On 31 March the European Commission published its decision exempting exploration for and exploitation of oil and gas in England, Scotland and Wales from the application of the utilities procurement rules.
The practical implications of the decision are that oil and gas operators will no longer be bound by the Utilities Contracts Regulations – even as set out in the "derogation" - in their procurements for E&P activities on the UKCS. Unhappy contractors will no longer be able to look to the special procurement remedies regime if they have a complaint about the way a contract was awarded. Operators can now make their own decisions whether a competitive process is appropriate to a particular situation. Good practice will continue to require review of the relevant provisions of any JOA, the PILOT Supply Chain CoP and company policies. FPAL will in many instances remain a useful starting point for the choice of supplier.
The full text of the decision can be found here .
Note that the exemption applies only to activities in England, Scotland and Wales. Oil and gas companies will still need to check the position in other EEA Member States. For example, the Netherlands has a full exemption but in Germany the derogation regime applies.
Norway remains under the derogation regime, and it looks as though this situation will continue for some time. Two years ago the Norwegian Ministry of Petroleum and Energy made an application for full exemption from the rules. This was rejected as incomplete by the EFTA Surveillance Authority (the ESA, which in this case performs the same analysis for EEA countries as does the European Commission in the EU). The ESA subsequently raised an issue in relation to the Norwegian petroleum legislation and now that issue will need to be resolved before a new exemption application can be made.
It will be interesting to see if further applications will now be brought by other EU Member States.
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Full Article
On 31 March the European Commission published its decision exempting exploration for and exploitation of oil and gas in England, Scotland and Wales from the application of the utilities procurement rules.
The practical implications of the decision are that oil and gas operators will no longer be bound by the Utilities Contracts Regulations - even as set out in the "derogation" - in their procurements for E&P activities on the UKCS. Unhappy contractors will no longer be able to look to the special procurement remedies regime if they have a complaint about the way a contract was awarded. Operators can now make their own decisions whether a competitive process is appropriate to a particular situation. Good practice will continue to require review of the relevant provisions of any JOA, the PILOT Supply Chain CoP and company policies. FPAL will in many instances remain a useful starting point for the choice of supplier.
Note that the exemption applies only to activities in England, Scotland and Wales. Oil and gas companies will still need to check the position in other EEA Member States. For example, the Netherlands has a full exemption but in Germany the derogation regime applies.
Norway remains under the derogation regime, and it looks as though this situation will continue for some time. Two years ago the Norwegian Ministry of Petroleum and Energy made an application for full exemption from the rules. This was rejected as incomplete by the EFTA Surveillance Authority (the ESA, which in this case performs the same analysis for EEA countries as does the European Commission in the EU). The ESA subsequently raised an issue in relation to the Norwegian petroleum legislation and now that issue will need to be resolved before a new exemption application can be made.
From derogation to full exemption in the UK
The UK upstream oil and gas industry has since 1997 had the benefit of a derogation from the full utilities procurement regime for its E&P activities. Instead of the detailed rules, the industry has been required only to follow the broad principles of non-discrimination and competitive procurement, making procurement intentions known and holding competitive tendering except where it could objectively justify not doing so. That led in particular to many painful decisions about when and where sole sourcing, amendments to scope and contract extensions were legitimate.
In July 2009 an application by NAM, the largest Dutch oil and gas operator, resulted in the European Commission granting a full exemption for E&P activities in the Netherlands (click here for our law-now on this). It therefore came as no surprise when the Commission announced that, following a request by Shell in October 2009 (see our earlier law-now ), a similar declaration had been made in relation to oil and gas E&P activities in England, Scotland and Wales. The full text of the decision can be found here . It is interesting not only as a summary of how the European Commission took its exemption decision but also as a rapid review of product and geographical market definitions as established in previous Commission decisions (in particular in relation to industry mergers).
Under regulation 9 of the Utilities Contracts Regulations (Article 30 of the Utilities Directive 2004/17/EC), the European Commission may exempt a particular activity completely from the procurement regime when the activity in question "is directly exposed to competition in markets to which access is not restricted".
The exemption analysis
The access point is covered by the implementation in the UK of the Hydrocarbons Licensing Directive 94/22/EC in the form of the relevant 1995 Regulations. The Commission then considered whether the market for oil and gas exploration and the separate markets for oil production and gas production were competitive. "Production" is taken also to include infrastructure development for future production.
Exploration for oil and gas is regarded as one worldwide market. The Commission reviewed the market shares of operators in relation to their share of proven reserves and of expected production. (The use of capital expenditure as an indicator of market share has been found to be unsuitable because of the varying levels of investment required in different geographic areas.)
Shell has some 0.46% of the worldwide combined proven oil and gas reserves in 2008. At 1 January 2009 Great Britain held some 0.22% of the worldwide whole. The Commission noted that the information available indicates that there is a direct correlation between proven reserves of oil and gas and future production. Each gives a similar indication of market share. The exploration market is not highly concentrated, being characterised by the presence of the vertically integrated supermajors ExxonMobil and BP, as well as a number of majors and state owned companies.
The production of oil is also a worldwide market. Shell's market share was some 2.16% in 2008 when ExxonMobil's was 3.08% and BP's 2.32%. The Commission presumed that there was effective competition when considering the degree of concentration and the relevant market as a whole, in particular the number of market players including as well as the supermajors the big state owned companies and a number of other majors.
The Commission has previously found the market for natural gas production to include at least the whole of the EEA and possibly also Russia and Algeria. (Questions of whether any specific product markets might exist for LCV gas, HCV gas and/or LNG were left open.) The decision gives examples of market shares in the EEA but also for the combination of the EEA, Russia and Algeria, where combined 2008 production was 976.7billion Sm3. The Commission confirmed that the degree of concentration on this market is low when taking into account the supermajors (ExxonMobil [10-20]%, BP [5-10]%), majors such as Shell (3.85%), Statoil [10-20]% and Total [5-10]% as well as pressure from the important state owned companies Gazprom [30-40]% and Sonatrach [10-20]%. The market is competitive.
The decision
Taking all of this into account, the Commission confirmed that since the condition of unrestricted access to the market had been deemed to be met, the Utilities Directive should not apply when oil and gas companies award contracts in relation to their exploration and production activities in England, Scotland and Wales.
It will be interesting to see if further applications will now be brought by other EU Member States.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 09/04/2010.