On 28 July 2011, the European Commission, following a request from the Kingdom of Denmark, published its latest decision exempting the application of the European public procurement rules in relation to the exploration for oil and natural gas, and production of oil in Denmark (excluding Greenland and the Faroe Islands).  The Commission’s decision means that in future, oil and gas operators in Denmark will no longer be restricted by the EU public procurement rules and can decide for themselves whether or not to go to competitive tender in a particular situation.

The exemption process was one of the innovations introduced by Directive 2004/17/EC of the European Parliament and of the Council of 31st March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors (“Utilities Directive”).  The Utilities Directive allows contracting entities to apply for an exemption from the rules altogether if it can be shown that the activity proposed to be undertaken, is directly exposed to competition on markets to which access is not restricted.

In the oil and gas industry, Denmark is the fourth EU member state to be granted exemption from the public procurement rules.  On 31 March 2010, the Commission published its decision exempting the application of the Utilities Directive relating to the exploration for and exploitation of oil and gas in England, Scotland and Wales (see our previous law-now article)Similarly, the Italian and Dutch exploration and production sectors also received exemption from the EU procurement rules as published in the Commission’s Decisions dated 24 June 2011 and 8 July 2011, respectively.  See our previous law-now articles on the Dutch request and exemption.

The European public sector procurement rules are intended to promote fair and open competition and a single European market.  The logic behind the public procurement rules was that public authorities and state controlled entities (which account for a major part of the economy of Europe) were not subject to competitive pressure in procurement and therefore rarely bothered to go out to competitive tender but went to their familiar local supplier.  Therefore, in order to develop the single market across the EU, the EU introduced legislation to force such entities to go out to tender and to publish those invitations to tender in a way which would allow foreign companies to bid.  The law also caught utilities as many of these were either state owned or held monopolies granted by the state and therefore faced a similar lack of competitive pressure.  The oil and gas exploration companies were caught in this net because they were viewed as having a government monopoly in the form of an exploration licence and/or sold their products to such a monopoly.  However, today, when oil companies themselves must bid competitively for licences, and are selling their products into a fully competitive market, there is no longer any real justification for including them in this regime.

Currently, in relation to the energy sector, there is one outstanding decision.  On 19 July 2011, the Commission published a notice in the Official Journal of the European Union announcing that it had received a request from RWE Gas Storage (“RWE”) for an exemption from the public procurement rules in relation to gas storage in the Czech Republic.  This is the first such request concerning gas storage that has been received by the Commission.  The Commission is required to take a decision on this request by 20 October 2011, although this period may be extended by three months. 

By comparison to its European counterparts, the UK has significantly lower supplies of gas storage, leaving it far more exposed to disruptions.  The UK is in need of increased gas storage capacity to cope with sudden demands in supply during, for example, harsh winters or if daily supplies are lost due to technical difficulties or other reasons.   More importantly however, the main reserves and supply of natural gas from the North Sea are declining, making the UK more dependent on imports. By 2015, it is likely that up to 80 per cent of the UK's gas supplies will be imported.  It will be interesting to see if a positive outcome to RWE’s request will encourage the UK and other countries to follow in RWE’s footsteps.