By an OGJ correspondent
NICOSIA, Feb. 14 -- The European Commission has stepped up pressure on Algeria to drop destination clauses from its natural gas contracts, saying they are illegal and could nullify existing agreements under legal challenge.
"Destination clauses in gas take-or-pay contracts are illegal under community law, as they are territorial restrictions," EC spokesman Gilles Gantelet told OGJ Online. He added that "the commission has no choice but to take action against them."
Gantelet said, "It is important that destination clauses are removed, because otherwise the whole contract would be in permanent risk of being declared void by a judge in a national court in any EU member state."
He underlined the threat to Algeria, saying that, "to avoid legal proceedings," state-run Sonatrach should enter into "rapid and constructive discussions with the commission."
Russian example
Gantelet said Sonatrach could follow the example of Russia's OAO Gazprom, saying that "negotiations with Gazprom have been proceeding quickly, and it is expected that final agreement will be reached with the Commission in the coming weeks.
"Clearly, Gazprom has been able to find solutions to this problem, deleting the territorial restrictions, while nonetheless protecting their commercial interests," Gantelet said, adding that "the solution envisaged with Gazprom could also provide a model for Sonatrach."
Gazprom is currently in negotiations with ENI SPA concerning gas supplies to Europe. Industry sources told OGJ Online that, under the agreement, ENI will be free to sell the gas it buys from Gazprom "anywhere it wishes in Europe."
Gazprom last month also renegotiated a long-term gas supply deal with Poland and thereby averted a potential legal battle with the EC over anticompetitive clauses in the Polish gas contract, especially destination clauses.
Once Poland enters the European Union in 2004, competition regulators could easily overturn that ban on reexports, releasing up to 3 billion cu m/year of surplus gas from Poland to compete with Gazprom's own sales in Western markets.
But Gazprom gained a concession. Removing the destination clauses cleared the way for EU cofinancing of a project considerably more interesting to Gazprom: a North European subsea pipeline from St. Petersburg to Germany that could ultimately extend to the UK.
That pipeline, if built, would deliver 20-30 billion cu m/year of Russian gas to the heart of one of the world's richest gas markets, Northwest Europe, by 2007-09.
EU-Algeria talks
The increased pressure on Algeria follows a meeting last week between EU Commissioner for Energy Loyola de Palacio and Algeria's Energy and Mines Minister Chekib Khelil, which focused on destination clauses in gas contracts.
In the wake of that meeting, Algeria proposed replacing the clauses with a profit-sharing arrangement, but that proposal is likely to fail as well, because profit-sharing practices also fall foul of EU competition rules.
Algeria fears that allowing EU member states to resell their imports of Algerian gas to other member states could drive gas prices down and harm gas-producing countries. Algeria is not alone in protesting the EU's stance.
Qatar's Minister of Energy and Industry Abdullah bin Hamad al-Attiyah last week said the EU's market deregulation plan will only impede development of the gas industry and discourage producers and energy firms from making investments.
"It is too risky to look at gas as any other product and subject it to similar market mechanisms," Attiyah said, adding that "such short-sighted actions would only put further obstacles towards development of the gas industry."
Gantelet, however, told OGJ Online that the EC has no objection to long-term take-or-pay contracts.
"On the contrary," he said, "the commission recognizes that they are vital to permit new investments for gas supply."
Destination clauses are simply incompatible with the EC's vision of the EU as a single energy market, not 15 markets linked together, Gantelet said, adding that "you can't have destination clauses in a single market."
The EC is unlikely to change that view. It has been striving to develop gas-on-gas competition among member states for much of the past decade and has recognized that destination clauses represent an impediment to that competition.
"The development of effective gas-to-gas competition in Europe may be hampered by the extent of long-term contracts in European gas supply and transportation," the EC said in a policy paper published in March 2001.
"An effective way of opening up the European gas market and developing gas-to-gas competition would be to introduce gas release programs by opening existing long-term exclusive supply contracts to third parties.
"A few member states have introduced such programs, and other member states should be encouraged to consider such programs, which would increase liquidity in the gas market," the paper said.
