European Commission objects to joint gas marketing

The Commission has warned Norwegian gas producers that the joint sale of Norwegian gas carried out through the Gas Negotiation Committee (GFU) is in breach of Article 81(1) EC and Article 51(3) of the EEA Agreement as it fixes, among other things, the price and the quantities sold. The case concerns joint sales of natural gas through a single seller, the GFU, from Norway to the EU since at least 1989. The GFU today comprises Statoil and Norsk Hydro. The Commission welcomes the recent announcement by the Norwegian government to discontinue the GFU joint sales. But the Commission wants this to be translated into facts by the companies and to see the long term adverse effects of the past and present misbehaviour remedied.

The GFU negotiates natural gas sales contracts with buyers on behalf of all the other natural gas producers in Norway and thus fixes the selling price, volumes and all other trading conditions.

The Commission has sent a statement of objections to the companies following investigations started in 1996. In the Commission's view, the companies concerned must put an end to the joint selling of gas from Norway and eliminate the restrictive effects in the contracts concluded with third parties under the joint selling scheme.

The GFU has entered into a large number of long term supply agreements with European gas operators which in the Commission's view perpetuate the adverse effects of the joint selling scheme and have led to a significant rigidity and lack of liquidity in the European gas markets.

The Commission takes the view that the European gas market is progressively being liberalised and that it is of paramount importance that producers sell their gas individually so that those customers who can already choose their supplier benefit from real choice and competitive prices.

The Norwegian government recently took measures aimed at the discontinuation of the sale of Norwegian natural gas through the GFU to the EEA from 1 June of this year. The European Commission welcomes this as a step in the right direction. The Commission notes, however, that the abolition of the GFU is not yet final. Moreover, as the Commission's proceedings concern the behaviour of Norwegian gas producers, its proceedings will continue until measures taken by the Norwegian Government have been implemented by the companies in question and all objections of the Commission remedied.

The Commission does not exclude in the near future issuing a statement of objections to other Norwegian gas producers in the context of the GFU case.

Corrib sales

There have been other recent moves by the European Commission in similar cases.

In April the Corrib Field owners (Enterprise Energy, Statoil and Marathon), withdrew their notification to the European Commission for exemption under Article 81(3) of the Treaty of Rome of joint gas marketing arrangements for the first five years of production from the Corrib Field off the West Coast of Ireland. The companies had argued (as part of their case for exemption) that joint marketing was necessary to balance the purchasing power of Bord Gais Eirean, the state owned gas company and Electricity Supply Board, the state owned electricity company (which purchases gas for electricity generation).

The Commission had been expected to refuse the request for an exemption. Carrying on without the exemption would have left the parties in breach of EC competition law and liable to possible fines and third party actions as a consequence. To avoid this situation the companies appear to have decided to withdraw the notification and resolved to market gas individually. Enterprise Energy acknowledged that the Irish gas market had grown much bigger that they had previously forecast. During the period leading up to the withdrawal of the notification the parties had not implemented the joint marketing agreement.

The sequence of events confirms that arrangements for the joint marketing of gas can infringe Article 81(1) of the Treaty and are difficult to justify so as to fall within the exemption criteria in Article 81(3).

Destination clauses

The European Commission also commenced a competition law investigation into restrictive provisions in long term gas sales contracts between European purchasers and third country suppliers. The contracts involve Gazprom and Italian companies SNAM (ENI's gas distribution unit), Enel and Edison. The Commission is concerned that clauses which prohibit reselling of gas to purchasers in other Member States are in breach of competition law. The EU's Competition Commissioner has stated that gas "destination clauses" can prevent the formation of the single market.

Note, however, that the reciprocity provisions of the Gas Directive empower Member States to refuse to allow suppliers from other EU countries access to certain categories of purchaser in their jurisdictions until such purchasers are in the supplier country eligible freely to purchase from target country suppliers. Both the liberalisation Directive and the competition rules need to be taken into account when planning gas sales strategy.

If you would like to discuss these issues further please call or e-mail Susan Hankey on +44 (0)207 367 3000 (e-mail [email protected]) or Judith Aldersey-Williams on +44 (0)1224 622 002 (e-mail [email protected]).