Investigation
The European Commission has opened a formal investigation to assess whether supply agreements for the export of LNG between Qatar Petroleum and European importers have hindered the free flow of gas within the EEA, in breach of EU competition law. It is stated that Qatar Petroleum is the largest supplier of LNG in Europe, accounting for around 40 per cent of the EU’s overall LNG imports and with significantly higher import shares in certain member states.
The Commission will investigate whether Qatar Petroleum’s long-term agreements (typically 20 or 25 years) for the supply of LNG into the EEA contain direct and/or indirect territorial restrictions. In particular, the Commission states that certain clauses appear to restrict the importers’ freedom to sell the LNG in alternative destinations within the EEA. For example, some contractual clauses were reported to prevent any diversion of cargoes to other destinations, or restrict the territories to which diversion can take place or the volumes that can be diverted.
Commissioner Margrethe Vestager, in charge of competition policy, said: “Energy should flow freely within Europe, regardless of where it comes from.” A recent investigation by the Commission into Gazprom’s use of territorial restrictions, in the form of export bans and destination clauses, was closed after Gazprom gave binding commitments aimed at enabling the free flow of gas in Central and Eastern European gas markets.
The European Commission is not the only competition authority to target territorial restrictions in natural gas markets. In June 2017, the Japan Fair Trade Commission issued a report considering the impact of destination clauses, diversion clauses and resale profit-sharing clauses in LNG supply contracts. It found that these practices were highly likely to violate Japan’s anti-monopoly law, especially when cargo is sold ‘free on board’, which passes title to the buyer as soon as it is loaded at an export terminal.
Conclusion
Exporters should consider carefully whether their supply contracts may result in territorial restrictions and violate competition law. This reasoning requires an analysis of the contractual mechanisms and their economic context, with the devil often in the detail. A useful starting point is to consider whether the effect of any clause is to create a disincentive to resell natural gas outside the originally intended destination, thereby limiting the buyer’s freedom to dispose of its gas as commercially appropriate.
Client Alert 2018-142
