LONDON (Reuters) - A Hungarian ethanol producer said it alerted the European Commission over the role of price agency Platts in setting prices, feeding into an investigation of three major oil companies.
Pannonia Ethanol, a recent entrant to Europe’s ethanol market, on Wednesday became the first company to identify itself as having complained to Brussels, which has now embarked on the biggest cross-border trading probe since the Libor scandal sent shock waves through the secretive financial industry.
The Commission said on Tuesday it was concerned that the three companies - Royal Dutch Shell (RDSa.L), BP (BP.L) and Statoil (STL.OL) - may have colluded in reporting distorted prices to Platts to manipulate published assessments for oil and biofuel products.
Authorities conducted surprise searches of those companies a day ago and visited the offices of Platts, a unit of U.S. publisher McGraw Hill MHFI.N, which said it is cooperating in the probe.
The European Union executive, responsible for antitrust regulation, also said companies may have prevented others from participating in the price assessment process.
Pannonia Ethanol said it approached Platts last spring to gain access to the publisher’s market-on-close (MOC) system - a daily half-hour window during which it determines prices on the basis of bids, offers and trades by participating companies.
The pricing agency, whose benchmarks are used to set the daily price for physical oil deals worth at least $2.5 trillion a year, has a stringent process for letting new companies become contributors to price assessments.
“We kept getting list after list of more things we had to do to get into the window. Platts kept saying they were exercising ‘editorial discretion’ and never gave us a definitive reason why they weren’t letting us in on the window,” said Eric Sievers, CEO of Ethanol Europe, the holding company of Pannonia Ethanol.
“Platts’ behaviour was very strange and certainly unprofessional and so we finally went to the Commission. They listened and asked a lot of questions.”
A Platts spokeswoman was not immediately available for comment.
The probe widened on Wednesday with oil firm Eni (ENI.MI) confirming that it had been asked to provide information - although it was not being investigated - and UK politicians warning that any wrongdoers would be held to account.
“It’s totally unacceptable for firms to fix prices and force consumers to pay more,” UK Prime Minister David Cameron told reporters in New York on the last day of his trip to the United States. “That’s why we are looking at how to extend this criminal offence to the energy sector to make sure that those who manipulate benchmark prices feel the full force of the law.”
Authorities have sharpened scrutiny of financial benchmarks around the world since slapping large fines on some of the world’s biggest banks for rigging interest rate benchmarks.
London is home to some of the biggest trading desks in the oil business. Following the Libor scandal, Britain approved legislation making a criminal offence of false or misleading statements in relation to the setting of financial benchmarks.
Over the past year many observers have noted the resemblance between the Libor self-reported benchmark and the journalist assessment-based methodology used to set most of the world’s oil prices, but this week’s investigation is the first indication that EU authorities are taking a harder look at the system.
“The investigation’s focus on potential collusion over price reporting draws parallels with the investigations by European and U.S. regulators into Libor rates,” Fitch ratings said.
‘HOLD PLATTS ACCOUNTABLE’
Sievers said Pannonia Ethanol told the European authorities that the company would often sell ethanol for less than the price that was traded in the Platts window.
The nature of the company’s complaint was that the actual impact of Platts on the market was to reduce liquidity and that it had an adverse impact on the ethanol market in Europe, Sievers said.
He said the company was probably only a small part of the European Commission’s overall investigation, but its experience might be representative of the way Platts operates.
Europe’s ethanol market is illiquid. Big players include BP, Shell, Abengoa (ABG.MC) and Cargill CARG.UL.
Sievers said Platts should clearly spell out objective admissions criteria for its window as well as an objective methodology for how it determines prices.
“We need to be able to hold Platts accountable,” he said.
Pannonia, based in Dunafoldvar, Hungary, has a 220-million-litre-a-year plant which makes fuel ethanol.
Sources and officials at major trading houses Glencore (GLEN.L), Vitol, Trafigura, Gunvor and Mercuria said they have not been asked so far to cooperate with the probe.
Swiss antitrust authority Weko said there were no proceedings under way as part of the EU probe. Switzerland is home to most global oil trading houses.
French oil major Total (TOTF.PA) also said there had been no inspections at its offices. Last year it wrote to regulators to question the way oil prices were determined, bringing into the spotlight the mechanisms of price reporting agencies.
Critics say the system is only a snapshot of the market and excludes most deals, making it vulnerable to manipulation.
Supporters say it is the best mechanism so far devised to assess huge but often opaque markets.
Olivier Jakob of energy consultancy Petromatrix said he believed the current pricing system was far from perfect but Platts still remained the main reference for the entire market.
“They are essential ... So if you were to close Platts tomorrow, you would have a very big problem,” he said.
Thomson Reuters (TRI.TO), parent of Reuters news, competes with Platts in providing news and information to the oil market.
Additional reporting by Dmitri Zhdannikov, and William James, Stephen Jewkes, Emma Farge; Editing by Anthony Barker, Richard Mably and Jim Marshall