All oil and gas exploration and production utilities operators awarding contracts in the UK were recently granted an exemption from the application of the EU procurement rules by the European Commission (the “Commission”), on foot of an application to the Commission by Shell UK under Article 30 of the EU Utilities Procurement Directive (the “Utilities Directive”). This adds to the exemption already in place in the UK in respect of the award of contracts in the electricity generation and electricity and gas supply sectors.

The Utilities Directive applies to the award of works, service and supply contracts by “a contracting entity” where the value of the contract in question exceeds certain financial thresholds. Contracting entities include private sector entities operating in the water, energy, transport and postal services sectors.

Article 30 of the Utilities Directive provides a mechanism whereby an application can be made to the Commission for an exemption from the Utilities Directive, where it can be demonstrated that the activity is “directly exposed to competition on markets to which access is not restricted”. If an application under Article 30 is successful, it exempts the award of contracts by all contracting entities performing the prescribed activity in the country concerned from the scope of the Utilities Directive.

On consideration of Shell’s application for an exemption, and after consultation with relevant UK authorities, the Commission found that oil and gas exploration and production in the UK is directly exposed to competition on markets to which access is not restricted. Consequently, all oil and gas exploration and production utilities operators are exempt from the application of the Utilities Directive in respect of contracts they award in the UK. In its decision, the Commission clarified that this also includes development contracts “i.e. the setting up of adequate infrastructure for future production (oil platforms, pipelines, terminals, etc.)”.

Before the Commission granted this exemption, oil and gas exploration and production utilities operators in the UK were only subject to limited application of the Utilities Directive. These operators only had to observe the principles of non-discrimination and competitive procurement, in particular in respect of the information made available to tenderers. Following the grant of the exemption, these utilities operators are completely exempt from the rules for the award of contracts in the UK.

What this means for Irish Utilities operators….

The award of contracts in Ireland for oil and gas exploration and production is not affected by the UK exemption. The award of these contracts in Ireland by utilities operators remains subject to the full application of the Utilities Directive. In contrast, the award of contracts in the UK for oil and gas exploration and production is not subject to the Utilities Directive and, as a consequence, UK contracts can now be awarded more quickly and flexibly.

That is not to say that the UK exemption decision will carry no benefit for Irish utilities operators. Irish utilities operators awarding contracts in the UK will benefit from the exemption and the flexibility that the decision confers upon all operators in that market.

To date, no applications have been made to the Commission to exempt the award of contracts by utilities operators in Ireland in any sector. There is an argument that, in order to keep up with neighbouring competitors, an application for an exemption should be made. This can be done in one of two ways. The first option is that a private sector operator could apply for an exemption, but (in the absence of pan-industry agreement as to the funding of such an application) the appetite for this may be low in circumstances where the exemption is not an individual one but applies to all operators in the sector – ie. the classic “free rider” problem arises. The second option is that the Irish Government could submit an application.