United States: Revisiting LNG Resale Restrictions – Implications Of Recent EU Decisions

In our July 2017 update in AG Speaking Energy, we highlighted that the Japan Fair Trade Commission (JFTC) concluded in its market study that destination clauses, diversion clauses, profit-sharing clauses and take-or-pay clauses (only in very limited circumstances as discussed in the July update), all of which are typically seen in LNG sale and purchase agreements (LNG SPAs), are likely to fall afoul of Japanese antimonopoly laws. However, there remains little guidance from the JFTC as to what counterparties to these potentially problematic agreements should do in response.

We have therefore decided to revisit the issue, focusing specifically on (i) the European Commission's (EC) recent investigation into the destination clauses in gas supply agreements between Qatar Petroleum and EEA importers; and (ii) other earlier European Union (EU) case laws in this area in order to identify what steps the EC considered, as an early regulator in this discrete topic, to be required from the market players in order to maintain a competitive energy market in Europe.

The Qatar Petroleum Investigation

The EC investigation into Qatar Petroleum represents the most recent regulatory action around the issue since the conclusion of the JFTC's market study in July 2017. On June 21, 2018, the EC announced that it had opened a formal investigation into Qatar Petroleum, looking into whether the destination clauses in its long-term LNG SPAs with EEA gas importers are in breach of EU antitrust rules (please refer to here for a recent market update in relation to this). We expect that the investigation will conclude in 18 to 36 months' time; therefore, it remains to be seen whether the results of this investigation would be consistent with the approach taken in earlier EC investigations and recent positions adopted by regulators in Asia.

Earlier EC Investigations

Prior to the Qatar Petroleum investigation, the EC ran a series of investigations against non-EU gas producers and EU gas importers since 2000. It examined gas contracts between external gas suppliers and European gas wholesale importers, and eventually concluded that destination clauses and profit-sharing mechanisms were not compatible with EU competition law. This exercise resulted in a series of settlements with gas suppliers outside Europe. In most cases, the EC was willing to close its investigation after the relevant entity (i) had deleted the relevant offending clause(s) from existing contracts and (ii) undertook to ensure that similar clauses would not be introduced in gas supply contracts in the future.

The EC/Sonatrach/Algerian Government Negotiation and the Common Understanding

Rather notably, the EC had a seven-year-long discussion/negotiation with Sonatrach and the Algerian government resolving their differences as to whether territorial restrictions and profit-sharing mechanisms could be used in particular types of gas supply contracts. The conclusion reached in this decision is instrumental in understanding what is/is not permissible under EU competition law, which may be of considerable reference value in the context of Japan.

By way of background, Algeria supplied 11 percent of the EU's total consumption of natural gas, LNG and pipeline gas in 2006, making it the third largest gas supplier after Russia and Norway. It was a major source of energy supply in the case of, for example, Italy and Spain, where it supplied 35 percent and 34 percent of their respective total gas consumption at that time.

While the Algerian government accepted the need to delete territorial restriction clauses from gas supply contracts, it insisted on replacing them with profit-sharing mechanisms. This position was not accepted by the EC inasmuch as it would result in a substantially similar effect to including a territorial restriction clause in the supply contract. Further, the EC insisted that it would be a matter for the commercial parties to agree on the precise contractual terms under a supply contract and that it was prepared to only advise the parties as to whether a particular proposed contractual arrangement was (or was not) compatible with EU competition law.

As a consequence of the findings, the EC, the Algerian government and Sonatrach agreed that the following should be pursued in future contracts with EU counterparties:

  • Sonatrach would delete territorial restrictions from all existing contracts and not insert such clauses in any future contracts.

  • Sonatrach would not insert profit-sharing mechanism in new LNG contracts where its use is not permissible (i.e., contracts under FOB and/or CIF conditions).

  • Sonatrach would change the then-existing LNG SPAs from other alternatives (under FOB and/or CIF conditions) to be shipped under DES terms.

  • Sonatrach would remove profit-sharing mechanisms from existing pipeline contracts and undertake not to insert them in future pipeline gas contracts.

  • There would not be any type of compensation or renegotiation of contracts following deletion of the relevant offending clauses.

The common understanding developed between the EC and the Algerian government is broadly similar to the JFTC conclusion.

The Gazprom/ENI Investigation and its Eventual Settlement

In a similar vein to Sonatrach's settlement, the EC issued a press release in October 2003 announcing the settlement of an investigation relating to certain gas supply contracts between Gazprom (a Russian gas producer) and ENI (an Italian oil and gas company) in relation to, among other things, destination clauses and consent clauses in gas contracts between them. The contractual commitments made by the parties, which eventually resulted in the EC deciding not to pursue further action against the parties, are as follows:

  • The territorial restrictions were deleted from all existing gas supply contracts. The amended contracts provided for two delivery points for Russian gas, and ENI was free to take gas from any of those delivery points.

  • ENI would have the right to resell and transport the purchased gas at its option (i.e., the resale restriction outside Italy with respect to gas purchased from Gazprom was lifted).

  • Gazprom and ENI deleted the consent clauses (where Gazprom needed to obtain consent from ENI if it were to sell gas to any other customers in Italy) from all existing agreements.

  • Gazprom and ENI undertook not to introduce similar provisions in any future gas supply contracts (whether pipeline gas or LNG), either between them or (in the case of Gazprom) between Gazprom and other European gas importers.

At the time of the Gazprom/ENI settlement, Gazprom was the largest gas supplier to Europe, with ENI importing approximate 20bcm (or approximately 14.6 mmtpa) of gas from Gazprom every year.

What Does This Mean for Japanese Importers and Non-Japanese Gas Sellers?

Bearing in mind the jurisdiction-specific elements of antimonopoly rules and regulations, the EU decisions and trains of thought could be helpful in foreshadowing what the JFTC may require market players to do if the JFTC were to commence investigations against non-Japanese gas producers and/or Japanese gas importers. Drawing from the EU experience, it seems that the baseline would be to: (i) require the deletion of territorial restriction clauses from existing contracts, (ii) allow the gas buyer to resell the purchased gas at its option (other than DES contracts, where neither title nor risk has passed to the buyer), (iii) allow the gas seller to sell gas to another buyer in the same jurisdiction without having to obtain consent from its counterparty and (iv) require the parties to undertake not to insert the contested clauses in future contracts.

Even though the EU experience might be helpful, we are mindful of the fact that there are key differences between the EU and the Japan legal systems that may or may not result in similar decisions in any enforcement action in Japan. In particular, the EU Single Market Objectives could have been a main driving force behind the EU decisions that might not be relevant in the Japanese context.  As a result, it might be the case that the JFTC would need to see evidence of likely negative economic effects before taking enforcement actions. The following notable differences between the EU and Japan might also be relevant:

  • Different factual scenarios: The JFTC is taking aim at scenarios where Japanese importers are prevented from onward export of the gas to third-country operators. The EU cases discussed above, however, concern scenarios where an EU importer is prevented from reselling to another EU party (clearly impacting competition within the EU Single Market).

  • By object infringements and illegality: Owing to the EU Single Market Objectives, and to the EU scenarios involved, the EC was able to find the relevant clauses to be by object infringements and thus illegal, not having to assess their effects. On the other hand, the clauses investigated by the JFTC are not by object infringements, and the JFTC would thus have to show anticompetitive effects (e.g., Japanese importers being prevented from onward export). Several practical difficulties arise as a result of the fragmented makeup of the Japanese LNG import market, meaning that it would be difficult to show the effects on competition of any such contract because none of the exporters have market power (unlike the EU, where a small number of large suppliers lead the EU gas market).

Responses from Japanese Importers and Other Asian Market Players So Far

Market players in Japan have already responded to the JFTC findings. Tokyo Gas, Japan's biggest city gas supplier and second largest LNG importer, has indicated that it will not accept new long-term LNG contracts that contain clauses restricting where gas can be sold1. Similarly, JERA, the world's biggest LNG importer and a joint venture between Tokyo Electric Power Co and Chubu Electric, is currently making progress in its talks with existing long-term LNG sellers to revise profit-splitting clauses in current contracts2.

Interestingly, we also note that Petronas, the world's third-biggest LNG exporter has indicated that it "will observe" JFTC's ruling that LNG sellers should not force restrictions on reselling LNG cargoes.3 In addition, we further note that South Korea's Fair Trade Commission announced in October 2017 that it was considering whether to initiate an investigation into LNG SPA clauses that restrict buyers from reselling to other markets.4

In light of the above observations, we wait with interest to see (i) whether the JFTC will adopt the EC's approach in furtherance of its efforts to regulate resale and profit-sharing terms in LNG SPAs; (ii) what conclusions the EC will reach in the Qatar Petroleum investigation; (iii) what actions other Japanese importers (and non-Japanese gas sellers) will take in response to the JFTC conclusions; and (iv) whether other Asia regulators (such as South Korea's Fair Trade Commission) will initiate similar investigations and, if so, whether they will reach conclusions similar to the JFTC conclusions.

Footnotes

1 See, http://uk.reuters.com/article/uk-japan-tokyo-gas/tokyo-gas-will-not-accept-destination-clauses-in-new-lng-contracts-president-idUKKBN1CA0X0?il=0

2 See, https://www.reuters.com/article/us-commodities-summit-jera/japans-jera-in-talks-for-lng-contract-with-no-destination-limits-idUSKBN1CG0SR

3 See, https://www.reuters.com/article/us-lng-japan-contracts/petronas-to-observe-japan-ruling-on-lng-destination-clause-nikkei-idUSKBN1D13DJ

4 See, https://www.reuters.com/article/us-southkorea-lng/south-koreas-regulator-weighing-whether-to-start-probe-into-lng-destination-clauses-idUSKBN1CO070

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions