Long-term upstream gas supply and purchase agreements and competition law considerations

Long-term natural gas sale and purchase agreements are vertical arrangements designed for project financing. This is facilitated through long durations and take-or-pay clauses for often significant volumes. Parties to a project use these types of contracts for hedging prices and quantities. At the same time, these types of agreements may have negative effects on markets. While they enable high fixed-cost investments, they may also have a foreclosure effect on markets through limiting entry of new market participants. This is particularly problematic when exclusivity contracts are used in large numbers in a specific market (impact of ‘web of contracts’) tying the buyers and seller for extended periods. These will in certain circumstances have a negative impact on the creation and liquidity of traded markets. This impact is created through locking in significant gas volumes over long periods, especially when combined with exclusivity clauses and tacit or early renewal mechanisms. This alone, but in particular when combined with the inclusion of various other types of restrictive clauses in these agreements can also create competition law-related concerns. This chapter will focus on competition law considerations connected to long-term natural gas agreements. Given that long-term natural gas agreements have been gaining momentum in the aftermath of the Russian attack on Ukraine, this question of competition law compatibility of various contractual provisions in long-term contracts has re-emerged as an important issue for the contracting parties.