Procurement rules and the oil and gas industry – an update

In 2002, we published a bulletin on proposals to update the law on public procurement as it applied to the oil and gas industry, and the possibility of a total exemption being granted. In that bulletin we stated that it would be at least 12 months until the draft Directive was adopted. Please click here to view the bulletin.

Adoption of new Directive February 2004

So, 18 months on, is there any sign of it? Well, after proceeding through the grindingly slow EU legislative process the Directive was finally adopted by the Council of Ministers on 2nd February 2004. Member states will have 21 months to bring it into force domestically from the time it is published in the Official Journal.

When the new Directive is implemented the UK Government will be entitled to apply to the Commission for a total exemption for the upstream oil and gas industry from EU procurement rules under Article 30 of the new Directive (previously Article 29 of the draft Directive). This states that where a Member State has implemented certain EU legislation to introduce competition into a sector (or where it can prove that in fact and in law the activity in question is exposed to competition in markets to which access is not restricted), then that sector may be granted an exemption. Since the UK has implemented the Hydrocarbons Directive, which requires licences for oil exploration and development to be granted under a competitive process, the sector is entitled to such an exemption.

Applications for full exemption – not before 2006?

Where a Member State applies for an exemption giving all the relevant data to the Commission, and a relevant independent national authority confirms the position, the exemption will be deemed granted if the Commission has not objected within one month of the Member State’s application. This application can only be made once the Directive has come into force – the earliest that the industry could therefore reasonably expect to be exempted would be early in 2006. It is unclear what national authority might fulfil the role of independent seconder of the Government’s application and if none can be identified it may take an additional two months to complete the process.

The Government has not yet confirmed its intentions with regard to the application for such an exemption but it is likely to be under pressure from the industry to apply in order to free it from what is seen as a bureaucratic burden. It is also fair to say the Government is usually keen to take advantage of all flexibilities allowed it under EU legislation.

Present position – derogation regime continues

In the meantime, the industry must continue to apply the procurement rules as modified by the derogation granted to the industry. This requires that the oil company purchaser must:

• observe principles of non-discrimination and competitive procurement;
• hold a competition unless it can objectively justify not doing so;
• make decisions objectively on the basis of relevant criteria when providing information to potential suppliers, establishing and operating qualification systems, selecting providers to tender for or negotiate contracts, holding design contests or awarding contracts;
• in some cases supply information about contract awards to the Commission.

Updated thresholds

The EU rules apply only to contracts above certain thresholds – for supply contracts and services contracts the threshold is 400,000 Euros and for works contracts the threshold is 5 million Euros. The conversion amount is fixed for two year periods and the EU has recently published the latest set of conversion values.

The threshold values applicable from 1 January 2004 to 31 December 2005 are:

• Supplies contracts - €400,000 – £258,923
• Services contracts - €400,000 - £258,923
• Works contracts - €5 million - £3,236,542.

Further information

For further information about the application of the procurement rules to the oil and gas sector please contact Judith Aldersey-Williams in Aberdeen (01224 622002 [email protected] ).or Susan Hankey in London (0207 367 2960 [email protected] ).