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European Commission Launches New Antitrust Investigation into LNG Destination Clauses

On June 21, 2018, the European Commission (“Commission”) started a new investigation to determine whether so-called destination clauses in Qatar Petroleum’s liquefied natural gas (“LNG”) supply contracts with European buyers infringe the European Union (“EU”) antitrust rules.

The investigation comes in a context of revived regulatory focus globally into these clauses and LNG trading conditions. It also comes hot on the heels of the Commission’s seven-year probe into similar clauses used by Gazprom, albeit in the different market for gas supplied through pipelines.

Ensuring the free flow of energy supplies across the EU has long been a top priority on the Commission’s energy agenda and a key focus of its enforcement activities in this sector. The Commission sees LNG as a promising alternative to the supply of gas through pipelines. In that sense, this new investigation comes as a clear signal that the EU regulator is minded to intervene if it identifies any problematic impediments to the access to LNG supplies across the EU.

Two types of clauses appear to be the focus of the Commission’s investigation:

  • Clauses that prevent any diversion of LNG cargo to alternative destinations within the EU; and
  • Clauses that restrict the territories to which EU importers can redirect cargo elsewhere in the EU or the volume of cargo that they can redirect within the EU.

These clauses are also known as “destination clauses,” and the Commission has concerns that they hinder the free flow of Qatar Petroleum’s LNG within the EU. These concerns are not new.

In 2002, the Commission probed territorial sales restrictions in Nigerian gas company NLNG’s supply contracts. Five years later, it investigated similar restrictions in Algerian company Sonatrach’s LNG supply contracts. In both cases, the Commission ended its investigation after the companies committed to remove the destination clauses from their LNG contracts.

This new investigation thus comes as no surprise. In fact, the Commission had been observing the LNG sector for quite a while. Last year, the Commission published the results of its study into LNG and Storage Strategy, in which it identified destination clauses as a significant obstacle to LNG trade and the development of a fully-integrated EU energy market.

This new investigation must also be seen in the context of heightened antitrust scrutiny of LNG supply flows globally. In June 2017, concluding an intense sector-wide review and debate, the Japanese Fair Trade Commission (“JFTC”) concluded that destination clauses and diversion restrictions and profit-sharing mechanisms in LNG supply contracts were likely or highly likely to violate the Japanese Anti-Monopoly Act depending on the terms of the contract in question. Shortly thereafter, the Korean Fair Trade Commission likewise started looking into the effects of these clauses on competition. The Commission and the Indian Competition Commission also signed bilateral cooperation agreements with the JFTC last year that aim at curbing problematic destination clauses in LNG arrangements.

In this toughening antirust regulatory context, it remains to be seen how the commercial complexities of the LNG sector and concerns about the EU’s security of supply of gas will play out in the Commission’s analysis. In previous cases, the Commission had considered in some detail the types of arrangements and restrictions at play (destination clauses and potential variations such as profit sharing mechanisms, incoterms (FOB, DES, CIF), etc.), as did the JFTC in its June 2017 report. Regardless of its approach, it is fair to assume that the Commission’s investigation may have implications that will go well beyond the specificities of this case and could impact the wider LNG industry.

© 2019 Covington & Burling LLP

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About this Author

Peter Camesasca, Covington Burling, corporate finance lawyer
Partner

Peter D. Camesasca is a partner in the Covington’s Brussels and London offices, with broad experience in all major aspects of EU and national competition law.

Dr. Camesasca specializes in complex competitor interactions, advising on M&A and JV activities (specialization, R&D, joint development, etc.), as well as various informal types of competitor cooperation. He counsels clients on Article 101 exposure ranging from pure information exchanges to cartel-like allegations, having represented or still representing clients in the majority of the European...

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Graham Vinter Attorney Covington Burling
Senior Of Counsel

Graham Vinter is chair of Covington’s International Project Finance Practice Group. Prior to joining the firm, he was General Counsel of BG Group plc (2007-2015) and a member of BG Group’s Group Executive Committee, reporting to the Chief Executive.

Whilst General Counsel at BG Group, Mr. Vinter was involved in a number of projects, including the company’s largest ever project, an LNG liquefaction plant and related upstream development in eastern Australia with a combined capital cost in excess of $20 billion. In his previous career in private practice, he was involved in numerous infrastructure and energy projects around the globe, including road and rail transportation projects in Europe, power projects in Europe and Asia and LNG liquefaction projects in the Middle East.

Prior to joining BG Group, Mr. Vinter spent 27 years with a UK Magic Circle firm, including just under 20 years as a partner, and was the Global Head of its projects practice from 1996 to 2007.

Mr. Vinter was also a member of the Executive of GC100 (the Association of General Counsel and Company Secretaries of the FTSE 100) from 2010 to January 2016 and was elected to a two-year term as Chair of the organization in January 2014.

Mr. Vinter is the founding author and now co-author of Project Finance, published by Sweet & Maxwell and now in its 4th edition (2013).

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Jeremy Wilson, Covington, Litigation attorney, London
Partner

Jeremy Wilson is a partner in Covington’s London office and co-chair of the firm’s International Arbitration practice. Mr. Wilson advises and represents parties in price review disputes, investor-state matters, and commercial arbitration matters, including in both ad hoc proceedings under the UNCITRAL Rules and institutional arbitrations around the world, including under the rules of the ICC, HKIAC, the SCC, and the LCIA.

The Chambers UK Guide to the Legal Profession (2018) ranks him as a leading lawyer for Arbitration. Clients note his “impressive...

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William H.Y. Park Attorney Covington Burling Seoul
Partner

William Park heads Covington's Seoul office.  His experience includes representing companies and financial institutions on a range of matters including mergers and acquisitions, financing and real property transactions, corporate reorganizations, EPC contracts, Energy projects, and antitrust investigations in the US and EU.

He has also advised clients on special investigations by US and foreign governments, numerous arbitration, litigation and other types of dispute resolution matters in the US, Africa, Middle East and Latin America.  Select...

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Ichiro Ike Morinaga Attorney DC Covington
Of Counsel

Ike Morinaga advises domestic and international companies on issues ranging from corporate transactions to governance and compliance matters.  Capitalizing on his prior experience as an international banker, Mr. Morinaga brings a unique, business-focused perspective to his legal advice.  He has considerable experience working with companies in the manufacturing, automotive, energy, and hospitality industries.

Mr. Morinaga is particularly adept in helping international companies structure transactions in the most advantageous manner possible.  As...

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