structure. The industry is divided into two main activity groups:

• Upstream Operations: This includes oil exploration, development, extraction, transportation, and crude oil sales. These activities form the initial phase of the oil market, focusing on the discovery and procurement of crude oil from natural reserves.
• Downstream Operations: These involve refining, primary transportation, storage of refined products, wholesale operations, secondary transportation, and retail sales at service stations. This phase converts crude oil into marketable products and includes further distribution and sales.

This vertical classification of the oil market, while based on the separation between crude oil and final products, highlights that the demand for crude oil is fundamentally driven by the need for final petroleum products. Refining activities are essential for producing these final products, maintaining a traditional "raw material-final product" relationship. However, at lower levels of the market, activities such as storage, transportation, and retail of final products do not create new value in the production process but are instead considered as "service" activities under the category of "resale".

Crude oil generally forms from the decomposition of long-deceased plant and animal remains in sedimentary layers under oxygen-free conditions, transformed under specific pressure and temperature conditions. Crude oil, a hydrocarbon mixture, undergoes several physical and chemical processes to be converted into fuel. Crude oil, referred to commercially as liquid petroleum, is distinguished from refined petroleum and is the most commercially significant type of oil.

The fuel products examined in this sector analysis refer to types of fuels derived from petroleum. Traditionally, fuel types are categorized into two main groups: black products and white products. White products, which include gasoline, diesel, kerosene, and jet fuel, are primarily used in motor vehicles, whereas black products such as fuel oil, heating oil, and asphalt types are used for heating and insulation purposes.

Focusing on gasoline and diesel, the primary subjects of this sector analysis, it is noted that these products are largely homogeneous and not prone to innovation. This characteristic of fuel homogeneity has also been emphasized in OECD reports published in 2008 and 2013.

Competition Board Practices and Opinions in the Fuel Market

The fuel market is among the earliest sectors to engage with competition law practices in Turkey, as per the report. Over the years, various competitive concerns have been noted, and the issues surrounding this market have consumed a significant portion of the Institution's efforts.

Decision on 21.10.2005 (Privatization)

Case: Permission for the privatization of a 51% share in TÜPRAŞ held by the Privatization Administration through block sale.

Findings and Assessment: TÜPRAŞ, holding a 70.1% market share in all fuel products considering imports and exports, is seen as dominant in the refinery market. The assessment examined the implications of Koç-Shell partnership and how Koç Group's activities in LPG imports and fuel product distribution might affect the market. It was determined that the merger of TÜPRAŞ and OPET would not significantly lessen competition in the supply of fuel products due to Turkey's geographic advantage and the absence of legal barriers to petroleum product imports.

Decision on 24.07.2008 (Preliminary Investigation)

Case: Investigation into whether the pricing of fuel products violated Articles 4 and 6 of Law No. 4054.

Findings and Assessment: Concerns were raised about whether the pricing practices of TÜPRAŞ and major distribution companies were compliant with competition laws. It was decided that a preliminary investigation was necessary, especially considering the potential non-compliance with Articles 4 and 6 regarding pricing behaviors in refining and distribution stages.

Detailed Sector Analysis (2008 Fuel Sector Report)

This report addresses issues such as the lack of free pricing and competitive pricing, which were intended to be established by Law No. 5015 but were hampered by structural issues stemming from vertical commercial relationships and legal regulations, as well as pricing practices.

The primary focus of the 2008 Fuel Sector Report has been the effects of exclusive contracts between distributors and dealers on the market, alongside various preliminary investigations and inquiries into the pricing behaviors of enterprises at different stages of the fuel sector.

Decision on 24.07.2008 (Preliminary Investigation)

Case: The investigation was initiated to determine if the pricing of fuel products by major companies like TÜPRAŞ, POAŞ, SHELL, BP, OPET, and TOTAL violated Articles 4 and 6 of Law No. 4054. The review was based on the allegations presented in the 2008 Fuel Sector Report and submissions from EPDK and the Consumers' Union, which highlighted concerns about the potential cartelization among distributors and uniform pricing across different regions.

Findings and Assessment: There were significant concerns about whether the structural issues beyond the pricing mechanisms led to violations of the competition law, particularly in how refinery exit prices set by TÜPRAŞ and pricing practices at the distribution and retail stages influenced the market.

TÜPRAŞ's dominant position in the refining market was reinforced, and with no legal barriers to the import of petroleum products, their market power was increasing. The assessment pointed out that the competitive pricing required the refining market to be more competitive and the removal of barriers to imports and new refinancing investments.

Despite the liberalization intended by Law No. 5015, the regulation process continued to some extent. Post OFM (Oil Fund Mechanism), TÜPRAŞ's pricing still took international benchmarks into account, showing differences in pricing dates which suggested a continuation of some form of regulated pricing system.

There was a high degree of price synchronization among the companies, attributed partly to the transparent market structure, which facilitated access to competitors' pricing information. This transparency led to pricing practices that often mirrored each other closely, sometimes without the necessary competitive intent.

The investigation also noted that promotional activities had intensified with market liberalization, suggesting that competition was not merely about pricing but also about sales strategies.

The inquiry concluded that while there was no sufficient evidence to proceed with a formal investigation into violations of Law No. 4054, the competitive structure of the market was not satisfactory. The report highlighted the need to address structural impediments to ensure a more competitive market environment.

It was recommended that the EPDK use its regulatory powers to adjust and address the pricing mechanisms and other structural issues to foster a genuinely competitive market for fuel products in Turkey.

This decision underscores the complexity of assessing competition in a market heavily influenced by both regulatory practices and dominant market players. It points to the necessity of continual regulatory oversight and adjustment to ensure market practices align with the principles of competitive fairness and transparency.

Decision on 04.07.2012 (Preliminary Investigation)

Case: The focus was on determining if enterprises in the fuel distribution sector were violating Article 4 of Law No. 4054 through parallel pricing and information exchange. The companies involved included PETDER, POAŞ, SHELL, OPET, BP, TOTAL, LUKOIL, ALPET, MİLAN, AYTEMİZ, TP, TERMOPET, KADOIL, Starpet Garzan Akaryakıt Dağıtım Pazarlama A.Ş., and Turkuaz Petrol Ürünleri A.Ş.

Findings and Assessment: The investigation observed that the pricing behaviors of TÜPRAŞ and distribution companies showed significant parallelism. Despite differences in stock costs, prices adjusted in close coordination with changes initiated by TÜPRAŞ. The fuel market's mature and transparent nature, which includes easy access to pricing information, facilitated parallel behaviors among companies. It was found that distribution companies developed predictive pricing models that utilized Platts CIF MED prices and exchange rates, allowing them to anticipate each other's pricing actions effectively. Distribution companies employed personnel to gather daily pricing information from competitor stations, which was then systematically reported. This practice contributed to the high level of market transparency. In addition, the participation of companies in PETDER's meetings and the exchange of information within these settings were noted. These activities might have fostered an environment of conscious parallelism rather than explicit collusion.

The Competition Board determined that the evidence was insufficient to conclusively demonstrate that the parallel pricing behavior resulted from explicit collusion or coordinated actions prohibited under Article 4. Instead, the behaviors observed were likely a result of conscious parallelism enabled by the transparent and oligopolistic market structure. Therefore, no formal investigation was initiated.

This decision underscores the complexities involved in distinguishing between collusive behaviors and independent actions that lead to similar outcomes in a transparent market context.

Decision on 17.01.2014 (Investigation)

Case: Examination of whether TÜPRAŞ's practices such as excessive pricing, refusal to sell, and tying violate Article 6 of Law No. 4054 and whether market sharing between TÜPRAŞ and OPET violates Article 4.

Findings and Assessment: TÜPRAŞ was found to abuse its dominant position through various exclusionary and exploitative practices, resulting in a significant administrative fine. The investigation into potential coordinated practices between TÜPRAŞ and OPET regarding market sharing did not yield sufficient evidence to prove a violation.

Decision on 11.10.2018 (Preliminary Investigation)

Case: Examination of practices by AYTEMİZ, LUKOIL, and TP towards their dealers, potentially violating Article 4 of Law No. 4054.

Findings and Assessment: The investigation did not find concrete evidence that these companies manipulated the resale prices at the dealer level. It was determined that there was no sufficient basis to initiate a formal investigation, as the suggested (ceiling) sales prices set by these companies were not mandatory, and the dealers were found to have the freedom to set lower prices independently.

Decision on 09.01.2020 (Investigation)

Case: Allegation that stations in Burdur were colluding to increase the prices of autogas LPG and other fuel products.

Findings and Assessment: Sensitive competitive information was shared among the parties, and they were found to have agreed on not offering discounts below the recommended price, constituting a violation of Article 4 of Law No. 4054. Consequently, the parties were fined a percentage of their annual gross revenues for restricting competition.

Decision on 12.03.2020 (Investigation)

Case: Investigation into whether BP, OPET, POAŞ, SHELL and TOTAL's practices towards their dealers violated Article 4 of Law No. 4054.

Findings and Assessment: There was evidence that these companies were interfering with the resale prices set by their dealers, particularly influencing the prices of gasoline, diesel, and autogas LPG. The investigation concluded that these practices constituted a violation of Article 4, and substantial fines were imposed on the companies involved. Appeals were made against this decision, and while most were rejected by higher courts, the decision regarding OPET was overturned by the Ankara 7th Administrative Court, citing insufficient evidence that OPET directly influenced dealer pricing.

As an important side note, OPET annuled the decision above, against the previous ruling on price fixing with dealers. The Ankara 7th Administrative Court annulled the decision of the Competition Board against OPET, stating that there was not enough conclusive evidence to prove that OPET had a significant influence over its dealers' pricing strategies. The court noted that the resale prices set by the dealers were not necessarily dictated by OPET, and the nature of the recommended prices did not forcefully prevent sales below those recommendations.

Key Observations and Assessments from the Fuel Sector Analysis:

Market Structure and Price Formation:

• The market stages of the value chain vary widely, from global to national, regional, and local markets, each with distinct supply and demand characteristics.
• Crude oil is a globally traded commodity impacting retail fuel prices. However, retail price volatility is also influenced by several other variables along the supply chain, affecting competitive conditions at each stage.

International Benchmark Prices:

• International benchmarks or quotations for refined products are key references for refinery gate prices of fuels like gasoline and diesel. Exchange rates also significantly impact retail fuel prices.
• Factors such as increased demand, reduced refining capacity, or production cutbacks generally push prices upward.

Responses to Price Changes:

• Price changes at one level of the product chain do not instantly elicit responses at other levels; rather, responses are typically delayed. While short-term changes in crude oil prices may vary from refined product prices, a close correlation is observed over the long term.

Import Parity Pricing (IPP):

• When no barriers to imports exist, refinery gate prices for fuels are largely determined by international reference prices plus additional costs like transport, insurance, and terminal handling fees. This pricing model, referred to as Import Parity Pricing (IPP), illustrates the competitive pressure imports can exert on local refineries.

Refinery and Retail Price Dynamics:

• Although refinery gate prices generally follow the IPP formula, actual prices are subject to agreements between buyers and local refineries, emphasizing the importance of bargaining power and availability of alternative supply sources.

Market Transparency and Coordination Challenges:

• High market transparency and the homogeneous nature of the product facilitate price monitoring and response among competitors, contributing to similar pricing without explicit agreements.
• Regulatory and competitive dynamics at the retail level are influenced by proximity to refineries or storage facilities, reducing transport costs and affecting pricing strategies.

Retail Market Composition:

• Retail markets consist of vertically integrated oil companies, independent retailers, and supermarkets, with supermarkets often exerting competitive pressure through aggressive pricing due to their ability to purchase fuel at lower wholesale prices.

Consumer Price Sensitivity and Market Entry Barriers:

• Despite the homogeneous nature of fuel, marketing strategies focus on non-price factors such as quality and additional services at stations. Loyalty programs also contribute to differentiation among stations.
• The entry into retail markets is typically constrained by factors like public safety, land use, supply stability, and environmental regulations, limiting competition at the retail level.

Empirical and Theoretical Challenges in Identifying Competitive Practices:

• Distinguishing between prices that result from illegal agreements and those from rational, independent responses by firms to mutual dependencies presents significant challenges.
• The prevalence of parallel pricing practices, price cycling, and "rockets and feathers" pricing dynamics often indicates competitive issues but requires further analysis to substantiate claims of competition law violations.

Suspected Tacit Collusion and Market Transparency:

• Experts often suspect the existence of tacit collusion within the fuel market, as companies are generally well-informed about each other's pricing. It's typical for competitors to closely monitor one another's prices.
• A public information platform facilitating transparency among competitors is viewed as having limited downsides if implicit collusion is already presumed. By understanding price differentials between stations, informed consumers are expected to drive competitive behaviors that outweigh any potential negative effects caused by increased transparency.

Regulatory Recommendations to Enhance Competition:

• Regulatory authorities frequently advocate for providing consumers with better price information and suggest measures to reduce entry barriers as more effective ways to make fuel markets more competitive.
• Solutions aimed at enhancing competitiveness in retail fuel markets also involve fostering competition at the wholesale level. Proposed measures include removing minimum quantity requirements for distribution licenses and ending long-term exclusivity contracts between distributors and retailers. Such actions could facilitate market entry for small retailers.
• Additionally, establishing restrictions on market entry for established retail players to benefit independent small operators is advised. Simplifying the excessively time-consuming planning procedures for opening new fuel stations and encouraging supermarkets to obtain fuel retailing licenses can increase supply in the retail market.
• Facilitating access to logistical infrastructure such as ports, pipelines, and storage facilities, which allows for easier importation of fuel, could decrease the potential for legal or illegal coordination and thus enhance competition.

Policy Recommendations for Enhancing Competition in the Fuel Market

• Non-Discriminatory Conditions in Law 5015: Refineries should offer the same conditions to all distributors, not just their own, to avoid discrimination and enhance competition, especially considering the new and upcoming refineries in Turkey which may strengthen competition against TÜPRAŞ.
• Domestic Production Impact on Prices: The impact of domestic production on fuel pricing should be assessed to avoid unnecessary price increases. Considerations might include whether a mix of CIF and Platts FOB Med prices could serve as a more appropriate pricing reference.
• Amendment to Prohibition of Reselling Fuel: The clause in Law 5015 that prevents distributors from selling fuel purchased from one distributor to another should be reconsidered. Removing this restriction could reduce illicit activities and enhance market functionality, subject to strict controls against illegal fuel activities.
• Adjustments to Distribution License Requirements: The regulation requiring a minimum sale of 60,000 tons of white products over five years for maintaining a distribution license should be revisited to allow flexibility and progressive compliance.
• Import Barriers and Distributor Licensing: Recommendations include easing the time requirements for distributor license holders to establish their dealership networks, which would facilitate market entry for new refineries and distributors.
• National Marker Regulatory Adjustments: The national marker surety bond amount should be adjusted to reduce cost discrepancies among distributors, making competition more feasible.
• Participation Fee Adjustments in the Licensing Regulation: Reevaluation of the fixed rate for calculating participation fees, currently set at 0.1%, to prevent cost disadvantages among players in the market.
• Subsidy Limitations and Sales Restrictions for Distributors: Regulations that limit subsidies and different practices at stations operated by distributors should be focused only on those with significant market power to foster competition from smaller distributors.
• Enhanced Consumer Information: Steps should be taken to more frequently and comprehensively inform consumers about fuel standards and pricing through various channels to aid in competitive decision-making.
• Minimum Purchase Commitments in Dealership Contracts: Legal regulations should be established to balance the competitive benefits of minimum purchase commitments with the potential risks of expanding the scope of "non-compete" clauses.
• Publication of Suggested Pump Prices: Recommendations include revising the practice of publishing distributor-suggested pump prices to avoid coordination that could suppress competition. Instead, real-time prices at the pump should be more accessible to consumers without being directly published by EPDK or distributors.
• Incentives for New Refinery Investments: Propose state support and incentives for new refinery investments to boost competition in the oil market, designed carefully to avoid anti-competitive effects.
• Alternative Control Mechanisms for Illegal Activities: Developing alternative monitoring systems to combat illicit fuel trade more effectively, without compromising competitive market structure.

These policy recommendations aim to address the competitive issues derived from market structure, player behaviors and sector-specific regulations, promoting a more competitive fuel market environment.

Conclusion

The sector report on the fuel market, published by the Turkish Competition Authority in January 2024, serves as a critical update to the prior report from 2008. While the structure and the major themes of the report show considerable continuity with the previous analysis, the data have been significantly updated to reflect the current economic realities and market conditions. This ensures that the report provides a current snapshot of the industry, detailing the ongoing market structure, the roles of key players, regulatory impacts, and prevailing market trends.

The report meticulously documents the competitive environment within the sector, identifying persistent challenges as well as emergent issues that influence market dynamics. Although the sector's landscape is described in a manner similar to past descriptions, the analysis is refreshed with recent data and insights, enhancing its relevance for today's market conditions.

In conclusion, the 2024 sector report does not introduce fundamentally new perspectives on the fuel market but updates and reaffirms the ongoing narrative with recent evidence and analysis. This objective assessment helps stakeholders understand the nuanced evolution of the market without dramatic deviations from the foundational understanding established in the 2008 report. As such, it is an essential tool for regulatory bodies, market participants, and policymakers to assess the efficacy of past interventions and to strategize future actions within a well-informed framework.

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