Z and Chevron merger under the microscope

Z shares last traded at $5.81, and have gained 25 per cent this year.

The Commerce Commission has identified a wide range of competition issues it will need to be satisfied about before it will tick the proposed merger of Z Energy and the Chevron NZ, operator of the Caltex chain of petrol stations.

The competition watchdog says it is "generally concerned with the ability of the merged entity to raise prices" right across the New Zealand fuel distribution and retail system, starting at the Marsden Point oil refinery and including aviation, shipping, trucking and retail petrol and diesel fuel sales.

In heavily redacted submissions published on the commission's website, Z argues there is virtually no overlap on either a 2km or 5km radius between Z and Caltex sites and that in markets that involve commercial or wholesale purchases of transport fuels, there are competitive forces already at play that will remain if the merger goes through.

It plans to run the Z and Caltex brands separately, preserving a business model under which Caltex petrol stations are set by head office, unlike Z's, which are set by reference to local competitors' pricing.

In a statement, the commission outlined four broad areas it will consider, along with the potential for existing coordination between major players in the transport fuel sector to be enhanced because of a Z-Chevron tie-up.

The commission makes no findings, saying it intends to report by December 18 on whether to allow the merger, while warning "this date may change as our investigation progresses".

Z and Chevron are working to a November merger plan, with all Chevron staff assured they will keep their jobs for at least a year. The commission says it will examine the extent of current competition between Z and Chevron, including "whether customers view the product or service that Z and Chevron offer as being close substitutes.

The second area of investigation would be the constraint provided by other competitors, mainly BP and Mobil, and in some areas discount fuel brand Gull Petroleum. This would include the extent to which competitors might be willing to replace lost competition and how much constraint distribution of fuel from rival firms creates.

Also to be considered is the ease with which new competitors could enter the market or expand, including an assessment of "whether the terms under which major fuel firms obtain refined product from the refinery makes it hard for rivals (such as Gull and/or a potential entrant) to profitably import".

Finally, it will consider whether customers have any countervailing power to resist price increases.

Elsewhere, the commission will examine whether the merged entity would have any capacity to raise rivals' costs, perhaps through arrangements at ports, airports and the management of storage capacity for bulk fuel. Of particular interest is the potential for existing co-ordination in various parts of the transport fuel supply chain to be used to raise prices to all fuel consumers.

Z shares last traded at $5.81, and have gained 25 per cent this year.