Implications of the New Utilities Directive for oil and gas E&P activities

United Kingdom

On 20 December 2012 the Council of the European Union published updated wording for the proposed Directive of the European Parliament and of the Council on procurement by entities operating in the water, energy, transport and postal services sectors, the “New Utilities Directive” (available here ). This draft Directive is intended to replace the Utilities Directive 2004/17/EC, the “Utilities Directive” which requires entities in certain sectors to follow rules of competitive procurement designed to ensure a single market in these sectors which have in the past been heavily dominated by state entities.

The practical implications of this New Utilities Directive on the UK oil and gas industry are limited as the sector (excluding Northern Ireland) will continue to benefit from a full exemption.  However, for other EU territories the new rules will provide a new exemption for exploration, but not production, activities.

Current situation under the Utilities Directive

The UK upstream oil and gas industry has since 1997 benefitted from a derogation from the full utilities procurement regime for its E&P activities, requiring it to follow broad principles of non-discrimination and competitive procurement, rather than detailed rules.  However, following a request by Shell U.K. Limited the Commission announced on 29 March 2010 that the exploration for and exploitation of oil and gas in England, Scotland and Wales would be fully exempt from the Utilities Directive.  Such exemption under Article 30 of the directive was for three distinct activities: 1) exploration for oil and natural gas; 2) production of oil; and 3) production of natural gas.  Production for the purposes of the decision was to include ‘development’, namely the setting up of infrastructure such as platforms, pipelines and terminals (click here for our earlier Law-Now on this).  It is also worth highlighting that the Commission uses the term ‘exploitation’ and ‘production’ interchangeably within the decision.  Moreover, the term ‘extraction’ is commonly used interchangeably with the term ‘production’.  Denmark, Italy and the Netherlands have similar full exemptions.

Situation under the New Utilities Directive

Article 11 of the New Utilities Directive states that the directive will apply “to activities relating to the exploitation of a geographical area for the purpose of: a) extracting oil or gas; b) exploring for or extracting coal or other solid fuels.”

Interestingly, therefore, it seems that exploring for oil or gas is not intended to be covered by the New Utilities Directive but extraction (development and production) will be covered.

The reason for this can be gleamed from section 5 of the Explanatory Memorandum included with the original proposal for the New Utilities Directive published by the European Commission on 20 December 2011 (available here). This states that the aim of the New Utilities Directive is to simplify the procurement regime and with this in mind it was decided that exploring for oil and gas should be withdrawn from the scope of the directive as the sector was found to already be subject to such competitive pressure that the procurement disciplines under the New Utilities Directive are not required.  The justification for this decision seems to be based upon the four exemption decisions issued by the Commission in relation to the oil and gas E&P industry mentioned above.  Within these decisions a distinction has been drawn by the Commission between exploration and production/extraction.  Exploration has been found to have a geographical market that is worldwide and not highly concentrated.  By contrast, although production/extraction has been found to be competitive, its geographical market has been determined more narrowly as the whole of the EEA and possibly also Russia and Algeria, rather than worldwide.  It seems a reasonable assumption that due to this narrower geographical market for production/extraction the Commission has decided to reserve its position in the New Utilities Directive to ensure competitive procurement in this sector. 

The Explanatory Memorandum also refers to the Hydrocarbons Licensing Directive as part of its justification for excluding exploration, as this directive creates the framework for increased competition, non-discrimination and transparency in the process for granting licences to search for, drill for and produce petroleum.  However, the Hydrocarbons Licensing Directive applies to licences for production as well as exploration so it is unclear why this justification does not apply to production as well.

Extraction/production of oil and gas in the UK would therefore be potentially subject to the New Utilities Directive.  Fortunately paragraph 22 of the New Utilities Directive states that:

 “For the sake of clarity all decision adopted prior to the entry into force of this Directive concerning the applicability of the corresponding provisions set out in Article 30 of Directive 2004/[…]17/EC continue to be applicable.”

As such England, Scotland and Wales will be unaffected by the New Utilities Directive as the 2010 decision to exempt production of oil and gas from the Utilities Directive will continue to apply under Article 27 of the New Utilities Directive. Italy, the Netherlands and Denmark will be similarly unaffected. For other EU territories, their exploration activities will cease to be subject to the procurement rules when the New Utilities Directive comes into force (expected to be June 2014) but development and production activities will continue to be subject to the requirements of competitive procurement unless new exemption decisions are granted.