With a robust demand for gas and a desire to reduce its reliance on Russian gas supplies, Europe is a market hotly pursued by liquefied natural gas (“LNG”) sellers and export project developers alike. Those seeking to sell to Europe, however, should be aware of the European Union’s (“EU”) Regulation on Wholesale Energy Market Integrity and Transparency (“REMIT”)[1]. REMIT imposes certain registration, disclosure and trade reporting obligations for those engaged in wholesale gas and power transactions in EU markets (otherwise known as “market participants”). This article provides an overview on REMIT as applied to LNG suppliers to the EU.

Background on REMIT

REMIT aims to improve the transparency and integrity of the EU’s wholesale gas and power markets through monitoring of trading activities and punishment of market manipulation practices. In particular, REMIT prohibits the use and unauthorized disclosure of inside information, requires disclosure of exclusive and price sensitive information in a timely and effective manner before trading in wholesale energy products and prohibits insider trading and market manipulation practices such as, among others, undertaking transactions that may give false or misleading signals about supply, demand or prices of wholesale energy products.  

For purposes of market monitoring, REMIT imposes obligations on market participants to report transactions in the wholesale energy market. Where relevant, market participants are also required to report information relating to the capacity and use of energy facilities, including LNG receiving terminals. Where a wholesale energy transaction must be reported, the party to that transaction must first register as a market participant.[2]

The Agency for the Cooperation of Energy Regulators (“ACER”), an EU body, coordinates market monitoring alongside the national regulatory authority of each EU member state (collectively, the “NRAs”). The NRAs are additionally responsible for investigating and enforcing compliance with REMIT, and their enforcement powers may include, among others, the powers to “require the cessation of any practice that is contrary to [REMIT]”, “request a court to freeze or sequester assets” and “request a court or any competent authority to impose a temporary prohibition of professional activity.”[3]

Registering as a Market Participant 

REMIT requires that market participants register before entering into a reportable transaction under REMIT. A market participant is defined as “any person, including transmission system operators, who enters into transactions, including the placing of orders to trade, in one or more wholesale energy markets” in the EU.[4]  In respect of the parties to an LNG transaction, ACER has clarified that “assuming the delivery of the [LNG] is in the European Union, both parties to the contract will need to register”[5] and “it makes no difference whether or not the person is resident within the EU.”[6]  Accordingly, an LNG seller who transacts within the EU, even if such seller is not established or resident or does not otherwise have any presence or carry out any other business activities in the EU, will nonetheless be required to register.

Reporting LNG Trades

While REMIT was promulgated in 2011 and its implementing regulations in 2014, the reporting requirements for bilateral trades came into effect only as of 2016.[7] As LNG trades are done on a bilateral basis, the reporting of these trades is now required.[8] So what are the reporting requirements for LNG trades?   ACER has clarified as follows: 

“Any importation or offloading of liquefied natural gas in any LNG facility (including flanges that connect the LNG vessel to the LNG terminal) [is considered by ACER] as ‘delivery in the [EU]’ as far as the delivery of the product takes place in the [EU] … Reload-contracts at a regasification terminal or at a vessel where the delivery of the product is not in the [EU] are not reportable.”[9]

Accordingly, sales of LNG on an EU-delivered basis (i.e., DAT under INCOTERMS[10]) are reportable, but not those on a free-on-board basis (i.e., FOB under INCOTERMS[11]) where the EU buyer loads the LNG at a non-EU terminal.

ACER has yet to address trades on a CIF/CFR[12] basis. Under these arrangements, the delivery of LNG effectively takes place at the loading port (and not the unloading port), and the seller merely procures transport on behalf of the buyer. Based on ACER’s answer above, the buyer (but not the seller) would arguably be a market participant in an LNG sale on a CIF/CFR basis where the LNG was loaded in a non-EU terminal and unloaded in an EU terminal and, accordingly, only the buyer would need to report the transaction. 

Master LNG agreements are not reportable for those engaged in LNG trading; however, they are reportable for any transactions confirmed pursuant to a master LNG agreement. ACER has expressly clarified that a master agreement “only sets out the rules for trading activities of the two counterparties of a contract, but does not set any obligation to the two parties ... e.g. the amount of electricity, time and place of delivery and price,[and] is not a reportable contract.”[13]

Potential Impact on LNG Industry

While this article focuses on the reporting burdens of a market participant under REMIT, it is important to reiterate that a market participant is also subject to the insider trading and market manipulation prohibitions under REMIT. A breach of these prohibitions may lead to civil liability and possibly criminal offences. Industry will likely view REMIT as another costly and time-consuming regulatory burden and it remains to be seen whether non-EU counterparties, who have no other nexus to the EU, will seek contractual alternatives in order to avoid REMIT – for example, by contracting on a CIF/CFR basis. In case of sales to a non-EU destination, REMIT may nonetheless be implicated in discussions around diversion rights if delivery of cargoes may be diverted to the EU. Thus, it would be advisable for non-EU counterparties to consider potential REMIT implications in their negotiations.

[1] Commission Regulation 1227/2011, On Wholesale Energy Market Integrity and Transparency, 2011 O.J. L(326) 1, 10 [Hereinafter REMIT]. 
[2] Registration shall be completed with the NRA in the EU member state in which the market participant is established or resident or, if it is not established or resident within the EU, within the EU member state in which it is active.
[3] REMIT Art. 13. Note that the NRAs may exercise their enforcement powers directly, in collaboration with other authorities or by application to the competent judicial authorities.
[4] REMIT Art. 2(7).
[5] See Questions & Answers on REMIT 20th Edition, III.3.36, available at https://www.acer-remit.eu/portal/custom-category/remit_questions, last updated Dec. 14, 2016.
[6] Id. at II.1.2.
[7] REMIT Art. 12, which provides that reporting of certain data, including transactions “concluded outside an organised market”, begins on 7 April 2016.
[8] According to REMIT Art. 8(4), a market participant may report directly to the NRA or use a third party. In case of the former, the market participant should be aware of additional ancillary obligations known as the “RMM requirements” relating to information transmission security and operational reliability. There is also the obligation to potentially upgrade IT systems to fall in line with ACER’s REMIT information systems. These additional obligations may encourage market participants to rely on third parties to satisfy their reporting obligations under REMIT.
[9] See footnote 6.
[10] DAT is short for Delivered at Terminal. Under a contract on a DAT basis, the seller transports the LNG to the buyer’s port and bears risk of loss on the LNG until it is unloaded at said port.
[11] Under a contract on a FOB basis, the buyer arranges for transportation and risk of loss on the LNG passes to the buyer as it is loaded onto the buyer’s arranged vessel at the seller’s port.
[12] CIF is short for Cost Insurance & Freight and CFR is short for Cost & Freight. 
[13] See Frequently Asked Questions (FAQs) on REMIT Transaction Reporting, 6th Ed., Question 1.1.11, available at https://www.acer-remit.eu/portal/custom-category/remit_questions, last updated Dec. 14, 2016.