EU and Algeria gas supply agreements: phasing out territorial restrictions

On 11 July 2007 the European Commission announced that the EU Competition Commissioner Neelie Kroes and the Algerian minister for energy and mines have come to a “common understanding” on territorial restrictions and profit sharing mechanisms (PSMs) in gas supply by the Algerian company Sonatrach to European countries.

Territorial restrictions (also known as “destination clauses”) in gas supply contracts prevent the purchaser from selling the gas outside a certain geographic area (often one EU Member State). The European Commission has been concerned about the anti-competitive nature of these clauses since 2001.

Profit sharing mechanisms oblige the buyer/importer to share a certain part of the profit with the supplier/producer if the gas is sold on by the importer to a customer outside the agreed territory or for a purpose other than that already agreed. The European Commission believes PSMs have been used as an alternative to territorial restrictions clauses.

The understanding reached can be summarised as:

• Territorial restrictions will be removed from all existing contracts. No territorial restrictions will be inserted in future contracts.
• PSMs will only be applied in LNG contracts under which the title of the gas remains with the seller until the ship is unloaded (in practice, sales under DES (“Delivered Ex Ship”) terms). Sonatrach is aiming to transform the remaining FOB and CIF existing LNG contracts to sales under DES terms.
• No PSMs will be included in future LNG contracts under which the title of the gas passes to the purchaser at the port of loading (in practice, for sales under FOB and CIF terms).
• No PSMs will be included in existing or future pipeline gas supply contracts.

Gas companies operating in the EU will welcome these clarifications.

Please click here for the European Commission’s press release.