THE FLEECING OF A NATION - The Reykjavik Grapevine

THE FLEECING OF A NATION

THE FLEECING OF A NATION

Published June 10, 2005

In an even bolder move, in 1996, representatives from the three oil companies wrote up an agreement among them detailing how they would divide the gas market among themselves at nine different locations in the countryside:

AGREEMENT
Olíuverzlun Íslands hf. [Ólís], Olíufélagið hf. [Esso] and Skeljungur hf. [Shell] agree to enact the following in order to make the most of the sale of gasoline in the countryside.

Búðardalur: Olís/Shell stop. Esso from now on with one station.
Mývatn: Olís/Shell stop. Esso from now on with one station.
Þórshöfn: Olís/Shell stop. Esso from now on with one station.
Hvolsvöllur: Olís/Shell stop. Esso from now on with one station.
Seyðisfjörður: Esso stops. Shell from now on with its own new station.
Neskaupstaður: Esso stops. Olís from now on with one station.
Eskifjörður: Esso stops. Shell from now on with one station.
Reyðarfjörður Esso stops. Olís continues. Shell continues.

The agreement will go into effect before October 1.
Esso and Shell will not open the sale of gasoline in Grindavík for at least the next five years.
Reykjavík, February 21, 1996.

Yes, competing gas companies were deciding together how to eliminate competing with each other.
These are only two examples of nearly 500 that appeared in the Competition Council’s report on the matter on January 29 of this year.

What first tipped the Competition Council off that something was wrong in the price of gas itself. As Mogensen told Grapevine, “There had been talk that something suspicious was going on, but there was nothing conclusive. But gas prices rose at pretty much the same rate and at the same time.”

And so the Competition Council petitioned the court to conduct a “dawn raid” of the offices of the oil companies. Not that it caught them off guard; in fact, at least one key player told us he saw it coming. Shell CEO Gunnar Karl Guðmundsson (who was CFO of Shell at the time of the raids) told Grapevine, “Honestly, I wasn’t very surprised. Media coverage of the oil companies had been fierce. Dawn raids had been going on in Europe for years. So we were expecting some sort of investigation and inquiries.”

After wading through a sea of files and e-mails, the Competition Council came to the conclusion that the Competition Law had been broken repeatedly by these three companies and that damages were to be paid. Shell was sentenced to pay 450 million ISK; Esso, 490 million ISK; and Ólís, a whopping 560 million ISK. All three companies have since paid their fines, but the Competition Council has already awarded “discounts” to Ólís and Esso for cooperating with the investigation: Ólís’ fine was reduced by 20% and Esso’s, by 45%. It should also be noted that as of yet, none of the people involved in this scandal have been arrested or convicted for theft.

In addition, the fallout for some of the key players seems to be minimal at best. Einar Benediktsson is still managing director of Ólís. Former CEO of Shell Kristinn Björnsson announced last November that he was “taking a break” from investment bank Straumur – and was quietly re-elected to the board of directors on February 4, 2005.

The most well-recognized player in this conspiracy, former Reykjavík mayor Þórólfur Árnason – who was marketing director of Esso from October 1993 to 1998 – resigned in disgrace from the mayoral office in November 2004 due to the Competition Council’s implication of him in the scandal. Yet on May 30 of this year, he was hired as the CEO of the fishery giant Icelandic Group hf.

Still, Mogensen contends that the Competition Council’s investigation will serve as a deterrent, citing “bad publicity” as one of the after-effects of the matter.

In this area Mogensen does have a point. A recent study was conducted earlier this year by two students at the University of Iceland, Inga María Ottósdóttir and Lára Inga Sigmundsdóttir, who surveyed a cross section of 160 people on their impressions of the three oil companies involved in the scandal. Of those who responded, 26.88% had a negative impression of Esso; 26.67% had a negative impression of Shell and 26.25% had a negative impression of Ólís. By comparison, only 5% had a positive impression of Ólís; 3.33% had a positive impression of Esso and 1.67% had a positive impression of Shell. In even sharper contrast, 43.96% of respondents said they had a positive impression of newcomer Atlantsólía, with only 6.04% saying they had a negative impression. What this will translate to in terms of lost business for the conspirators is close to impossible to gauge, but at least consumers can rest easy knowing that the Competition Council has fined the businesses enough to pay off what was stolen, right?

Unfortunately, no. For starters, while the fines have been paid, all three companies are currently appealing the decision. Understandably so. While the case against the oil companies seems strong, the methods of the prosecution are worrisome. As was pointed out by people involved in this case, The Ministry of Justice, which will oversee this case, administers the police who helped conduct the raids as well as the courts that will try the oil companies. In essense, one man – Minister of Justice Björn Bjarnason – controls both the enforcement and the interpretation of the law.

Guðmundsson told Grapevine he was “prepared to go all the way to the Supreme Court” if necessary. Ólís has promised to counter-sue the government for its losses. In the meantime, the fines paid remain on hold. But whether the oil companies win or lose, none of this money will actually go back to the consumer – it will be paid to the state. Individual consumers who want justice will have to take on the oil companies in court and are more or less on their own.

Mogensen told the Grapevine that individuals don’t have much of a chance of recouping any of the losses that were stolen from them. “You would probably need to have kept every receipt from the past ten years,” he told us. “In my opinion, proving your loss would not be easy. You would have to cover all your legal costs, too, and while you could sue to have your costs covered, if you lose, you would have to pay for [the defendant’s] legal costs as well as your own.”

Not that the matter is completely hopeless for the average consumer. Consumer advocacy group Neytendasamtökin is currently in the process of launching a class action suit against the oil companies on behalf of private consumers. Many formerly loyal customers, shocked and angered over the scandal, have come forward demanding justice. As Neytendasamtökin Chairman Jóhannes Gunnarsson told Grapevine, “We’ve had over one hundred people come to us with their receipts and many more have called. We’re filing one case with the courts right now, and if we win that case, then we’ll send a letter to the oil companies [asking for a settlement deal].”

Outside of this suit, there are businesses that are going their own way in seeking compensation. Friðrik Árngrímsson, managing director of The Federation of Icelandic Fishing Vessel Owners (LÍÚ), told Grapevine that there are captains who have bought fuel from these companies in the past who are looking to file their own suits against the oil companies, and that LÍÚ might help cover their legal expenses. Árngrímsson said his suspicions about the oil companies arose when he was trying to broker a deal with them to buy oil for less by buying it at sea, and found the oil companies “impossible to do business with.”

For his own part, Árngrímsson expressed disappointment with the players involved. “I was more saddened than angered when I learned about this,” he told Grapevine. “I know [Shell CEO] Gunnar Karl and all these guys and have met with them in person. They’re normal people who I guess just ended up in some circle where they thought they could do whatever they wanted. I think this matter hurts society as a whole. It’s just unbelievable the way they’ve acted.”

Árngrímsson isn’t alone in his disappointment. Government officials from every party have expressed outrage over this scandal. As Progressive Party MP and chairman of the Parliamentary Industry Committee Birkir Jónsson told Grapevine, “During the 1980s, the price of gas was decided by the government, but with the liberalization of the market, we gave companies more freedom. More freedom means more responsibility but unfortunately, these companies didn’t follow their duty. This conspiracy is intolerable and this violation of competition will probably disturb the Icelandic market for some time to come.”

Unfortunately for all plaintiffs involved, determining damages is one giant grey area. Not only is the burden of proof on them to produce receipts showing their loyalty to these companies, but their lawyers have to face the mathematical nightmare of determining what the price of gas would have been, had there been no price-fixing conspiracy. Adding insult to injury, Grapevine found signs that the behaviour that caused this scandal in the first place shows no signs of abating.

Since December 2001, gas prices have been steadily rising among the three oil companies at relatively the same rate. While rising global crude oil prices are one explanation for the price hike, it doesn’t explain why the prices should rise at nearly the exact same rate, and only among these three oil companies.

Consider the following: the litre price of self-service gasoline among these three oil companies rose by about two ISK in early March. Later in the month, Shell raised the price of its gas again, which was followed by Esso and Ólís both raising the price of their gas, both by 2.7 ISK. When Shell raised the price of its gas again on April 6, Esso matched the price the following day. In total, this brought the price of self-service gasoline for all three oil companies up to about 102.5 ISK each. And yet during this same period, the litre price of self-service gasoline at Atlantsólía went from 97.2 ISK, which is where it had remained unchanged since December 30, 2004, to 101.2 ISK on April 14.

At the time of this writing, the price of self-service gasoline at Esso is at 110.5 ISK; at Shell, 104.8 ISK and at Ólís, 104.3 ISK. Atlantsólía is at 103.8 ISK.
Considering the data, the notion that a price-fixing conspiracy is still ongoing is not outside of the reasonable realm of possibility, especially when one considers that these companies have legal expenses to cover and that some have had to borrow money in order to cover their fines. But in the meantime, will justice be served?

If anyone is sentenced to any sort of jail time, the law allows for only up to four years in prison. By comparison, a lawyer Grapevine spoke to told us that for corporate embezzlement of about the same amount over the same length of time, the maximum sentence would be five to ten years. For robbing someone on the street, the maximum sentence would be up to sixteen years, regardless of the amount stolen. In either case, there would be no special discounts for cooperating with the investigation.

Guðmundsson told Grapevine that he considers the case “aggravating” and is hoping that the amount of time the investigation has taken will help him win an appeal on the grounds that it’s surpassed the statute of limitations. In terms of the evidence against him personally – namely, the recorded documents detailing his communications with Esso and Ólís, he says, “When they were questioning me on certain things, asking what I meant when I said such-and-such – how am I supposed to remember what I meant by what I said ten years ago?”

Mogensen replied to this comment by saying, “Well, I can understand that he doesn’t recall everything he said ten years ago, but we have lots of e-mails which very graphically show discussions of prices and such. So he doesn’t have to remember exactly what he said; the e-mails are pretty conclusive.”
Mogensen seems confident that the courts will rule in the Competition Council’s favour. When asked what kind of chances the oil companies have of winning an appeal, he said, “It’s impossible to say, but I think the evidence [against them] is solid.”

An overturned appeal may come as a relief to Icelandic consumers, and may be of some comfort to those who’ve already been burned. In addition, both individuals and businesses can take the oil companies to court themselves, however daunting that may be. The final judgement – as well as how effectively authorities will prevent this from happening again – remains to be seen.

Anyone interested filing their own suit against Esso, Ólís or Shell can contact Neytendasamtökin at 545 1200 or by e-mail at ns@ns.is.

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