Challenges for the public sector in reducing links with Gazprom

It has been estimated that the UK arm of Gazprom, the Russian state-owned oil and gas organisation, has a UK market share of around 20%, with local authorities and NHS Trusts reportedly spending £107m over the period of 2016-2021.  The unfolding military and humanitarian situation in Ukraine has led to a number of local authorities in the UK reporting that they are either actively seeking to cut ties with Gazprom, or are deliberately investigating their options on this point. It has also been reported that Sajid Javid has indicated to NHS England that NHS Trusts should stop using Gazprom.

This raises a number of practical questions for public sector bodies with current supply contracts with Gazprom, as well as those who are currently procuring their supply arrangements.

For those with existing supply contracts, what rights does the purchaser have to terminate the arrangement?

• Termination for breach – most contracts include a right to terminate but breach but there is no current suggestion that this is relevant here
• Termination for conduct that brings the client into disrepute – some public sector contracts contain this additional ground but again, there is no suggestion that this would apply to Gazprom’s UK arm
• Force majeure – most contracts include provisions that apply in the event of war or sanctions but if the UK itself is not involved in the war and there are no formal UK sanctions in place against Gazprom this is unlikely to assist public sector customers
• Termination on notice (without breach) – a right of this kind usually attaches to an obligation to pay compensation to the other party, which squeezed public sector organisations may struggle to afford.

For those in the procurement process there will be questions as to whether they can exclude Gazprom from the process. Both local government and NHS Trusts are subject to the Public Contracts Regulations 2015 (as amended) in carrying out their procurements, and local authorities must also comply with the Local Government Act 1988. Public sector bodies who are keen to avoid contracting with Gazprom will need to consider if that legislation allows them to do so, if not that organisation is likely to be vulnerable to challenge.

Finally, public sector bodies (as well as other customers) will need to consider the financial costs of switching suppliers. In a situation where energy prices are only going up, whereas public sector budgets are increasingly squeezed, public sector bodies will need to consider whether their budgets can sustain a move to another supplier. It remains to be seen whether the UK government will provide any form of assistance to local authorities and NHS Trusts in order to allow them to move to other suppliers.

If you would like to discuss this topic in more detail, please contact Angela Lovett, David Hutton or Nathan Bradberry.