UK: Developments in the public procurement rules applicable to the oil and gas sector

By Judith Aldersey-Williams and Susan Hankey

In past Law-Now bulletins we have referred to changes due to take place in the application of procurement legislation to the oil and gas industry. The new Regulations which implement updated EU directives come into force today. One immediate change for the oil and gas industry is an adjustment to the thresholds for application of the rules. There is potential for the industry to become fully exempt from the application of the procurement regime but at present there seems no appetite for an application for exemption.

In past Law-Now bulletins we have referred to changes due to take place in the application of procurement legislation to the oil and gas industry. The new Regulations which implement updated EU directives come into force today. One immediate change for the oil and gas industry is an adjustment to the thresholds for application of the rules. There is potential for the industry to become fully exempt from the application of the procurement regime but at present there seems no appetite for an application for exemption.

The relevant law for England is The Utilities Contracts Regulations 2006 which can be found by clicking here implementing Directive 2004/17/EC of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy and transport sectors ("the New Directive"). This has recently replaced the Utilities Contracts Regulations 1996 (as amended by the Utilities Contracts (Amendment) Regulations 2001) which implemented an earlier Council Directive 93/38/EC of 14th June 1993, as amended.

The New Directive is separately implemented in Scotland through almost identical regulations (as procurement is a devolved matter) and these regulations can be found by clicking here.

The Regulations place detailed and specific obligations on operators in a number of utility sectors in the EU and EEA to ensure that they apply competitive procedures in major procurement decisions.

Significantly, the oil and gas sector in the UK benefits from a Commission decision of 1997 - the so-called Article 3 derogation - which means that there is no need to apply the full rules but only some basic principles, including transparency and non-discrimination and holding a competition unless there is an objective reason not to do so. Other Member States with a derogation are the Netherlands, Germany, Austria and Norway.

Recital 38 and Article 27 of the New Directive (and Paragraph 8 of the Regulations) confirm that the regime established for the UK's upstream oil and gas industry by the "derogation" from the old Directive remains in place under the New Directive. There is therefore no chance of oil companies finding themselves subjected to the full rigour of the rules.

However, the New Directive goes further in that it enables particular sectors to apply for a full exemption from the public procurement rules provided certain conditions are met (market access must be open and relevant utilities subject to direct competition). Article 30 provides three routes for obtaining a full exemption from the requirements of the New Directive.

• Utilities may apply through their Member States to the European Commission;

• If national legislation permits (and the UK Regulations do so) utilities may apply directly to the Commission for exclusion of their sector. In this instance, the Commission would notify the Member State of the application.

• The third route is for the Commission to consider the matter on its own initiative (although presumably this is most likely to be triggered by an informal approach from relevant utilities where the second route has not been made available).

The main difference between the three routes is likely to be timing. The Directive requires the Commission generally to take decisions within six months of an application (and in the case of applications by Member States, a decision is deemed granted if no decision has been taken within that time). An application by a Member State therefore has the firmest timetable but in some cases utilities may feel they can put in an application quicker than the Member State may be expected to do.

A strong argument could be made that the relevant conditions are met in relation to the oil and gas industry. In principle an application could be made by the purchasing entities as soon as the new Regulations come into force. If accepted, this could lead to an exemption later in 2006. However, our current understanding is that, as a result of lack of interest from operators and pressure from the supply chain, UKOOA is no longer treating an application for an exemption as a priority and therefore it is presently unknown whether or when an application may be made.

In the meantime, oil and gas companies must comply with the existing procurement regime, as ameliorated by the derogation.

The EU rules apply only to contracts above the following thresholds:

• works contracts over 5,278,000 Euros (£3,611,219);

• supply contracts over 400,000 Euros (£288,741);

• services contracts over 400,000 Euros (£288,741).

Currently a contractor may apply during a tender procedure to ensure the rules are applied fairly, and the procedure may have to be stopped and restarted. After the contract has been signed, the only remedy for an aggrieved contractor is damages. As a result of the judgment of the European Court in a case involving Alcatel which held that such remedies were inadequate, the New Regulations amend the public procurement regime in the UK to enable contractors to complain at any time within 15 days of contract announcement and have the contract set aside, even if has already been entered into. However these amendments will not apply to utilities which are subject to a derogation, and therefore are of no direct concern to the oil and gas sector.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 31/01/2006.