It may surprise some readers to know that oil&gas companies across the EU are subject to the same rules requiring cross-border competitive procurement as government departments, local authorities and public utilities.
The thinking behind the public procurement rules is that entities which are state funded or which hold state monopolies might not be subject to the usual market pressures to achieve the lowest cost procurement, but might favour local companies.
The Utilities Directive aims at strengthening the single European market for goods and services by requiring utilities and other entities with some sort of state-granted monopoly to procure using competitive tendering processes open to bidders across the EU. Companies with licences to engage in oil&gas exploration and production fall within the scope of this directive.
Fortunately for the E&P sector in the UK, it already has a “derogation” which means that the rules which operators on the UK Continental Shelf (UKCS) have to apply are not the detailed set of procedures which most of the public sector must follow, but simply a set of basic principles requiring competitive tenders when oil companies buy goods and services and non-discriminatory treatment of bidders.
In March this year, NAM (Nederlandse Aardolie Maatschappij) applied to the European Commission for a full exemption from the public procurement rules for oil&gas operators in The Netherlands. Generally, such applications are made by trade associations representing entire industries; it is unusual to see a request from an individual company. However, NAM is the biggest oil&gas operator in The Netherlands, representing a large part of domestic production. It is owned jointly by Shell and ExxonMobil.
Under Article 30 of the Utilities Directive, the commission may exempt a particular activity totally from these rules when:
Access to the market is not restricted.
The activity in question is directly exposed to competition.
Following receipt of NAM’s application, the commission took written evidence from the Dutch government and from NAM itself.
It concluded that access to the Dutch market for oil&gas exploration and production was not restricted since The Netherlands has implemented the Hydrocarbons Licensing Directive, which requires competitive bidding for oil&gas licences. It then considered whether the market for oil&gas exploration, and the separate markets for oil production and gas production, were competitive. In order to do this, it reviewed the market shares of NAM and other players in the relevant markets.
It considered the market for oil&gas exploration as a worldwide market, of which the Dutch contribution was about 3.7% and NAM’s own share even lower.
Likewise, oil production was a worldwide market in which NAM represented less than 0.5%, and even the vertically integrated super-majors represented only a few percentage points each. These markets were clearly highly competitive.
Natural gas was a slightly different case – here, the market had been found by the commission in earlier decisions to be limited to the EEA (European Economic Area), possibly with the addition of Russia and Algeria.
Within the EEA, NAM’s market share was a respectable 17.76%, but after taking into account Russian and Algerian production, this fell to a little over 5%. Again, this enabled the commission to conclude with apparent ease that the market was competitive.
The commission has now granted the declaration requested, so in future, NAM – and other oil&gas operators in The Netherlands – will no longer have to comply with the rules set out in the Utilities Directive, but can make their own decisions as to whether a competitive tender is appropriate in a particular case. In many cases, they will continue to use competitive tendering because it is a requirement of the joint operating agreements under which they operate oil&gas fields, or simply because it is sound business practice.
However, where the situation is urgent or there are other strong reasons for preferring to go direct to a single supplier, they will have this option without needing to worry about action from aggrieved contractors for breach of this regulatory regime.
The UK upstream sector has considered, from time to time, whether or not to apply for a similar exemption to that which now applies in The Netherlands as access is unrestricted (as the UK has also implemented the Hydrocarbons Licensing Directive) and the analysis which the commission applied to the Dutch application would seem to be equally applicable to a UK application. In the past, there has seemed to be no strong demand in the UK industry for an exemption as the rules are not viewed as particularly onerous and may provide some benefits for the supply chain. It will be interesting to see whether this decision prompts any change of heart on this issue.
Penelope Warne is head of oil&gas at CMS Cameron McKenna