Report of Working Committee 10: "Gas and Developing/Transitional Economy Countries"

22nd World Gas Conference June 15, 2003 Tokyo, Japan
Report of Working Committee 10

Gas and Developing/Transitional Economy Countries
Rapport du Comit de Travail 10

Pays gaziers en voie de dveloppement
et en transition conomique
Chairman/Prsident
Eduardo Zapata
Argentina
ABSTRACT
This report details the work undertaken by Working Committee 10 during the triennium 2000
2003.
To analyse the complexities surrounding the development of the gas industries in developing and
transitional countries, the work was divided in two:
Gas Supply
Domestic Market Development
Each of these major issues was studied by a corresponding Study Group.
The result of Study Group 10.1 who focused on the challenges posed by international projects for
gas supply covers the first part of this report, while the second, submitted by Study Group 10.2,
contains the description of domestic gas market development in some selected country cases, and
the learning and insights that can be extracted from them.
Additional information on these subjects will be discussed at the round tables organized within the
two WOC10 Sessions which will take place during the World Gas Congress 2003.
Some of the issues addressed will also be debated during our sessions at the Technology Forum.
RSUME
Ce rapport prsente lensemble du travail ralis par le Comit de Travail 10 pendant le triennium
2000-2003.
Afin danalyser la complexit de lenvironnement dans lequel se dveloppe lindustrie gazire des
pays en voie de dveloppement et en transition ltude a port sur deux volets :
Lapprovisionnement en gaz ;
Le dveloppement du march domestique.
Chacun de ces thmes majeurs a t tudi par un groupe de travail spcifique.
Le rsultat du travail du Groupe de Travail 10.1 qui a essentiellement abord les dfis relevs
durant la ralisation de grands projets internationaux de transport de gaz constitue la premire partie
de ce rapport.
Prsente par le Groupe de travail 10.2 la seconde partie, quant elle, analyse la croissance du
march gazier domestique de certains pays slectionns et les enseignements qui peuvent tre tirs
de ces expriences exemplaires.
Ces sujets seront galement lobjet de dbats complmentaires loccasion de la tenue de tables
rondes organises lors des deux sessions du Comit de Travail 10 pendant le Congrs Mondial du
Gaz 2003.
Enfin le Forum Technologique offrira une occasion supplmentaire de revenir sur certains sujets
voqus dans le rapport ou discuts durant des tables rondes.
TABLE OF CONTENTS
1. INTRODUCTION
2. REPORT OF STUDY GROUP 10.1
Overview
The International Gas Pipeline Russia-Turkey: the Blue Stream Project
ASEAN Pipelines Seen from Gas Importing Economies
Pipeline Projects to Croatia
3. REPORT OF STUDY GROUP 10.2
Introduction
Preamble
Country Case: Argentina
Country Case: Brazil
Country Case: Cameroon
Country Case: Poland
Country Case: Romania
Natural Gas in Low-Income Areas of South Africa
Problematic of Smaller Customers Markets Development
Lessons and Conclusions
Working Committee 10
Gas Market in Developing and Transitional Countries
2000-2003 Triennium Report
INTRODUCTION
As one could possibly imagine when reading this Working Committees title, our group deals with
the global, strategy-oriented fields in the gas industry, following the long-term vision established by
the IGU.
From a systemic point of view, WOC10 is responsible of working on the feed-back information
from diverse experiences in the gas industry of developing and transitional countries. Through valueadded compilation and analysis, it intends to generate a learning cycle that will help expand gas
utilization, and increase its efficiency, in areas which are still in the early stages of development.
Thus, the Committee has not only worked on countries who are developing their gas systems
(both physical and organizational), but has also concentrated on cases quite unique in their class due
to their political and economic environment, which could possibly provide solid references for future
gas developing countries.
The objective of the following reports therefore, is to provide learning and insights on several of
the main issues which surround the construction of gas structures, mainly:
Legal
Regulatory
Economic
Financial
Technical
Environmental
During the decision process on how to tackle this task during the 2000-2003 triennium, and based
on the particular complexities of each aspect of gas development, WOC10, according to IGUs
Triennial Working Programme, decided to divide this study in two. The first half of this work,
elaborated by Study Group 10.1 deals with issues surrounding Gas Sourcing, while the second part,
submitted by Study Group 10.2, focuses on Domestic Market Development.
Gas Sourcing
In order to be able to extract useful teaching tools from the gas sourcing issue, Study Group
10.1 has selected three major, international projects, currently on different levels of advancement,
which are (or will be) deployed in different areas of the globe.
Indeed, the Blue Stream Project is one that has been completed and which can provide some
lessons on how some complex problems can be approached regarding technical, financial and fiscal
issues, as well as in international agreements.
The ASEAN Pipelines Project is also a large scale project involving several countries, though in
this case only part of it has been completed. The analysis of the impact on the economy of importing
countries, specially the Philippines and Singapore could prove useful for similar setups elsewhere.
Similar learning could be derived from the Pipelines Project to Croatia, which focuses on a
specific country-market, and the alternative supply solutions to service it.
It was the general feeling of the group, however, that this work would not be complete if a
spotlight was not placed on the impact that Liquid Natural Gas (LNG) has on major gas sourcing
projects, specially considering the expansion this energy source has shown during the past decade.
It is for this reason that Study Group 10.1 has organized for the WOC10 Session to be held on June
2nd during the World Gas Congress 2003, a roundtable under the title Pipelines vs. LNG: Competition
or Cooperation, with panelists from the private sector and institutions, who will provide their views
from a global and a particular perspective.
Domestic Market Development

Extracting lessons from gas market developments in diverse regions in the world poses a
considerable challenge, considering the wide range of situations regarding macro-economic context,
energy policy, financing issues, gas pricing, regulatory constrains, environmental concerns and
technical problems which have an impact on the development of the downstream sector.
However, the ever present globalized scenario is also evident through a few mega-trends that
have affected the gas industry worldwide, namely:
Deregulation and privatisation of services

Introduction of competition through Third Party Access and Unbundling
New role of the state
International financing
Environmental issues
Though there is a general consensus on the key success factors that allow developing projects
efficiently (stable macroeconomic environment, transparent and reliable legal framework, marketbased pricing, etc.), the ways and timing of these may differ in some cases.
In an attempt to cover some of these complex and intertwining situations, Study Group 10.2 has
worked on a group of countries with a particular set of features of their own.
The case of Argentina shows the importance of a sound regulatory framework, though this alone
is not enough when facing a severe economical and financial crisis.
With the example of one of the private distribution experiences in a vast country like Brazil, we
intend to provide some learning when a market of huge potential must be developed practically from
grass roots, and with major supply issues to be resolved.
At a much earlier stage of development, Cameroon however poses a case of governments
intention of developing its market and resources, with the economical and environmental issues as
the main drivers.
In the transitional countries we developed the cases of Poland and Romania, who are refining a
fresh set of rules, including the new role of the state, while having to modernize their infrastructures in
a complex economic scenario.
To elaborate further some of the issues developed in this work, Study Group 10.2 has prepared,
for the second WOC10 Session to be held on June 4th, another roundtable to debate the ideas on:
Development of smaller customer markets in developing and transitional countries: How and in what
context. We are confident that the panelists selected from within as well as outside the gas industry,
will provide a wide and enriching perspective of views.
Other Activities
During the last leg of this triennium, a Call for Papers was put into effect. With the intention of
obtaining papers which could complement our reports, we proposed the following themes:
Regulation and pricing in gas business in developing/transitional economies

Issues related to gas supply diversification in developing/transitional countries
Experiences of gas market transformation in developing/transitional countries
Management and financing of gas projects in developing/transitional countries
Impact of financial crises on gas market development
As a result, we received over 20 papers from countries from Central and South America, Europe,
Asia, Africa and Oceania.
To further highlight the authors ideas, we have organized for each of our three sessions at the
Technology Forum, to be held during the first three days of the World Gas Congress, a mini-seminar
with the following titles:
Regulation and Tariff Policy, the Launch Pad for a Successful Market Evolution
Supply diversification and Security: The Cases of Asia Pacific and Europe
Market Transformations - Lessons From the World
During these, we have invited some of the authors who have presented papers related to these
issues, to act as panelists exposing the core ideas of their works.
We therefore encourage you to read on the two comprehensive Study Groups reports, in the
hope you find them useful as well as entertaining. They contain three years of research and analysis
we hope will render practical knowledge to future developers and decision-makers to find an easier
way to a successful completion of their individual gas projects.
We would also like to express our sincere gratitude to all those people whose support and
encouragement has made this work possible.
WOC 10 and SGs

Gas and Developing / Economy Transitional Countries
Members / Contributors 2000-2003

Name
Eduardo ZAPATA
Camillo M. GLORIA
Andres KIDD
Luciano MARCHESI
Yannick GUERRINI
Johann GALLISTL
Robert BOSNJAK
Povl Dons CHRISTENSEN
Gilles GUEGAN
Jean-Michel MERZEAU
Carine SANCHEZ
Angelo FERRARI
Teodosio TIRELLI
C. R. PRASAD
Koichi ABE
Hiroki OKIMI
Toshio YAMAMOTO
Wanda LUTOSLAWASKA
Lev CHERNYAK
Milan SEDLACEK
Fusun IVAK
Mourad BELGUEDJ
Bent SVENSSON
Paul Nag NGII
Simon F. TAMFU
R. SEME Abomo
Nation or Institution
Argentina
Italy
Argentina
Italy
UN/ECE, Geneva
Austria
Croatia
Denmark
France
France
France
Italy
Italy
India
Japan
Japan
Japan
Poland
Russia
Slovac Republic
Turkey
World Bank, Washington
World Bank, Washington
Cameroon
Cameroon
Cameroon
WOC 10 Chairman
WOC10 Vice Chairrman
WOC10 Secretary
SG 10.1 Coordinator
SG 10.2 Coordinator
SG 10.1
SG 10.1
SG 10.2
SG 10.2
SG 10.1
SG 10.2
SG 10.1
SG 10.2
SG 10.2
SG10.1; from 2002
SG 10.1
SG 10.1
SG 10.2
SG10.1
SG10.1
SG10.1
SG 10.2
SG 10.2
SG 10.2
SG 10.2
SG 10.2
Remark
Sergio RABALLO
Jose M. VAZQUEZ
Marcelo MORING
Jimmy ROZE
Alfred WUERZINGER
Shunjiro YAMASHITA
Mike DE PONTES
Argentina
Argentina
Argentina
France
Germany
Japan
South Africa
WOC10 Chair. in 2000

WOC10 Chair. till Mar. 2002
WOC10 Secr. in 2000
SG10.2 till 2002
SG10.2 till 2001
SG10.1 till 2002
SG 10.2 till 2001
Note: Members in country names alphabetical order; non-member contributors and earlier members later.
Report of Study Group 10.1

The International Gas Pipelines:
Impacts in Economic Development
Coordinator
Luciano Marchesi
Italy
OVERVIEW
The work of the Study Group 10.1 focused on International Gas Pipelines and their Impact on the
Economic Development of the concerned countries.
Such activities were carried out in the framework of Working Committee 10s tasks, which, as
highlighted in the WOC 10s Report, were defined by and based on the constantly growing concern on
how to help the development of the natural gas sector in the developing / transitional countries.
Study Committee 10.1s goal was, therefore, to study the experience from different examples of
main gas pipelines around the world and to define the major topics related to the trade (market to be
served, rules and regulation, contractual arrangements, influence on economic development, .) .
The studies were carried out with the intent of making available to the governments and to the
operators involved in the gas market development a tool from which to extract useful suggestions for
their work.
The choice made was to analyse actual cases, at different stages of implementation, in order to
offer experiences and learning from the real world and not just from desk studies.
The limitation of this realistic approach, decided according to the Triennial Working Programme
indications, is that projects of the size and type under discussion are always different to each other
and consequently only one part of the lessons derived from one of them can be applied to the others.
On the other side, the indications and the conclusions derived from the analysis of such projects can
be regarded as more instructive than generic studies, also in consideration of the fact that they were
mainly carried out by the SG 10.1 members involved, or whose companies are involved, in the
projects analysed.
According to the above, WOC 10 selected three Case Studies to be carried out by SG 10.1:
-
The Blue Stream Project;

The ASEAN Pipelines Seen from Gas Importing Economies;
The Pipeline Projects to Croatia.
The Blue stream Project is an international gas pipeline connecting directly Russia and Turkey
by means of two parallel sea-lines laid on the Black Sea bed. These lines will transport, at plateau,
sixteen billion cubic metres of gas per year, giving a fundamental contribution to the fulfilment of the
Turkish markets fast growing natural gas request. The project is completed by two on-shore
sections: the first in Russia, connecting the Russian main gas transportation system in the Stavropol
region to the sea-line Russian landfall at Dzhubga; the second in Turkey, from the Turkish landfall at
Samsun to the countrys high pressure transportation network at Ankara.
The Blue Stream Project is one which has been realised, thus it can show given its goals how
various challenging problems of different natures were solved, and it is possible to derive conclusions
from this experience.
The challenges that this complex project had to face ranged from the technical to the fiscal and
financial ones, in the framework of international agreements between countries and companies.
The analysis of this project, centred on the Turkish economy and its energy needs, showed also
the benefits deriving from it for the Russian economy and for its internal gas market.
The growing relations between the gas markets of gas exporting and importing countries and the
mutual benefits deriving from the development of large international gas projects is an interesting
issue that could be better analysed in the future in order to further contribute to the developing gas
markets growth.
The ASEAN Pipelines Seen from Gas Importing Economies case study analyses the
possible effects of the Trans-ASEAN Pipeline System (TAGP) on the involved economies (ASEAN is
the Association of South East Asian Nations see chapter 3.1 of the case study for details).
Such a System, a very large scale one, partly existing and partly to be realised, has been
conceived to connect various gas producing areas with the consumption centres both of which are not
uniformly distributed in the wide Southeast Asian Archipelago.
The analysis of the present situation, of the potential developments and of their impact on the
economies of the importing countries specifically studied (i.e. the Philippines and Singapore) gives an
interesting picture from which various considerations and conclusions can be derived.
Furthermore, this case study takes into consideration another very interesting topic: the increased
competitiveness of the LNG as a supply option in comparison with the pipelines, making several
interesting considerations not only from the economic point of view but also with respect to the supply
diversification and security and to the possibility that Pipelines and LNG can complement each other.
This is a topic of interest not only for the ASEAN countries, but also for most of the developing
gas markets. In fact it has been chosen as the theme of the first of the two Round Tables organised
by WOC 10, whose title is Pipeline vs. LNG in Developing Markets: Competition or Cooperation ?.
This issue, anyway, is far from having been completely analysed and, because of the worldwide
gas market LNGs growing share and of its flexibility, could be further studied in the future in the
framework of the above mentioned increasing gas markets interdependence and complementariness.
The Pipeline Projects to Croatia completes the range of case studies carried out, being
different from the previous two both for the dimension of the market taken into consideration and for
the supply projects development stage.
It is a detailed analysis of a specific countrys market, of its needs for gas and of possible
alternative supply options, which are still under evaluation, and offers very interesting examples of
how a transitional economy will be able to benefit from having additional gas availability.
Three specific areas have been particularly analysed (Istria, the Split-Dalmatian County and the
city of Zagreb) and the impact that natural gas has had, and will have, on their environments and
economies is highlighted.
The considerations on how an increased availability of natural gas will either displace other energy
sources, or complement them or allow an optimisation of their use or of the related infrastructures are
also of particular interest.
As anticipated, the preparation of each one of the three case studies was performed by the SG
10.1 members who were, in different ways, involved in that specific project or could have direct
access to the relevant information.
The Study Groups role, with respect to the case studies, was to address the basic choices and to
comment on their structures and drafts during the various meetings held in the triennium 2000-2003.
The SG 10.1 members who, with high professionalism, carried out the case studies are:
-
the Blue Stream Project :

Mrs. Fusun Ivak (Turkey), Mr. Lev M. Tcherniak (Russia) and Mr. Teodosio Tirelli (Italy);
The ASEAN Pipelines Seen from Gas Importing Economies :

Mr. Hiroki Okimi (Japan) with the help of Mr. Shunjiro Yamashita and Mr. Toshio Yamamoto
(both from Japan);
The Pipelines Projects to Croatia:

Mr. Robert Bonjak (Croatia), Mr. Johann Gallistl (Austria) and Mr. Angelo Ferrari (Italy).
As said at the beginning of this Overview, the aim of SG 10.1 was to produce a work which could
be of some help for those who operate or will operate in the gas market development in developing /
transitional economies, at least as a contribution of ideas and experiences from real situations.
During our triennial work, new issues surfaced as the result of the analyses or of new
technological achievements or of markets evolution (such as the above mentioned growing gas
markets interdependence and the pipelines / LNG issue).
These topics deserve attention, being among the keys for the successful development of many
gas markets and /or projects and could be taken into consideration in the next triennium activities.
CASE STUDY:
The International Gas Pipeline Russia-Turkey:

The Blue Stream Project
Table of Contents
1 Introduction
2 Technical Description of the Project
2.1 General Description
2.2 The Russian On-Shore Section
2.3 The Off-Shore Section
2.3.1 Generalities
2.3.2 The Pipelines
2.3.3 The Compressor Station
2.3.4 The Off-Shore Challenges
Geomorphology
H2S Concentration
Geo-Hazard
The Pipeline Installation
Pipeline Integrity Analyses
Pipeline Repair
During Construction
During In-Service Life
2.4 The Turkish On-Shore Section
2.5 Environment
2.6 Technical Rules and Codes
3 The Scheme and Sources of Financing
3.1 Total Cost Of the Project
4 The Project Participants
5 Fiscal Aspects
6 The Turkish Gas Market
6.1 Demand and Supply Forecast
6.2 Commercial Agreements
6.3 The Turkish Gas Infrastructures
7 The Gas Supply Contract

8 The Gas Transportation Contracts
9 Conclusions and Suggestions
9.1 Major Challenges
9.2 Experience and Prospects
9.3 Economic Impact on the Countries Involved in the Project
9.3.1 Russia
9.3.2 Turkey
9.4 Effectiveness of the Blue Stream
9.5 Suggestions
The International Gas Pipeline Russia-Turkey:

The Blue Stream Project
ABSTRACT
Natural gas has been available for Turkish consumption for 17 years. Its use expanded sharply
after the signing of the first sales and purchase agreement with the former Soviet Union in 1986. Gas
sales began at 0.5 bcm in 1987 and reached some 17.3 bcm in 2002.
A dynamic economy together with population growth, industrialization, rapid urbanization, source
diversification and environmental concerns have been responsible for the increased use of natural
gas in Turkey.
Natural gas demand for power generation is driving the gas consumption growth in Turkey as a
result of increased gas use in base load power plants. The consumption projections for natural gas
are around 32.1 bcm in 2005, 55.1 bcm in 2010 and 82.8 bcm in 2020.
In this context, Russia and Turkey signed, on December 15th, 1997, a 25-year deal under which
the Russian Company GAZPROM would construct a new gas export pipeline (the Blue Stream
Project) to Turkey for the delivery of 16 bcm of natural gas annually.
On February 11th, 1998, Eni and GAZPROM signed a strategic alliance agreement for the
cooperation in hydrocarbons production and transportation activities. The Blue Stream can be
considered as the most significant result produced to date by that agreement.
Le gazoduc international russo-turc : le Projet Blue Stream .

RSUME
Le gaz naturel est accessible la consommation turque depuis presque 17 ans. Son
utilisation saccrut considrablement aprs la signature des premiers accords de vente et dachat
avec lUnion Sovitique en 1986. Les ventes de gaz dbutrent 0.5 milliards de m3 en 1987 et
atteignirent les 17.3 milliards de m3 en lan 2002.
Une conomie dynamique conjugue la croissance de la population, lindustrialisation,
lurbanisation rapide, la diversification des sources dapprovisionnement et au soucis
environnemental sont les principales causes de la croissance de lusage de gaz naturel en Turquie.
La demande de gaz naturel pour la production dlectricit dtermine aujourdhui la
croissance de la consommation de gaz en Turquie, en raison de laugmentation de lutilisation du gaz
naturel dans les centrales lectriques utilises en base. Les prvisions pour la consommation de gaz
naturel se chiffrent aux alentours de 32.1 milliards de m3 pour 2005, 55.1 milliards de m3 pour 2010 et
82.8 milliards de m3 pour 2020.
Dans ce contexte, le 15 dcembre 1997, la Russie et la Turquie ont sign un accord en vertu
duquel, sur une priode de 25 ans, la compagnie russe GAZPROM devait construire un nouveau
gazoduc pour lexportation vers la Turquie (le Projet Blue Stream ) permettant de fournir 16
milliards de m3 par an.
Le 11 fvrier 1998, Eni et GAZPROM ont sign un accord dalliance stratgique de
coopration pour les activits de production et de transport dhydrocarbures. A ce jour, le Blue
Stream peut tre considr comme le rsultat le plus significatif produit par cet accord.
1. Introduction
Turkey is one of the most perspective and capacious markets in the whole European and West
Asian region. According to the available estimations, the Turkish markets natural gas demand will
considerably increase in the coming years. The average annual rate of growth will be several times
more than the analogues West European index.
Before the decision to approve the construction of the Gas Pipeline Russia-Turkey via the Black
Sea basin ("Blue Stream"), Turkey was already receiving natural gas from Russia via Ukraine,
Moldova, Romania and Bulgaria. The first contract was signed in 1986 for 6 bcm/y of natural gas.
Additional 8 bcm/y of natural gas are supplied through Turusgaz in the framework of a contract signed
by BOTA and Turusgaz in 1998. The deliveries began in 1987 for the 6 bcm/y contract and in 1998
for the 8 bcm/y contract. Turkey is also receiving 4 bcm/y of LNG from Algeria and 1.2 bcm/y from
Nigeria since 1994 and 1999 respectively, but such volumes did not meet the country's requirements.
According to the Turkish State Company " BOTA " gas consumption will reach 32.1 bcm in
2005, 55.1 bcm in 2010 and 82.8 bcm in 2020, starting from a consumption of 17.3 bcm in 2002. The
country carried out the negotiations with different perspective gas suppliers over many years.
Natural gas deliveries from Russia to Turkey via the Black Sea became the subject of the
Agreement, between the Governments of the Russian Federation and of the Republic of Turkey,
signed on December 15th, 1997. As a result, on the same date, GAZEXPORT and BOTA signed a
Natural Gas Sale and Purchase Contract which provides for pre-agreed natural gas volumes
amounting to a total annual volume of 16 bcm at the plateau level throughout the duration of the
contract. 365 bcm of natural gas will be imported from Russia to Turkey via the Black Sea during the
25-year term of its validity.
The natural gas supply both from the Eastern and Western directions will allow not only to
increase the natural gas export from Russia to Turkey up to 30 bcm/y, but also to improve the
reliability of supply. According to the contracted volumes, Russia will be able to meet approximately
45% of the natural gas requirements in Turkey in 2015.
Based upon this contract, GAZPROM planned the construction of a new off-shore gas pipeline
system from the Russian Federation to Turkey, running below the Black Sea waters.
On February 11th, 1998, Eni and GAZPROM signed a strategic alliance agreement for the
cooperation in hydrocarbons production and transportation activities. The Blue Stream Project can be
considered as the most significant result produced to date by that agreement.
On November 20th, 1998, Eni and GAZPROM entered into a Memorandum of Understanding
(MoU) to participate on an equal basis in a joint venture for the development and implementation of a
gas transportation system from Dhzubga in the Russian Federation to Samsun in Turkey.
The off-shore part of the Blue Stream Project includes the engineering, construction and
installation of two parallel 24 gas pipelines for an overall length of about 774 km (391+383) laid in the
Black Sea at a maximum depth of about 2,150 m, and the building of a 180 MW compressor station in
the Dzhubga area on the Russian coast, able to compress gas at the pressure of 250 bar, which is
needed to transport the gas to Turkey.
To feed the offshore lines, GAZPROM built in Russia an additional 56/48 pipeline from
Stavropol to Dzhubga for an overall length of about 370 km.
Also in Turkey it was necessary to connect the offshore pipeline coming from Russia to the
national gas network: BOTA built a new 48 pipeline from Samsun, on the shore, to Ankara, whose
length is 501 km.
Figure 1 gives an overall view of the pipelines routes.
Fig. 1 Overall View of the Pipelines Routes
Krasnodarskaya
60 MW
Pipeline
48 (62 Km)
Pipeline
56 (308 Km)
Stavropolskaya
60 MW
Krasnodarskaya
GAZPROM
Dzhubga
Compressor Stations
Beregovaya
180 MW (4+2 T.C.)
Max Depth = 2,150 m
W
Pipeline
24 (391 Km)
ENI - GAZPROM
(2 LINES 24)
Pipeline
24 (383 Km)
Pipeline
48 x 501 Km
S
TA
BO
2. Technical Description of the Project

2.1 General Description
The "Blue Stream" gas pipeline consists of three sections: the Russian on-shore section, the offshore section (including the Beregovaya Compressor Station, named BCS) and the Turkish on-shore
section. Its total length is about 1,260 km. The Russian on-shore section begins at the city of
Izobylnoe, Stavropol region, Russian Federation and runs to the city of Dzhubga near the Black Sea
coast. The off-shore gas pipeline section begins at Dzhubga, including the Beregovaya compressor
station, and runs up to Samsun, Turkey. The Turkish on-shore section runs between Samsun and
Ankara. The specifications of the pipeline sections are given in Table 1.
Table 1 - The "Blue Stream" Pipelines

by section
The Russian on-shore section
(Izobylnoe-Dzhubga)
The off-shore
section
(DzhubgaSamsun)
The Turkish onshore section

(SamsunAnkara)
Length
( km )
370
383+391
501
Diameter
(inches)
56 (307.8 km)
48 ( 62.2 km)
24
(2 lines)
48
Pressure
( bar )
75 (307.8 km)
100 ( 62.2 km)
250
75

The Russian on-shore section (cost about US$ 1,050 M) is totally owned by GAZPROM and
includes 2 compressor station units, 20 valve units, 1 gas measuring station and 11 cathodic
protection stations.
The gas pipeline runs through the territory related to the Azov Sea basin, crossing 7 water obstacles,
2 km bogs, 13.5 km water encroached territories. The geological section shows the predominance of
the argillaceous sediments down to 35-45 m. The km 308-km 370 section route runs through the
Caucasus mountains . Absolute elevations change from 190 m up to 340 m. This region is the area
of the development of active geo-tectonics and of the modern geological processes such as
landslides, erosion, screes, etc.
Two compressor stations (Stavropolskaya, 60 MW capacity, and Krasnodarskaya, 60 MW
capacity) are under construction in the Russian section.
The Beregovaya compressor station (180 MW capacity) belongs to the off-shore section. Its
function is gas transmission through the off-shore section of the gas pipeline system.
The off-shore section cost is around US$ 2,300 M .
2.3.1 Generalities
On the technical side, the Blue Stream is one of the most challenging pipeline projects ever
realised, above all for the off-shore part.
Its extreme characteristics led the engineers to face new problems and find new solutions.
Saipem 7000, the biggest J-lay vessel in the world was purposely modified and its capabilities
extended in order to perform the work.
For the first time such a large and thick pipeline (24 OD, 31.8 mm thickness) was laid in ultra deep
waters in an environment with a high H2S (Hydrogen Sulphide) concentration, on a very soft seabed
and along steep slopes where geo-hazards were deeply evaluated and considered during the
engineering phase.
2.3.2 The Pipelines

The two 24 outer diameter pipes laid in the Black Sea were sized according to the following
criteria reported in DNV96 (i.e. Rules for Submarine Pipeline System 1996, issued by the Norwegian
Independent Third Party Foundation DET NORSKE VERITAS):
Internal pressure containment;
External pressure resistance;
Prevention of buckle propagation due to bending, external pressure and axial combined loads.
The sizing analyses performed according to DNV96 confirmed the suitability of the 31.8 mm steel
wall pipe to safely sustain construction and operational loads along the whole pipe route. The external
coating consists of three polypropylene layers with a minimum thickness of 4 mm.
The off-shore section consists of 2x24 pipelines due to the following main reasons:
-
technical feasibility to lay down at the deep section (2,150 m) such a type of pipe;
suitability to transport the established nominal quantity of gas (16 billion cubic meters of gas per
year in total);
reliability of the gas transport system. With two independent pipelines, the consequences of
failures on the transport system are reduced, avoiding critical stoppage.
In summary, after lengthy studies, it has been shown that 2x24 pipes were the best optimisation
among technical feasibility, investments, installation and operative risks.
2.3.3 The Compressor Station
The function of the compressor station in Beregovaya is to give the gas enough energy to run
through the off-shore section up to the maximum transmission capacity of 16 bcm/y.
For this purpose it was foreseen to install 6 turbo-compressor units for a maximum installed power of
180 MW. The nominal working pressure is 250 bar. The stations foreseen final operational
configuration is 4 units running and 2 standing-by.
Three turbo-generators will be used to generate electricity up to 13.5 MW with the aim to make
the plant self-sufficient with respect to any electricity need. In addition, it is possible to potentially
transfer to the external electrical network up to 35 GWh/y.
The compressor station is built on the levelled top of a hill on an area of 140,000 m2 at a distance
of 2 km from the shore.
2.3.4 The Off-Shore Challenges
Geomorphology
Geotechnical, geomorphological and bathymetric characteristics of the regions traversed by the

pipelines present varied and challenging features.
Two routes were selected after the completion of the initial geophysical and geotechnical surveys
and related studies, called Route E1 and Route W2.
The pipelines routes differ only on the Russian shelf and along the upper Russian slope, after which
they join and run parallel up to the Turkish landfall.
Route E1 is approximately 383 km long, while route W2 is 391 km, and both reach a maximum water
depth of about 2,150 m. This difference in length is due to the impossibility to lay both lines in a
unique corridor along the Russian slope, which is characterized by narrow and steep canyons.
For this reason route W2 runs parallel to the coast for about 7 km before turning South and starting
descending in its canyons.
The geomorphology along the Blue Stream pipeline routes can be divided into the following
distinct areas:
1.
the Russian shelf, which deepens gently from the landfall point to the shelf edge;
2.
the Russian continental slope, which is highly dissected by submarine canyons and deepens
steeply from the shelf break to 1,900 m. Near the top of the slope the steep V-shaped canyons
average 15 to 50 m in width. These canyons widen downslope into broad, flat-bottomed Ushaped valleys over 1,000 m wide. The canyons floors, at the top of the continental slope,
exhibit a near-continuous veneer of slump / debris flow material, which is generally blocky in
nature and contains numerous boulders;
3.
the abyssal plain which has a seabed gradient of less than 1:1,000 at an average water depth
of 2,130 m;
4.
the Turkish continental slope, which has a relatively smooth slope and shoals steadily. In
contrast to the concave Russian continental slope, the Turkish continental slope has a convex
morphology. The slope is cut by only a small number of canyons and valleys, which are
generally smaller than those found on the Russian continental slope;
5.
the Turkish shelf, which is subdivided into a sub-horizontal plateau and a terraced shelf slope.
H2S Concentration
The seabed of the Black Sea differs from the usual sea bottom environments because of the
great depth, high concentrations of H2S and sulphides that are not typical of the environments of most
submarine pipelines.
In order to verify the suitability of the selected pipe material and welding techniques and to
substantiate the coatings selection and the cathodic protection design, many experimental activities
and surveys were performed.
A thorough experimental activity was carried out to collect information and data about the soil and the
corrosive species concentration through two field surveys, which revealed the lowest measured pH as
6.3. Measuring of H2S concentration both in soils and seawater was also made, revealing the
seawater to contain up to 11 ppm H2S and the soil up to 1,200 ppm H2S.
Materials performance (steel pipes, welds, coating, anodes for cathodic protection) was studied to
ensure safe behaviour by a wide corrosion testing program.
Corrosion tests did confirm that the system is resistant to corrosion (both general and localised) in
the Blue Stream environment, and that the selected coating and cathodic protection approach is
suitable to protect the pipeline for the entire design life (36 years).
Geo-Hazard
Geo-hazard is one of the most peculiar aspects of Blue Stream. The geo-hazard assessment and
its implications in the definition of protective works for the Blue Stream Project is a multi-disciplinary
matter involving different environmental and engineering disciplines.
Potential geo-hazards interfering with the pipeline on the Russian and Turkish continental slopes
include soil slides, mass flows and turbidity currents, that could be mainly activated by severe
earthquakes.
Slope Stability
Both Russian and Turkish continental slopes were assessed for stability along and adjacent to
the pipeline routes. As a conclusion of the studies, it was calculated that the occurrence probability of
considerable slope instability due to seismic activity (mass flows-turbidity currents) is about 10-3/year
in the Russian margin and about 10-4/year in the Turkish side.
The maximum calculated permanent down-slope displacements are in the order of 1 - 10 m for the
10,000-year event.
Mass Gravity Flows
Mass gravity flows (mass debris flows, mud flows, and turbidity currents) might occur in the
Russian and Turkish slopes with an annual probability of 10-4 for lateral impacts and of 2x10-3 for axial
flows. These parameters were accounted for during the pipeline design.
Turbidity Currents
Major turbidity currents are expected to occur in association with mass flows triggered by seismic
action; less intense turbidity currents triggered by meteo-marine events or excess sediment
accumulation by river discharge can be expected with higher frequency.
The Pipeline Installation

Installation techniques for sub-sea pipelines have developed over the past 50 years.
There are various methods of submarine-pipeline installations, including the lay-barge, reel,
bottom-pull, tow, and other ones. Some of these methods are more suited for a particular application
than others.
The S-lay barge technique is one of the most commonly used, involving the on-board welding of
individual sections of pipe as the line is passed over a stinger into the water.
An illustration of a conventional S-lay barge is shown in Figure 2.
Fig. 2 Conventional S-Lay Barge Method
Pipes are delivered to the lay barge in single or double-length joints ( 12,2 m or 24,4 m ) by a
cargo barge.
After welding the pipe joints on the barge fire-line, the field joints are coated with corrosion coatings
(and weight coating sometimes). Pipe laying operations continue, with the pipe supported by the
barge rollers and the stinger before moving to the seabed.
As the pipe is laid, it is first bent in one direction at the stinger (overbend) and then moves down
through the suspended section till it is reverse-bended (sagbend) before reaching the seabed (Touch
Down Point).
The stinger is a frame-work made up of tubular members. With its curved geometry, the barge
stinger helps supporting the pipe and forms an S-curve as the pipe is laid. Stingers have developed
from straight-line designs, originally used in shallow water, to the curved, sectional, articulated
stingers required for deepwater operations.
Tensioning machines ( tensioners ) positioned along the production line provide a hold-back force
to limit the curvature of the pipe as it descends to the seafloor. Rollers are installed on the stinger
sections to support the pipe during lowering.
The maximum depths to which conventional lay barges can operate are governed by:
1. Capacity of the barge mooring system;
2. Stinger size;
3. Tensioner capacity;
4. Pipe diameter and wall thickness;
In fact, with the increase of the water depth, the S-lay method is mainly limited by the excessive
bending moment reached at the stinger end, due to the pipes curvature at the lift-off point.
To overcome this limitation, the S-lay method for water depth greater than 8001000 m is
substituted by the J-lay method, which is in fact the most suitable technique to lay pipelines in very
deep waters.
The pipe is laid through an almost vertical ramp positioned on board a vessel (see Figure 3).
Figure 3 S-Lay and J-Lay Techniques
S
TR
CA
O
OI
The deepwater pipeline is maintained in the optimal angular position and pulled under a
predetermined high tensile force while being lowered to the bottom. Vertical space configuration on a
J-lay vessel allows for only one pipe joining station, hence a fast and reliable pipe-joining technique or
prefabricated pipe sections are prerequisite for practical use of the J-lay method.
The J-Lay offers the following advantages:
allows the pipe to be laid in a more natural configuration;
pipe stresses are maintained well within the linear elastic limit;
lower lay tension is required, resulting in reduced on-bottom tension, hence reducing freespan;
less susceptible to weather conditions;
the vessel is free to choose an optimal heading to minimize environmental forces.
However, the J-lay method being a primarily deep water method some limitations occur when
used in shallow waters.
For this reason the Blue Stream pipeline was laid with the S-lay method in shallow waters while
the extraordinary depth of the abyssal plain compelled to use the J-lay technique in that section.
The J-lay system on board Saipem 7000 has been designed for operations in very deep waters
up to 3,000 m. Its characteristics were defined in order to allow its use in the Blue Stream project.
The overall weight of the 135 m high tower, A-frame, tower angle adjusters, line-up tool and other
equipments is 4,500 t.
The J-Lay tower can pivot up to 20 degrees off the vertical. Saipem 7000 is also a heavy lift vessel
with two 7,000 t cranes mounted on its bow. The J-Lay system can easily be installed on the vessel,
when it is required to work in J-lay mode or removed to allow Saipem 7000 to act in the heavy lift
mode when needed.
The modular tower with its pin connections to the barge is equipped with three tensioners of 175 t
capacity each. There are also 2 x 500 t friction clamps for enhanced safety. It also houses two work
stations: one for welding and the other for non-destructive testing and coating.
The Abandonment & Recovery winch has a capacity of 555 t.
The J-lay system is designed for rigid pipes with diameters from 4 inches to 32 inches in
quadruple joints (made up of 4 x 12.2 metres spools prefabricated on-shore).
The behaviour of the pipeline is monitored in real time by a computer for pull, reaction stresses and
touch down point position.
Pipeline Integrity Analyses
As the pipeline response is affected by constraint conditions on the seabed, loading scenarios
have been investigated through the analysis of geotechnical/morphological data and pipeline
equilibrium configuration along the route.
Three fundamental sections along the route were assumed:
-
Russian upper slope pipe partially spanning;
Russian lower slope pipe in contact with the seabed;
Turkish slope pipe embedded.
The pipeline response against basic interfering events has been analysed concluding that the
design allows the pipeline to survive quite severe soil movements.
In particular the results of the integrity assessment showed that:
- under the most frequent event, minor downslope movements along the Russian and
Turkish slopes are not critical for the pipeline integrity because of the pipe configuration
resting on the seabed or slightly embedded;
- in the upper Russian slope, the pipeline was expected to be significantly spanning and for
this reason several remedial actions like pipeline burial and stabilisation were designed
and realized (post-lay trenching with a specifically designed underwater machine, called
Beluga, by Sonsub, Saipem Group).
Pipeline Repair
Due to high strength pipe section capacity, the pipeline is be able to tackle even the severest
events. Nevertheless, underwater repair systems have been planned for both for the construction
and the in operation phases.
Pipeline Repair During Construction

The capability to deal with a wet buckle during pipelay in deep water is critical. The proposed
procedure consists of the following steps:
1. pipe abandonment from the pipelay barge with the use of the Abandonment & Recovery
winch;
2. sub sea pipe cutting;
3. fitting of a contingency head at the pipeline end;
4. pipeline dewatering using shore contingency compressor station;
5. recovery of the pipeline with a cable attached to the contingency head;
6. pipelay continuation.
A system able to intervene underwater, performing points 2 and 3, was developed and was ready
to operate during the whole pipeline construction phase.
The time necessary for the repair is a function of the location and extension of the damage.
Mainly because of dewatering, time delay could be from 4 to 12 days.
Pipeline Repair During In-Service Life
In order to protect the pipelines during their entire life, a stand-by repair system is also necessary.
The special system to be used on the Blue Stream is an evolution of the ARCOS repair system,
that was built by Snam and Saipem in the late 90s to protect the 20/26 deepwater pipelines laid
between Tunisia and Sicily.
The Blue Stream repair system consists of a suite of submarine automatic machines able to cut
and substitute any damaged section of the pipe, restoring the continuity of the line with no bore
restrictions or limitations in the pipeline allowable operative pressures. The new system is designed to
fit with the specific environment, also considering the acidity of water and sand and the challenging
water depth.

The Turkish on-shore section is owned 100% by BOTA .
Its cost was negotiated with the OHS JV and was estimated to be around US$ 340 M, including
the compressor station.
The line is composed of 3 main parts:
The Samsun-Ankara Natural Gas Pipeline: total length of 501 km, with a diameter of 48 and
wall thickness of 14.3 mm. There are 5 take-off valves (Samsun, Amasya, orum, Sungurlu,
Krkkale) and 4 pig stations (Samsun, orum, Krkkale, Ankara) on the line;
The Samsun/Durusu Pressure Reducing and Metering Station: it was installed to reduce the
pressure from about 130 barg at regime to the maximum operational pressure of 75 barg;
Compressor Station: the requirement of an intermediate compressor station will be

considered in a later phase.
During the route surveying works for the Samsun-Ankara Natural Gas Pipeline Project, the North
Anatolian Fault Line was taken into consideration and, as a result of the studies, the current routing of
the project was selected. The Samsun-Ankara Natural Gas Pipeline route crosses two active fault
lines, which registered two events of activity during the last century. In any case the appropriate
design of the pipelines is able to practically eliminate the risk associated with earthquakes, as
demonstrated by world statistics.
2.5 Environment
A detailed environmental analysis of the impact of the Blue Stream project was performed
considering biophysical and socio-economical aspects of the interested areas.
During construction, technologies have been selected and precautions taken in order to preserve
the aquatic environment as well as the flora, fauna and soil quality of the on-land sections. Also
impacts on noise and air quality have been engineered to be kept very low.
The direct impact on the environment of the pipeline and of the eventual compressor station is
minimum, while the increased use of natural gas as an energy source in Turkey guarantees a clean
air development.
2.6 Technical Rules and Codes
The main governing rules for the on-shore section are both International Codes and Standards,
as well as Russian and Turkish Codes and Regulations.
In the absence of relevant Russian and Turkish design codes and standards for off-shore
pipelines, the Blue Stream Project was designed using DNV 96 as the primary code.
Det Norske Veritas has carried out independent analyses and verifications for the Certification
Process purpose.
3. The Scheme and Sources of Financing

3.1 Total Cost of the Project
The total cost of the project is US$ 3,690 M .
Its breakdown, by section, is reported below.
The expected expenses for the Russian gas pipeline on-shore section construction are given
in Table 2.
Table 2 Russian On-Shore Section Cost
Materials + Construction
Other Costs
Financial Costs
Total
US$ M
930
65
55
1,050
The investment relevant to the Russian on-shore section is under GAZPROM responsibility.
The Russian on-shore section was financed, having GAZPROM as a borrower, according to the
structured finance scheme described in point 3.3 :
under the SACE coverage for an amount up to 278 million US$;
under an overseas untied insurance program granted by the Japanese MITI for an amount up to
295 million US$.
In addition, a credit line without insurance coverage was granted by a European banks
consortium headed by Hypo and Vereinsbank for an amount up to 250 million Euro.
The residual part of the financing was procured directly by GAZPROM.
3.3 The off-shore section

Project cost
The costs of the off-shore section of the Blue Stream Project are summarised in the following
table:
Table 3 Off-Shore Section Cost
Materials + Construction (EPC Contract)
Other Costs
Financial Costs and Taxes
Total
US$ M
1,700
200
400
2,300
Note: numbers are rounded

To procure such a huge amount of financing resources, it was necessary to build a complex
architecture of loans and guarantees involving major international credit agencies and banks, mainly
in Europe and Japan.
Structured Finance Scheme

It was agreed between Eni and GAZPROM, sponsors of the project, that the investment, to be
realized by the special purpose company Blue Stream Pipeline Company BV (BSPC), was to be
funded through equity contributions for a total amount of 254 million US$ while the residual funding
through debt procured by the sponsors on a several basis.
In this respect Eni procured a credit facility to BSPC for an overall amount of 866 million
US$ while GAZPROM procured financing to BSPC by means of multi-source export credit lines:
under the SACE coverage for 855 million US$, arranged by IntesaBCI, MCC and WestLB;
under the JExim coverage for 330 million US$, arranged by Mizuho.
The Eni facility and the GAZPROM facilities are guaranteed by the assignment of the receivables
of the transportation tariffs paid by the shippers, Snam Trading BV and GAZEXPORT, to BSPC; the
payment of the transportation tariffs is secured by the assignment of the receivables of the gas sales
to BOTA from Snam Trading BV and GAZEXPORT.
In addition, on top of the security structure outlined above, the GAZPROM procured facilities are
guaranteed by the assignment of the receivables deriving to GAZEXPORT from the gas sales under
the Third Gas Contract entered into between Eni and GAZEXPORT in 1986.
Thanks to the complexity of the project and the sophisticated and huge financial structure, the
Blue Stream Project was awarded "European Oil & Gas Finance Deal of the Year 2000" by the
prestigious Euromoney publication, Project Finance Magazine.
The feasibility studies were conducted by TMA. Following the price negotiations, BOTA
concluded that the pipeline between Samsun and Ankara would have been constructed by OHS
(zta-Hazinedarolu-Stroytransgaz) for a cost of around US$ 340 M .
The investment amount, realized at the end of 2002, is:
Table 4 Turkish On-Shore Section Cost
Materials
Construction
Other Costs + Financial costs
Total
US$ M
187.2
120.1
17.0
324.3
The project is fully financed by BOTA equity.
4. The Project Participants

OAO GAZPROM is an authorized agent for the part of Russia for the fulfilment of the Agreement
between the Government of Russia and the Government of the Republic of Turkey on the Supplies of
Russian Natural Gas to the Republic of Turkey via the Black Sea Water Area, as well as for the
construction and operation of the gas pipeline "Blue Stream".
OAO Stroytransgaz and OAO Gazavtomatlka are the General Contractors for the construction,
on a turn-key basis, of the gas main pipeline on-shore section running from the city of Izobylnoe, in
the Stavropol region, up to the compressor station in the city of Beregovaya, in the Krasnodarsky
region.
GAZPROM's OOO GAZEXPORT, operator for the gas export will be responsible for gas supply to
Turkey.
DOAO Gyprospetzgaz is the General Designer.
By the beginning of June, 2001, the participants in the "Blue Stream" Project managed the
organization and technical works of the preparatory period and began its realization.
The general designer, DOAO Gyprospetsgaz prepared all the necessary design plans and
specifications and the cost estimation for the construction of the gas pipeline on-shore section.
The general contracts for the gas pipeline construction, pipes and main technological equipment
deliveries were signed.
OOO Kavkaztransgaz (section km 0 - km 56) and OOO Kubangazprom (km 56 - km 370) became
the authorized companies.
The authorized companies legalized the allotment of earth plots along the pipeline route to the
construction companies and also procured the works performance permissions.
Glavgosexpertiza of the Russian Federation carried out the consideration of anti-creep measures
on the km 320 - km 340 section (the active tectonic fracture zone crossed by the gas pipeline) and on
the river crossings realised by the sloping hole directional drilling technology.
OAO Stroytransgaz was appointed as the general contractor of the linear section and compressor
stations (Stavropolskaya, Krasnodarskaya).
The linear part was constructed by 14 subcontractors, 3 complexes for automatic pipe welding CRCEvans and a company for underwater crossing, where the pipe is laid by underwater horizontal
drilling.
GAZPROM conducted a feasibility study since December 1996 for the offshore section. This work
involved the review of environmental and bathymetric data related to the Black Sea crossing and the
conceptual and preliminary system design.
In November 1998, OAO Gazprom and Eni S.p.A. enterd into a Memoranum of Understanding
providing, inter alia, for a joint participation on an equal basis in the Blue Stream Pipeline company
BV (BSPC) for the development and implementation of the offshore segment of a gas transportation
system that would allow the transportation of natural gas from Russia to Turkey through the Black
Sea.
In November 1999 BSPC entered into an EPC Contract on a turnkey basis for the design,
procurement and construction of the Beregovaya compressor station and of the two 24 off-shore
pipelines described above.
The Contract was awarded to a consortium of companies consisting of Saipem S.p.A., Bouygues
Offshore S.A. and a Japanese Consortium (Mitsui & Co. Ltd., Sumitomo Corporation, and Itochu
Corporation).
BSPC was assisted in supervising the contractors work by the Norwegian company DNV that
was also in charge of verifying the respect of quality assurance rules and of certifying the pipeline
design, construction and installation.
The steel pipes were mainly produced in Japan by a steel mills consortium consisting of MITSUI
& Co Ltd., Sumitomo Corporation and ITOCHU Corporation. This contract also allowed to recover
financing resources in Japan.
Concerning the compressor station in Beregovaya, the main subcontract was assigned to Nuovo
Pignone to supply the 6 turbo compressors that, at plateau level, will increase the gas pressure from
about 90 bar up to 250 bar, allowing its transportation from the Russian coast up to Turkey.
With the starting of the gas transportation, BSPCs role changes from a Construction Company
into a fully operational Gas Transportation Company.
The offshore pipeline reaches the Turkish coast at Durusu, near Samsun, and then continues on
land to Ankara. The responsibility of construction and operation of the Samsun-Ankara section
belongs to BOTA, including the Samsun / Durusu Pressure Reducing and Metering Station.
According to the Intergovernmental Agreement signed on December 15th, 1997, the Samsun
Ankara section of the pipeline was constructed by a consortium of GAZPROMs main construction
company and Turkish construction companies.
The feasibility study of the 501 km Samsun-Ankara Natural Gas Pipeline was carried out by
TMA and the construction was assigned to the OHS (zta-Hazinedarolu-Stroytransgaz) Joint
Venture which was established by the construction company of GAZPROM, Stroytransgaz, and the
Turkish companies zta and Hazinedarolu.
Regarding the Sales and Purchase Agreement signed between BOTA and GAZEXPORT,
GAZEXPORT is responsible for delivering and BOTA is responsible for receiving the gas at the
agreed quality and pressure at Samsun.
5. Fiscal Aspects
On the basis of the tax legislation in force in the Russian Federation and in the Republic of
Turkey, the construction phase would have been too heavy a burden which would have jeopardised
the project feasibility.
Moreover, the huge amount of investments required a stable and affordable tax environment for
the whole duration of the contract period which could be granted only through an Intergovernmental
Agreement pertaining to the Blue Stream Project.
The Agreement consists of a Protocol, signed in Moscow on November 27th, 1999, to the
Intergovernmental Agreement dated December 15th, 1997, between the Government of the Russian
Federation and the Government of the Republic of Turkey on Supplies of Russian Natural Gas to the
Republic of Turkey via the Black Sea and ratified by the Parliaments of both Signatories Countries, in
Russia with law no. 221 FZ dated December 30th, 1999, published on the Russiskaj Gazeta on
January 6th, 2000, and ratified by the Turkish Grand National Assembly, approved on June 2nd, 2000.
Two fundamental considerations lied behind the Protocol:
-
firstly it was necessary to eliminate the tax burden on the project during the construction
phase, mainly represented by indirect taxation (VAT, turnover taxes and customs duties) but
also direct taxation;
secondly it was necessary to keep the transportation cost at a level sustainable by the project.
This could not be achieved by applying the ordinary taxation because the resulting increase
of gas transportation costs would have reached a level which could not be born by the gas
sellers given the current BOTA price. An acceptable gas transportation cost could be
achieved by means of the payment of an ad hoc comprehensive tax set at a level which was
affordable for the project.
BSPC BV is the company constructing, owing and operating the off-shore portion of the Blue
Stream Pipeline, held paritetically by Eni and GAZPROM, which benefits from special tax treatment
by means of the tax Protocol.
In particular BSPC is subject to the exclusive tax jurisdiction of the Russian Federation. This taxation
principle attributes the taxing authority to the gas source country only. This is in line with the
principles of international law, as well as with the majority of bilateral agreements according to which
the receiving State (in this case Turkey) does not have taxation rights over foreign owned and
operated pipelines crossing its continental shelf and territorial waters.
The Protocol has introduced a profit tax to be paid by BSPC and determined applying a fixed rate
on the actual volumes of gas transported by the Shipper during each month.
In the Republic of Turkey the Protocol provides full exemptions with respect to direct, indirect
taxes and Customs duties. The exemption is also extended to materials and equipment to be utilised
in connection with the construction activities. The original main aim of this provision was to reduce the
cost of the project and to allow its feasibility and stability.
For this purpose, the Protocol provides also a tax stabilisation clause aimed at ensuring the
special and stable taxation of the Blue Stream Project for its entire life and in particular irrespective of
any possible change in the ordinary tax legislation of both the Signatories Countries which might
worsen the economic situation of the taxpayers and whose tax exposure is covered by the Protocol
itself. This means that any amendments to the existing laws or newly introduced taxes, charges and
fees shall not increase the aggregate tax burden of the Blue Stream Project.
6. The Turkish Gas Market

6.1 Demand and Supply Forecast
Gas demand is mainly concentrated in the western part of Turkey, which is the most industrially
developed area of the country.
In 2001, 19% of the primary energy need was covered by natural gas, being power generation
(64%), industry (17%), residential (18%) and fertilizer (1%) the most relevant uses of natural gas.
The market has been strongly growing since the late eighties, having natural gas demand jumped
from 0.2% in 1985 to, as said, 19% in 2001 in accordance with the principle of diversification followed
by the Turkish government.
The expected growth of natural gas demand, split in the most important market sectors, is shown
in the following Table 5:
Table 5 - Turkish Natural Gas Demand (bcm/y)
Year
2000
2005
2010
2015
2020
Power
sector
9.7
19.4
25.6
34.8
48.3
Fertiliser
production
0.1
0.5
0.3
0.3
0.3
Industry
1.5
6.9
17.1
18.5
19.8
Heating/
/Residential
3.3
5.3
12.1
13.7
14.4
Total
Demand
14.6
32.1
55.1
67.3
82.8
Table 6 allows the balance between the total gas demand and the contracted quantities with the
various suppliers.
Table 6 - Gas Supply to Turkey (bcm/y)
Russian Russian Russian Algerian Nigerian
Fed.
Fed.
Fed.
LNG
LNG
Year
2000
2005
2010
2015
2020
(a)
4.1
8
8
8
8
6
6
6
0
0
(a): Additional
(b): Blue Stream
(b)
0
6
16
16
16
4
4
4
0
0
0.8
1.2
1.2
1.2
1.2
Iran
Azerb.
(c)
0
7
10
10
10
(d)
0
0
6.6
6.6
6.6
Turkm.
0
0
9.2
14.2
16.0
Total
Supply
14.9
32.2
61.0
56.0
57.8
(c): Azerbaijan
(d): Turkmenistan
Within the framework of delays experienced in delivery of natural gas from several countries on
the basis of sale and purchase contracts already signed as well as in the light of the recent economic
recession, BOTA revised the supply/demand figures till 2006.
6.2 Commercial Agreements
Because of the low level of domestic production (<0.5 bcm/y ), importation contracts were signed
as shown in Table 7.
Table 7 - Gas Import Contracts in Turkey
Contracts
Max Quantity
(bcm/year)
Year of
Signature
Duration
(years)
Situation
Russia (West)
6.0
1986
25
Effective
Russia (West)
8.0
1998
23
Effective
Algeria (LNG)
2.0
(Increased to 4.0
bcm)
1.2
1988
1996
20
Effective
1995
22
Effective
1996
Effective
Nigeria (LNG)
Iran
10.0
Blue Stream
16.0
1997
(Extended to
25 years in
2000)
25
Turkmenistan
16.0
1999
30
2002-2004*
6.6
2001
15
2004-2005*
Azerbaijan
Effective
* Starting date mentioned in PSA.

BOTAs original field of activity of transportation of crude oil by pipelines has expanded to cover
the natural gas transportation and trade activities since 1987, having a monopoly status in import,
distribution (except city distribution), pricing and sales of natural gas in Turkey.
However, with the new Natural Gas Market Law that was enacted on May 2nd, 2001, the
monopoly rights of importation, transmission, distribution, storing and sales of natural gas which was
given to BOTA was removed so as to enable third parties to emerge in the market. The basic
objective of the law is to transform the monopolized character of the market structure into a
competitive one, to lighten the burden of the State in the market, and to encourage entrepreneurs to
invest in the gas sector.
Each year until 2009, starting from the transition period, BOTA will transfer fully or partially all its
rights and liabilities of the current natural gas sale and purchase contracts until BOTAs share in
imports falls down to 20% of the national annual consumption level. As stated in this Law, except for
distribution activities, BOTAs vertically integrated legal body will continue until 2009. The
companies that will be established following the restructuring of BOTA will be privatised in a twoyear period of time except for the ones performing transmission activities.
6.3 The Turkish Gas Infrastructures

At present, the first main trunk line, originating from the Russian Federation, enters Turkey from
Bulgaria near the town of Malkolar (see Figure 4). Its current transmission capacity is around 61
million sm/day. Along the 842 km stretch from Malkolar to Ankara it supplies power plants, several
large industrial plants and the cities of Ankara, stanbul, zmit, Bursa and Eskiehir.
Fig. 4 Turkish Gas Infrastructures and Interconnections
IRAN
GREECE
LNG PLANT
EXISTING
FORESEEN
In 1996, the transmission pipeline was extended to the Western Black Sea Region through the
209 km long zmit-Karadeniz Ereli Transmission Line. With another project which was completed in
the same year, the natural gas grid was extended to an via the 208 km long Bursa-an
Transmission Line. BOTA extended the existing transmission network further from an to
anakkale with a pipeline of 107 km length in 2000.
The Eastern Anatolia Transmission Line (the second main trunk line), planned to transport natural
gas supplied from the sources located east of Turkey, extends from the Iranian border to Ankara and
Konya-Seydiehir and has been in operation since December 2001, transporting Iranian natural gas.
The Karacabey-Izmir Natural Gas Transmission line was commissioned in 2002.
Currently, the length of the existing gas transmission lines of BOTA is about 4,200 km. In line
with the strong expected demand growth, BOTA is extending the transmission grid and contracting
further gas in increasing amounts. With the completion of currently ongoing and planned pipeline
constructions, the length of the internal natural gas transportation system will reach approximately
6,300 km and by the end of the year 2004 approximately 60 cities will have access to natural gas.
Besides, BOTA operates a LNG re-gasification terminal in Marmara Ereglisi for diversifying the
natural gas supply sources and increasing the supply security and flexibility.
7. The Gas Supply Contract

The Intergovernmental Agreement for supplying 16 billion cubic meters of natural gas yearly from
the Russian Federation to Turkey by a pipeline crossing the Black Sea, as said, was signed on
December 15th, 1997, between the Governments of the Russian Federation and of the Republic of
Turkey.
On the same date the natural gas Sale and Purchase Contract was signed between BOTA and
OOO GAZEXPORT for supplying increasing amounts of natural gas up to 16 billion cubic meters per
year for a period of 25 years.
With a specific subcontract agreement GAZEXPORT assigned to Eni the commercialisation in
Turkey of 50% of the volumes under contract.
8. The Gas Transportation Contracts

BSPC signed two transportation contracts with the shippers Snam Trading (fully owned by Eni)
and GAZEXPORT.
The transportation tariffs, on a Ship or Pay basis, will allow during the life of the project to
recover the investments, the financial costs as well as the operational costs and finally the return on
equity.
Each shipper pays for the costs related to its industrial group.
9. Conclusions and Suggestions

9.1 Major Challenges
Before being realized, the Blue Stream Project encountered many obstacles and challenges on
its way, the major of which were:
Project Financing (finding the financing to cover such a huge project giving high rated
warranties) ;
Technical problems (water depth required J-Lay solution, chemically aggressive environment,
geo-hazards);
Political matters (Competition with other projects and delays in the ratification of tax
exemptions by the Turkish Parliament);
Co-ordination between upstream and downstream activities (resulting in uncertainties on the

completion time);
Permits (difficult and slow to be procured);
Fiscal aspects (slowness in obtaining tax exemptions).
9.2 Experience and Prospects

The realization of the Blue Stream project confirmed the efficiency of the strategic partnership
between two of the largest European gas companies, the Russian GAZPROM and the Italian Eni
Group. High technical potential of design and construction companies (belonging to their Groups)
engaged in the construction of complicated off-shore and on-shore gas pipeline sections, availability
of necessary machinery sets, pipelaying ships and equipment, as well as highly skilled personnel
contributed to this success. In particular:
The Blue Stream project is among the most outstanding projects due to the scale and
complexity of the engineering decisions;
The development of the Projects unique financing scheme permitted involving the
consortium of large European and Japanese banks and obtaining guarantees for risks by
export credit agencies;
The creation of preferential conditions for taxation and other state supporting measures for
construction and operational organizations were the considerable material incentives for all
the Project participants;
High level technologies as well as state of the art international technical standards were
applied to the project;
Energy assurance to Turkey and prospects for additional gas export to Europe will be
provided by diversification of gas deliveries to Turkey by a new route to export Russian
natural gas via the Black Sea;
The Russians North Caucasian regions received an additional natural gas resource. This will
eventually lead to the wide scale gasification of the Kuban, Sochi and Dzhubga regions.
The decisive factors for the success of the Project turned out to be:
The Italian and Japanese financial support;
The capability to completely solve new and challenging technical problems;
The ratification of the tax protocol by the Russian and Turkish governments.
9.3 Economic Impact on the Countries Involved in the Project

9.3.1 Russia
The "Blue Stream" project realization has economic, social and geopolitical importance for
Russia.
The strategic partnership with the Italian Eni Group allowed the joint realization of the
sophisticated investment project of laying a deep water gas pipeline, as well as achieving valuable
experience in partnership for further cooperation in future large international gas projects.
Russia will receive considerable financial advantage. The supplementary sizes of allocations from
the natural gas supply into the budget will provide billions of US Dollars for the 25 year period of the
gas pipeline operation, depending on the prices of natural gas.
Seven thousand additional jobs are being created in the Stavropolsky and Krasnodarsky
territories, following the construction of the 370 km on-shore natural gas pipeline section (IzobilnoeDzhubga) and of the compressor stations, due to the increased gas availability. Infrastructures and
power supply of these territories will be improved and more gas pipelines will be laid to Sochi and
other settlements to distribute gas in those areas.
The gas field nearby Zapolyarnoe (Tyumen region) will be considerably developed. It is a main
source of natural gas supply for the "Blue Stream" gas pipeline. Production and social infrastructures
will receive the essential development; dwelling will receive a substantial uprise. Industrial enterprises
will increase their production for over US$ 400 M.
Finally, Russia will strengthen its geopolitical position in Europe and Turkey.
With the realization of the Blue Stream, Russia will have the possibility to play an important role in
the Black Sea region as an investor, transporter and trade partner, as well as maintaining a dominant
position among Turkeys gas suppliers, without interference from transit countries (directness of the
route from Russia to Turkey).
9.3.2 Turkey
Before the Blue Stream, as described above, Turkey had already been receiving natural gas from
Russia by means of two natural gas sales and purchase contracts via Ukraine, Moldova, Romania
and Bulgaria.
Thus the importance of the Blue Stream Project is to secure the natural gas transmission to
Turkey from the Russian Federation without transiting onland any in-between countries. This project
was developed in order to meet some part of Turkeys natural gas demand and increase the supply
security.
As known, the Turkish gas market is an emerging one, having the highest growth rate in Europe.
The demand for gas in Turkey is expected to reach more than 80 bcm in 2020. Therefore, the Blue
Stream project will have a very important role in supporting the regional industrial and economical
development in Turkey.
It will supply natural gas to the cities along the route such as Samsun, Amasya, Corum, Kirikkale etc.
Thus, natural gas usage in the residential and industrial sectors will start in this region soon.
In this context, the industrial sector activities will be developed and the air pollution problem in these
cities will be reduced. The Krkkale Refinery will also be supplied by natural gas from this pipeline.
On the other hand, most of the natural gas supplied through this line will be transmitted to the
Western Marmara Region for the industrial consumption as well as for the electricity sector
consumption (two new power plants were commissioned in Gebze and Adapazar in 2002).
As a result, the new energy supply from this project will have positive impacts on energy
consumption, industrial development, competition, employment, living standards, social welfare,
gross national income, etc.
Turkey's geographical position, that is laying between three seas, is exceptionally favourable to
transport gas from the East which is rich with hydrocarbon resources to the countries of the Western
Europe where a high gas demand growth is predicted.
Taking into consideration these facts, one of the major strategies of Turkey by signing natural gas
contracts is not only to supply the emerging Turkish natural gas market, but also to establish the
East-West Energy Corridor between the Eastern energy resources and the Western energy markets,
playing the roles of both energy exporter and transporter.
The European Union has been envisaging an important strategic role for Turkey in gas
transmission to Europe. BOTA and DEPA have been studying a connection of the Turkish and the
Greek natural gas grids by a pipeline within the EU INOGATE Programme. The Interconnector
Turkey-Greece will constitute the first phase of a comprehensive South European Gas Ring Project
aiming to transport Eastern natural gas sources to the Western natural gas markets. Furthermore,
BOTA and DEPA are studying to extend this line to Italy and to other European markets from there.
9.4 Effectiveness of the Blue Stream
The link between supply and demand areas created by the Blue Stream will make possible:
the implementation of gas supplies to meet Turkeys energy demand;

the connection of the Turkish gas pipeline system to Europe in order to feed gas demand to
the West using natural gas produced in the Caspian Basin, Russia, The Middle East and
southern Mediterranean Countries;
a positive effect on the political and economic stability of the whole area;
an improvement in the safety of the international gas transmission system considering that
multiple routes always serve for supply security and export flexibility.
9.5 Suggestions
Starting from the first phases of a large scale international Gas Pipeline Project realised in
countries with transitional economies, some actions should be taken into account, in order to lower
and control the overall project risks better.
Here below some recommendations are reported. Some of them might imply a cost increase but
their usefulness in preventing the onset of critical problems strongly pushes towards considering their
implementation:
to highlight and always consider during the decision making process all the project-related
strategic aspects (e.g. social, environmental, economical, financial and commercial issues);
it is highly recommended to start the project implementation phase after subscribing long
term gas sale agreements in order to give a strong support to the whole project;
to verify, by means of independent investigations and studies, the market trends and the
possible overall scenarios always considering the evolutions in the above mentioned strategic
issues;
to carefully compare different alternatives (pipeline routes, LNG vs. pipeline, etc.);
to examine and monitor connections and interactions with other existing gas transportation
projects, with a special consideration towards those directly connected, both upstream and
downstream;
to promote partnerships with reliable Companies that provide true added value in the
technical field and, if necessary, also in the financial one;
to analyse the impact on the project of local laws and regulations in all the countries involved,
highlighting and controlling any potential risks (fiscal matters, special construction permits,
custom formalities and duties, etc.);
to use, when and where applicable to the project, international rules and standard codes, in
particular for technical matters;
to certify the pipeline in order to increase its value, lower insurance costs and give additional
guarantees to the financial bodies;
to provide the pipeline with efficient maintenance and emergency systems and procedures in
order to keep its performance and reliability constant for the duration of its life;
as the implementation of international gas projects involves the participation of several

countries and of large national and international companies, it is necessary to create peculiar
juridical and legal conditions for such projects as well as favourable mutual relations with the
local authorities;
the analysis of the experiences connected with large scale projects implementation shows
the necessity to establish a contractual organization with all the functions involved on a turnkey basis. Expensive gas projects implementation in the developing countries and in the
countries with a transitional economy requires the development of preferential taxation
conditions directly for its sponsor companies and indirectly for the appointed contractors. It
may be applied to tax exemption on the company's property, VAT, road toll, etc. ;
to use the system of penalties and claims for breach of obligations, construction schedules,
equipment deliveries, opening of financing, etc. ;
to use strict tender bases for choosing every contractor/supplier.
CASE STUDY:
Table of Contents
1 Overview
2 International Gas Transportation Plans in East Asia
3 ASEAN and Pipelines
3.1 ASEAN in Brief
3.2 ASEAN and Gas
3.3 ASEAN Pipelines and Alternatives
4 Philippine Views on Gas Import via TAGP or LNG
4.1 Philippine Energy Status
4.2 Gas Industry Development in the Philippines
4.3 Necessity of Security and Gas Import
4.4 Economic Impact on the Philippines
5 Characteristics of Pipeline and LNG for the Philippines in Gas Import
6 Possibility of Singapore to Select LNG or Pipeline for Future Supply
6.1 Singapore Economy and Energy Status,
6.2 Gas Status and Possibility of LNG Option
7 Lessons and Conclusions
Acknowledgments

ABSTRACT
The ASEAN countries are drawing dream gas pipelines to cover the broad archipelago in
Southeast Asia to link many gas fields and demand centers well scattered in the region. This paper
appreciates the significance of the pipelines for the economic development of the region, and
specifically discusses the aspects of the plan from the viewpoints of two gas consuming countries in
the region, one in the peripheral area of the ASEAN, i.e., the Philippines, and the other located in the
center, Singapore. The discussion revealed that in addition to pipelines, LNG may be another option
to be jointly pursued to link the ASEAN member nations with a natural gas network.
LNG used to be consumed mainly by industrial countries due to huge investment cost and the
nature of a chain to connect specific liquefaction and regasification terminals. The considerable cost
reduction in the last decade and proliferation of LNG trades, however, have drastically changed the
comparative economy of pipelines and LNG. As long as costs are concerned, i.e., not necessarily
prices that are influenced by plural factors, LNG can compete with pipelines at shorter distances than
in the past. Furthermore, considering the specific nature of LNG, uniquely different from pipelines, the
two methods can jointly well complement each other in the archipelago.
Les gazoducs de lASEAN

vus par les conomies importatrices de gaz
RSUME
Les pays de lASEAN ont en projet de construire des gazoducs afin de couvrir lensemble du
vaste archipel du Sud-Est Asiatique, de relier entre eux de nombreux gisements de gaz ainsi que les
centres demandeurs qui sont dissmins dans la rgion. Les prsentes pages ont pour but dvaluer
limportance des gazoducs pour le dveloppement conomique de la rgion ; en particulier, elles
envisagent diffrents aspects de ce plan depuis le point de vue de deux pays consommateurs de gaz
de cette aire gographique, le premier, les Philippines, tant situ dans la zone priphrique de
lASEAN, et lautre, Singapour, en plein cur de ce dernier. La discussion mit au jour que, en plus
des gazoducs, le GNL pouvait tre une autre possibilit mettre au point conjointement afin de relier
les pays membres de lASEAN grce un rseau de distribution de gaz naturel.
Dans le pass, le GNL tait surtout consomm par les pays industrialiss en raison des cots
dinvestissements normes et de la nature des passages qui interviennent du processus de
liqufaction spcifique aux terminaux de re-gazification. Toutefois, la considrable rduction des
cots lors de la dernire dcennie et la prolifration du commerce de GNL ont radicalement modifi
lconomie comparative des gazoducs et du GNL. Pour ce qui concerne les cots, ce qui ninclut pas
ncessairement les prix qui sont influencs par des facteurs multiples, la comptitivit du GNL par
rapport aux gazoducs sur les courtes distances est plus importante que par le pass. De plus, si lon
considre la nature spcifique du GNL, qui est si diffrente de celle du gazoduc, les deux mthodes
peuvent tout--fait se complter dans larchipel.

1. Overview
The Study Group 10.1 (SG10.1) of the Working Committee 10 Gas and Developing / Transit
Economy Countries of the International Gas Union (IGU) defined this study as one of the three
studies related to International Pipelines Its Impact on Economic Development in the triennium of
2000 2003.
The objective of this report is to discuss the potential effects of the Trans-ASEAN Gas Pipeline
System (TAGP) on the relevant countries, especially on the Philippines as well as applicability of LNG
for the country. Trans-ASEAN pipelines are an aggregate of pipelines covering the Southeast Asian
archipelago which have been or are being constructed with or without being recognized as part of
such ASEAN energy context (Note: ASEAN is pronounced as <assayan>).
Pipelines are naturally perceived as important in the central parts of ASEAN, i.e., Malaysia,
Singapore and Indonesia, but how far the system or the network can be extended to the peripheral
areas like Philippines is an interesting question in considering gas supply there.
Also an LNG scheme could be conceived in connecting the central and peripheral parts of the
ASEAN region, raising another question of how offshore pipelines and LNG can be incorporated in
the gas transmission system of the archipelago. Since LNG has another role of storage in addition to
transmission, it may add extra values to a network.
The author was involved in the study of the national use of gas in Indonesia and the Philippines
and witnessed plural views on this issue in the region. We will see how the Philippines and other
countries will benefit from Trans ASEAN and its potentially modified systems.
2 International Gas Transportation Plans in East Asia

Asian international gas pipelines at large are generally in the developmental stages compared to
other continents and activities there symbolize where future sizable natural gas industry will be
located in the world. Prospective East Asian pipelines may be grouped in several regional lines or
networks: China Pipelines concentrated to serve China, Trans ASEAN Pipelines, Potential South Asia
Pipelines and East Asian Pipelines. Fig. 1 shows existing and potential international pipelines in East
Asia as reported in the media to date, including certain relevant domestic pipelines. Penetration of the
use of gas longed for from the global views truly depends on how natural gas infrastructures, i.e.,
transmission, as well as distribution, will be developed and those plans exemplified above are
rigorously considered in the international gas community as involving developing countries and
requiring various kinds of international cooperation.
Fig 1 Major Gas Pipelines in East Asia
# #
RUSSIA
Okha
Irkutsk
Russia - China
Pipeline
Khabarovsk
MONGOLIA
Ulan Bator
Sakhalin
Pipelines
Harbin
Tarim Basin
Ordos
Pipelines
Lanxhou
Kabul
#
PAKISTAN
INDIA
Xian
Dhaka
KOREA
Seoul
Dheli
Karachi
Beijing
West-East
Pipeline
CHINA
NEPAL
Islamabad
#
#
Tienjin
Tokyo
Kita-Kyushu
Osaka
Legend
Nanjin
Wuhan
Shanghai
Sichuan Pipelines
Taipei
BANGLADESH
Hanoi
Hong Kong
MYANMAR
THAILAND
PHILIPPINES
Munbai
Yangon
#
VIETNAM#
Bangkok
1,000 km (approximate)
ASEAN
#
Note) Scale and locations are approximate.
Manila
PIPELINES
Source: Osaka Gas; based on Petroleum Economist
See
Fig.
4
and other media, 2002. Accuracy not guaranteed.
#
JAPAN
Capital City
Major city
Major gas field
Existing pipeline
Projected line
Speculative line
M a jo r Ga s
P ipe line s in
East Asia
In the last few decades, the center of natural gas consumption in Asia was mainly concentrated in
the Far East and LNG scheme has dominated the long haul gas transportation there. Relevant Far
East economies are surrounded by sea and the distance between Japan and LNG sources then
were generally more than 4,000 km, making the LNG comparatively more justifiable than pipelines.
Due to the economic and demographic growth of other Asian countries, as well as increasing energy
demand and environmental needs more seriously recognized, however, the situation is gradually
changing over the turn of the century.
The LNG transportation in the Far East began in 1969 with the first cargo from Alaska, USA, to
Tokyo, followed by another one from Brunei to Tokyo and Osaka in 1972. LNG supply sources quickly
spread to Indonesia and Malaysia, and then to Australia and to the Middle East. On the market side,
Korea and Taiwan joined the LNG consuming economies in 1987 and 1990 respectively. After the turn
of the century, China is entering the LNG buyers world as well as India, and a few others are
considering it as a choice, thus the use of LNG being about to spread over the developing world.
On the side of pipelines, the first international pipeline in Asia is one from Malaysia to Singapore
which was started in mid 1995, and the second one from Myanmar to Thailand in 2000. The third
pipeline for international trade in the area was installed in 2002 for the gas from West Natuna gas
field, Indonesia, to Singapore. As of summer 2002, we learned the fourth one connected the South
Natuna field and a Malaysian offshore gas field for the first gas trade through pipeline between
Indonesia and Malaysia under the South China Sea.
There have long been other gas transmission pipelines in Asia for domestic purposes in
Indonesia, Malaysia, Thailand, China, Taiwan, India, Pakistan, Japan and Korea. Some of these
pipelines will be incorporated into international pipelines by extending them over the national borders
as exemplified in the plan of the Trans-ASEAN Pipeline System (TAGP).
Table 1 ASEAN and the World Compared
Population
Primary
Primary Energy
Proven Oil
Proven Gas
1989
Energy
Consumption
Reserves
Reserves
Consumption
in 2000
January
January 2001
2001 **
**
In 2000
thousand
Million toe
BCM NGeq*
Billion ton
TCM(10^12 m )
ASEAN (10 nations*)
505,192
279.0
294
11.3
5.62
Asia Pacific (US/EIA)
3,588,877
2,351.1
2,479
6.0
10.33
OECD
4,748,310
5,173.0
5,455
11.2
13.43
Non-OECD
1,181,530
3,579.4
3,774
130.9
136.76
World
5,929,840
8,752.4
9,229
142.1
150.19
3
Sources: Data from WB, UN, USDOE/EIA, BP, combined and reassembled; *NGeq=Natural gas equivalent 10^9 m , converted
3
as kgoe=10,000 kcal and NG=9,485 kcal/m3 at 15 C; Billion ton= 10^9 metric tons; TCM=10^12m ; **ASEAN proven reserves
are from major six nations only.
3 ASEAN and Pipelines

3.1 ASEAN in Brief
The ASEAN, or the Association of South East Asian Nations, comprises ten economies, i.e.,
Indonesia, Philippines, Malaysia, Singapore, Thailand, Brunei, Vietnam, Cambodia, Laos and
Myanmar (former Burma), of which the last four joined relatively recently, i.e., in 1990s. Location of
these economies or countries are found in the map, Fig. 2.
Table 1 compares ASEAN and the whole world as well as other groups of the world on the
population and sizes of various energy indicators. The ASEAN occupies roughly 10%- of the world
population, 3%+ of energy consumption, and 8% and 4% of oil and gas proven reserves of the world
respectively, according to the table.
Table 2 ASEAN Economies, Energy Use and Gas

Member
Member-
Population
GNI per
Area
Nation
Ship
1999
capita
1999
2
since
(1000)
($ PPP1999)
(1000km )
(year)
(WB Atlas)
(WB Atlas)
(WB Atlas)
Energy
Proven
Potential
Use per
Gas
Gas
capita
Reserves
Export or
1998
2001
Import
(kgoe)
(BCM)
Category
Indonesia
1967
207,022
2,660
1,811.6
604
2,046
Exporter
Malaysia
1967
22,710
7,640
328.6
1,967
2,312
Exporter
Thailand
1967
60,246
5,950
510.9
1,153
334
Exporter
Philippines
1967
74,259
3,990
298.2
526
79
Importer
Singapore
1967
3,952
22,310
0.6
6,285
Importer
Brunei
1984
322
9,300
5.3
6,610
391
Exporter
Vietnam
1995
77,515
1,860
325.5
440
192
Importer
Lao
1997
5,097
1,430
230.8
--
Importer
Myanmar
1997
45,529
700
957.6
307
283
Exporter
Cambodia
1999
11,757
1,350
176.5
--
Importer
Total
509,408
4,645.6
7,638
Notes: GNIs for Brunei, Lao, Myanmar and Cambodia are not from statistics but are World Bank (WB) estimates for
3
minimum or maximum; ( - -) unknown. Gas reserves are from O&GJ with unit converted into 10^9 m (BCM).
The ASEAN members have mutually cooperated with each other for the common economic
growth eventually envisaging a common market in perspective. They have established and executed
progressive treaties for that purpose among them as well as closely communicating with the Pacific
world including Japan, China, Taiwan, Korea, Australia, the US and others as is called, e.g., the
ASEAN plus three (3) or five (5) depending on regional or diplomatic themes.
An important characteristic of ASEAN, however, is in the diversity in size of land and population,
ethnic status, culture, religion, standard of economy, all distributed in the archipelago, requiring from
all members an extra effort in uniting themselves compared to other common markets like the EU or
North America. Some of these differences like population, land area, energy resources and Gross
National Income, are presented in Table 2. With respect to culture, some are either Islamic, Buddhist,
Chinese, socialistic or Catholic dominated, and the difference in language is enormous with
uncountable number of languages of different linguistic or phylogenic origin spoken in the region.
There are even territorial disputes, historical conflicts and outspoken diplomatic differences among
some of them. All these nations are in the tropical region and most have long coastlines, except for
one landlocked, showing an exceptional similarity among the members.
Nevertheless, the effort of the member nations for common prosperity and economic integrity has
been remarkable and has achieved many agreements for goodness. The ASEAN Free Trade Area, or
AFTA, amongst all has been effectively developed establishing, e.g., Common Effective Preferential
Tariff Scheme (CEPT). Energy security issue reportedly is another important topic often discussed
and ASEAN Energy Council has been established as well as other institutions including those for the
Trans-ASEAN Gas Pipeline as well as the Trans ASEAN Power Grid.
Fig. 2 ASEAN Member Nations and Major Cities (Demand Centres)

Hanoi
Manila
LAOS
VIETNAM
THAILAND
#
MYANMAR CAMBODIA
Yangon
Bangkok
Ho Chi Minh City
(Acceh)
#
BRUNEI
#
MALAYSIA
Kuala Lumpur
Davao
(Saba)
Major city
Other city
(Sarawak)
Samalinda
SINGAPORE (Kalimantan)
(South Sumatra) INDONESIA
#
Bandung
(West Java)
Gas fields
( ) Regional name
CAPITAL LETTER:
ASEAN member
(East
Kalimantan)
#
Jakarta
Capital City
Bandar Seri Begawan
Singapore
Palembang
PHILIPPINES
Cebu
(Palawan)
Legend
(Malay Peninsula)
Medan
Quezon City
(Irian Jaya - Papua)
Surabaya
Semarang
(East Java)
#
East Timor
(Bali)
Nations and Major Cities in

the ASEAN Archipelago
Note) Scale, shapes, locations and boundaries are approximate in the

hand drawn map; no responsibility is assumed.
#
Australia
3.2 ASEAN and Gas

Oil and gas resource potential of ASEAN is not necessarily large compared to the world total gas
reserves but has been still important within Asia where such potential as a whole is deemed
comparatively limited. Fig.3 illustrates the proven gas reserves in the Pacific region for comparison.
Indonesia has long been a net oil exporter and supplied Asian nations with crude oil. With increased
use of energy along with demographic and economic growth, however, it is becoming a net oil
importer and plans to use more gas domestically. Natural gas potential available in East Asia is
largely concentrated in Indonesia, Malaysia and surrounding offshore regions so far.
Fig. 3 Proven Gas Reserves of Asia Pacific Economies
Asia Pacific Gas Reserves 2000 (TCM)

Malaysia
Indonesia
China
Australia
Other Asia Pacific
India
Total Asia Pacific:

10.33 TCM = 265.1 TCF
Pakistan
Brunei
Thailand
Bangladesh
Papua New Guinea
Vietnam
0.50
1.00
1.50
2.00
2.50
Note) Derived from BP Statistics 2002. TCM: trillion (10^12) cubic metere, TCF: 10^12 cubic feet.
Brunei, Indonesia and Malaysia, are among the worlds pioneers in exporting natural gas in the
form of LNG to the Far East, having approximately 30 years of experience. Far East economies, like
Japan, Korea and Taiwan, faced environmental difficulties in consuming energy much earlier than
southern countries demanding use of natural gas.
On the producers side, the export of LNG has been an important resource for national trade
balance and a prime mover for economic growth. Development of domestic use of gas in gas
producing countries, however, has followed a little later. Growth of population and economy as well
as environmental sensitivity and recognition in these countries have finally come to demand to use
more natural gas and other clean energy resources as well as saving use of oil, forcing more natural
gas development to be promoted.
Asian population is large, and so is potential energy demand. If the potential energy demand is
related to the urban population, Table 3 shows the populations of the major cities in South East Asian
nations, giving an indication of the related potential energy demand. The gas in the ASEAN
archipelago is unique in that large potential energy demand areas and large and small gas fields are
well scattered in the region. This very fact, in fact triggered the concept of ASEAN pipelines, offering
long haul gas transmission opportunities in a form different from other ones, e.g., to Europe from
Russia and from North Africa.
Table 3 Major Urban Population in South East Asia
City / Urban Area
Nation/ Economy
Population
(year)
(in thousand)
Jakarta
Indonesia
9,374
(1997)
Bangkok *1
Thailand
7,507
(1999)
Bandung
Indonesia
5,919
(1997)
Singapore
Singapore
3,894
(1999)
Ho chi min
Vietnam
3,016
(1992)
Surabaya
Indonesia
2,801
(1997)
Taipei
Taiwan
2,640
(1999)
Yangon (Rangoon)
Myanmar
2,513
(1983)
Samarang
Indonesia
2,222
(1997)
Quezon City
Philippines
1,989
(1995)
Medan
Indonesia
1,988
(1997)
Manila
Philippines
1,655
(1995)
Palembang
Indonesia
1,416
(1997)
Kuala Lumpur
Malaysia
1,145
(1991)
Hanoi
Vietnam
1,074
(1992)
Davao
Philippines
1,009
(1995)
Notes) Based on permanent inhabitants in the city except that *1 Includes suburban areas. Source:
Japanese Ministry of General Administration, Statistics Bureau, 2002. The year of status of the statistics
differs from city to city based on officially published data available.
3.3 ASEAN Pipelines and Alternatives

The Trans-ASEAN Gas Pipeline Project (TAGP) earlier was conceived as a possible integration
of numerous independently planned pipeline systems to connect South East Asian archipelago
nations. In fact, a long haul pipeline requires huge investment and, in principle, can be financed and
implemented only with assured demand as well as proved gas supply. A transmission line also has to
be connected through a gas distribution infrastructure to the end users for a smooth cash flow to
actually occur. An aggregate dream network has naturally to comprise many of complete upstream to
downstream gas projects. The ASEAN region is characteristic of offering such features since gas rich
and lean economies are ideally scattered in this archipelago, where, the geographical size of the
region being larger than Western Europe, various sizes of gas fields and large energy demand
centres are scattered.
Fig. 4 ASEAN Pipelines
Taipei
Dacca
S.E. Asian Pipelines

Existing and
Perspective
Hong Kong
Hanoi
Legend
Yangon
Manila
Bangkok
(Yadana)
Location and route not to scale.
(Camago/
Malampaya)
City or region
Batangas
(major gas fields)
Ho Chi Minh
(Yetagun)
Existing pipe
(Bach Ho)
Prospective pipe
(JDA)
LNG Liquefaction
(Natuna
and West
Natuna)
Kuala Lumpur
Medan
- Arun
Bandar S. Begawan
Proposed LNG Terminal
Singapore
Duri
IGU WOC 10 / SG10.1
Bontang
Batam
I
Palembang
(Tangguh)
Banjarmasin
Ujung
Pandang
(LNG)
Jakarta
Source: Osaka Gas 2002

Based on media and published reports
Future Liquefaction
Surabaya
(Timor)
1,000 km approximately
While an aggregate gas transmission network to cover the archipelago had been proposed by
various sectors, it was officially recognized by the ASEAN in 1996 and the idea has quickly evolved to
date with internationally organized institutional development. The main objective for such a scheme is
energy security of ASEAN nations as a whole. The TAGP is a concept used together with the before
mentioned Trans-ASEAN Power Grid (TAPG) which will not be elaborated on here. It is reported that
a Memorandum of Understanding (MOU) for the TAGP was signed among the 10 ASEAN member
countries for the project to get more clearly defined in Bali for ASEAN Council for Petroleum JV
company in July 2002.
Since authorization of the project by the ASEAN, many pipelines have been implemented with or
without recognition of linking to the Trans-ASEAN pipelines. Some pipelines had the function of long
haul gas gathering from off-shore gas fields to on-shore gas processing rather than for transmission,
but later became apparently a transmission line by linking to other lines of similar function.
The pipelines or relevant projects that are deemed to conform part of ASEAN pipelines are partly
international and partly domestic. Domestic pipelines, however, have a possibility to be extended to a
border to be used for international gas trade or become part of Trans-ASEAN someday.
Those pipelines or projects are shown in Fig. 4 and are listed below (as of September 2002):
Existing Fully or Partly, or Firmly Scheduled Pipelines (as of 2002):

Java pipelines:
West Java Pipeline (200 km, 1976) and Surabaya pipelines

(1995) are existing; Trans-Java pipeline planned as well as
Kalimantan-Java connection.
Thai development in the Gulf Existing (since 1980s) and expanding into Joint Development
of Thailand:
Area (JDA) with Malaysia
Malaysian
peninsula National network fully developed (early 1990) and expanding.
pipelines:
Malaysia
to
Singapore The first international pipe in Asia to serve a gas power
pipeline:
generation in Singapore (1995).
Sumatra Corridor pipelines :
South Sumatra Duri pipeline for enhanced oil recovery
(1996).
Myanmar- Thailand pipelines: Two lines completed from Myanmar offshore gas fields
(Yadana and Yettagun fields) to Thailand border to serve a
large gas power plant in the latter (2000).
Malaysia-Thai
Joint Pipelines through offshore border gas field development area
Development Area (JDA):
(late 1990s).
West Natuna Singapore:
The first Indonesia to Singapore gas export line (2001).
South Sumatra Singapore:
The second Indonesia to Singapore gas export line (2002).
South Sumatra Java:
Connecting South Sumatra gas fields to West Java markets
including Jakarta (near implementation).
Planned Pipelines:
Trans-Java Pipeline:
Kalimantan-Java Pipeline:
Trans-Malay Peninsula:
Extension to the Philippines:
Connecting West Java and Surabaya onshore

Connecting East Kalimantan and East Java offshore
Going though Peninsula from Malaysia to Thailand
Malaysias Sarawak/Saba provinces to Luzon, Philippines, or
Indonesian Kalimantan to Luzon, for gas export.
Also possibilities of LNG transportation within the region have been occasionally suggested; an
example of which is a gas transportation from Irian Jaya (Papua) to Surabaya, Java, Indonesia. There
are already several gas liquefaction and export terminals in the ASEAN region for supplying the Far
East, which may be ready for use within the region in the future. Current and perspective LNG
terminals, both liquefaction and re-gasification, in the ASEAN area and vicinities are listed below:
LNG Terminal Locations:
Existing export:
Potential export:
Potential import:
(1) Brunei; (2) East Kalimantan, Indonesia; (3) Acceh,

Indonesia; (4) Sarawak, Malaysia; (5) West Australia, Australia
Irian Jaya (Papua)
India (facility existing); China; Philippines; Singapore
With the Trans-ASEAN background stated above, this paper discusses pipelines for the
Philippines in particular as well as for Singapore together with the possibilities of LNG transportation.
4 Philippine Views on Gas Import via TAGP or LNG

4.1 Philippine Energy Status
A foremost archipelago country, the Philippines is located at the eastern rim of the ASEAN
archipelago region offering a unique situation in choosing energy supply portfolio for its economic
development.
Table 4 Economic Indicators of The Philippines
Population (million)
GDP
Real GDP growth
GDP/Capita (current)
Industrial Production
Exchange rate (ave.)
Consumer price index
FDI flow
million
billion
'95US$
%/year
US$
%/year
/ US$
1990=100
million US$
1995
68.61
74.180
2000
76.50
79.24
2005
84.75
93.75
2010
92.93
111.34
2015
100.71
132.24
1.5
454.6
17.40
25.714
163.9
3,992
3.5
282.8
23.28
44.192
231.11
153
3.5
355.4
8.0
55.0
309.71
500
3.5
473.6
8.0
55.0
504.48
1000
3.5
562.3
8.00
55.0
1048.78
1,000
Note) Actual through 2000; the rest are informal estimates.
With limited fossil energy resources compared to some of other ASEAN nations, the Philippines,
notwithstanding its traditional high cultural position, economically ranks as a bit less developed
country, but the numbers in Table 4 show that the country is steadily growing. Steady economic
growth is also explained by that it was much less affected by the 1997-98 Asian Financial Crisis than
some other countries.
The country is, in fact, endowed with various energy opportunities which successfully brought
down the level of energy dependence on imported petroleum from more than 80% in 1970s to less
than 50% in 2002 through remarkable national effort to replace imported oil. Energy security has long
been a top on national agenda since the Petroleum Act of 1949 of the country.
The primary energy breakdown of the Philippines shown in Table 5 tells us how well energy
sources are being diversified and specially how extensively the use of geothermal and renewable
energies is developed. The Philippine geothermal energy development has been second only to the
US in the world and it is going to be No.1 by the end of 2002 when a new plant is added in terms of
generating capacity. The Philippines is also active in developing other renewable energy like hydro,
wind and solar. Use of biomass energy is also vigorous and consists of use of Bagasse (sugar
canes), rice hull, forestry products, coconut, animal waste and municipal waste. A recent inception of
the use of indigenous natural gas from the off-shore Camago/Malampaya fields is again considerably
changing the energy scene of the country.
Table 5 Philippine Primary Energy Supply Outlook

Year
Energy Unit
Indigenous
Energy
Oil
Natural gas
Coal
Hydro
Geothermal
Renewable***
Imported Energy
Oil
Coal
Natural gas
Other
Total
Oil
Non-oil
2000actual
Mtoe**
17.7
44.9
0.05
0.01
0.7
1.9
3.1
11.9
21.8
17.9
3.8
39.54
18.03
21.51
2001
Mtoe**
17.73
44.3
0.1
0.0
1.8
4.9
7.9
30.1
55.1
45.4
9.7
100
45.5
54.5
0.59
0.05
0.71
1.57
2.62
12.19
22.28
16.73
5.55
40.01
17.32
22.70
1.5
0.1
1.8
3.9
6.6
30.5
55.7
41.8
13.9
100
43.3
56.7
2011
Mtoe**
35.27
48.9
1.15
4.17
2.28
4.76
6.65
16.26
36.60
27.75
3.92
4.93
0.27
72.13
28.90
43.24
1.6
5.8
3.2
6.6
9.2
22.5
50.7
38.5
5.4
6.8
0.4
100
40.1
59.9
Notes) Philippine DOEs Unit converted at 1 bfoe (barrel fuel oil equivalent) = 6,621.85 MJ = 1,581,600 kcal(IT).
**)Mtoe = Mega ton oil equivalent. 1 kgoe = 10,000 kcal (IT); 1 mmbfoe = 0.15816 Mtoe.
***) Mostly biomass.
Source: Phil DOE, Philippine Energy Plan (PEP)2002-2011LNG Import Scenario (December 2001)
The Philippines appropriately uses various international supports in energy development, while it
also encourages private sector initiatives and entry of foreign investors. In the long standing and
unique Philippine statutory systems, energy infrastructure sectors are basically defined as public utility,
restricting foreign investment and management, requiring Congress-approved franchise, as well as
forcing non-exclusivity, non-discrimination and third party access, in a progressively democratic
environment. Nevertheless, the national effort has brought about completely deregulated oil industry
and the power generation sector expressly defined as non-public utility in order to attracting private
sector investors in recent years as commented later.
4.2 Gas Industry Development in the Philippines

The Camago/Malampaya gas, with estimated reserves of approximately 88x109 m3 (3.1 TCF)
was inaugurated into operation in October 2002 after 10 years of development since the first gas find.
It is the first indigenous natural gas field of sizable amount ever developed in the Philippines and the
largest ever project financially. The deep gas from the field of 3000 meters depth below the seabed,
at 830 meter water depth, is transported via a 504 km offshore pipeline to the landfall at Batangas,
100 km south of Metro Manila. The capacity of the facility is 500 mmscfd (or 5.17x109 m3/y at 15C)
and could be raised to 650 mmscfd (6.72x109 m3/y) by installing an offshore compressor. The project
was only materialized through securing natural gas demand. Three (3) gas power plants were
installed for using this gas: Ilijan Power (1,200 MW), Santa Rita Power (1,000 MW) and San Lorenzo
Power (500 MW), which started natural gas powered operation in 2002. The total cost of over
US$ 5.5 billion for these facilities is the largest investment ever in the Philippines. These plants are
expected to use 365 mmscfd (3.77x109 m3/y) of gas. The inception of the use of gas is bringing about
enormous benefits to the country, replacing imported oil, improving the foreign currency balances,
improving the environment and increasing employment. A study on the downstream for natural gas
industry development has also shown that the Gross Domestic Product (GDP) will be up.
Taking this opportunity of inception of gas industry, the Philippine government and relevant
energy institutions have embarked on creating the national gas industry and have hosted conducting
various gas use promotion studies involving international cooperation. Various studies target the
possibility of the use of gas in Luzon Island where countrys population and industry concentrate by
more than 40%.
Studies show that around or more than 90% of potential gas consumption will be by the power
generation sector and the rest will be for large industries at least in early stages. There are many
industrial estates in southern and central Luzon, developed in the last few decades through national
and private sector efforts, which, however, mostly accommodate light industries using limited amount
of energy or using energy in the form of electricity. This explains why only 10% of gas or less will be
for direct use in industries.
Public and civil use of gas, while it is well desired by people, may be occurring much later due to
economics. The tropical climate there makes them use limited thermal energy for the gas supply to be
economically justified. The government is also aggressively promoting natural gas vehicles in the
Manila area where people supposedly suffer from automobile emissions, with high premium of gas
use suggested. Commercial high rise building and shopping mall clusters are also developing in large
scale around the national capital region (greater Manila) and use of gas for cogeneration and gas
chillers is also being expected when urban pipeline infrastructures are installed.
Thus power generation is the initial target of using gas which is now formulated in national energy
plans. These changes will considerably modify the projected power generation shares of the
Philippines as shown in Table 6.
Table 6 Breakdown of Power Generation in the Philippines

Unit
Oil
Coal
Indigenous
Imported
Hydro
Geothermal
Natural gas
Biomass
Other
Total
Amount of
Power
1990
1995
2000
2005
2010
3,228
4,025
600
3,425
3,216
1,931
3,028
40
7,470
22,938
MW
MW
MW
MW
MW
MW
MW
MW
MW
MW
3,136
525
2,153
888
0
167
6,869
5424
850
2,303
1154
0
0
9,732
5,201
3,825
600
3,225
2,304
1,931
3
0
13,264
3,438
3,825
600
3,225
3,216
1,931
3,028
40
460
15,938
GWh
26,327
33,554
45,290
65,825 108,571
Share in
2000
(%)
39.2
28.8
4.5
24.3
17.4
14.6
0.02
0.0
0.0
100.0
Share in
2010
(%)
14.1
17.5
2.6
14.9
14.0
8.4
13.2
0.2
32.6
100.0
Note) Actual through 2000. Estimates for 2005 and 2010 based on PEP2002-11 Outlook, High GDP Base Case
SourcePhilippine DOE
The Philippines has had self-effort experience of mine mouth gas power generation of three (3)
MW in Northern Luzon by using indigenous gas for several years while large scale gas power
generation began only in 2002 as stated before. Since Malampaya gas pipelines have a capacity of
500 mmscfd, without capacity expansion for the time being, 135 mmscfd of gas as the balance of
power generation use are available for gas industry development. The Philippines is aggressively
pursuing the possibilities of industrial estates and natural gas conversion of other existing power
plants as well as for NGVs and commercial use in the Manila area, and South and Central Luzons.
Natural gas industry plans are instituted in the ten year Philippine Energy Plan, or PEP, which is
legally updated every year. Most of gas legislative principles are traditionally recognized in the
existing Philippine laws, which are rather complex but progressive even to include the principles of,
e.g., open access and non-exclusive, non-discriminatory concepts. Modern regulatory systems to
encourage private sector participation have been established in the newly promulgated Interim Rules
in the official Implementing Rules and Regulations, or IRR, since August 2002. The government
already plans to establish a new integrated gas law replacing complex traditional laws for further
accountability to investors and consumers.
While regulations are ready in advance, there has been no natural gas transmission and
downstream infrastructure constructed yet as of 2002, except for virtually abolished old town gas
network in Manila City. The first project for gas use promotion will be a 100 km pipeline from the
landfall of the Malampaya Pipeline, at Batangas, to the Manila area and relevant gas distribution
pipelines as well as gas market creation activities, which are going to happen shortly.
4.3 Necessity of Security and Gas Import

Installation of an expensive infrastructure financially requires long standing gas industry and
assured long-term gas supply projections. Depending solely on the Camago-Malampaya gas pipeline
may not satisfy this condition and the Philippines is pursuing gas import options for energy security
and benefit to more people and next generations, while pursuing additional indigenous gas field
development at the same time.
Energy security issue means many things; paramount among all with regard to natural gas
infrastructure will be technically robust systems and diversification of supply sources. Relying on only
one pipeline from Malampaya all the way to Manila, from south to north, for the market there, may be
susceptible to disruptions due to any cause as exemplified by various incidents. Holding certain gas
storage is another security measure. While promoting development of indigenous gas itself
contributes to security, reservation of some indigenous gas reserves for future generation by
importing some is another security contribution in the long-term unless the country has infinite energy
resources.
Fig. 5 Potential Natural Gas System in the Manila Area
Legend
Manila City
Capital satellite city
Luzon
Major suburban city

Other demand center
Phase 1 Pipeline (planned)
Phase 2 Pipelines (preliminary)
Clark Field
Subic Bay
Bataan Peninsula
Potential LNG Inlet
National Capital Region
Batangas City
Malampaya Gas Pipeline and future
ASEAN pipeline route
Under the circumstances, the government wants to augment the systems by securing supply from
the northern side and plans to locate an LNG receiving terminal in Bataan Peninsula for a short- or
mid-term plan, while looking to more use of indigenous gas at the same time. Fig. 5 shows how the
expected LNG import point, existing pipeline gas landing point and demand centers are located in
Southern Luzon.
This scheme also means supply diversification by introducing another natural gas source.
Introduction of gas from the north in the form of LNG secures an alternative to indigenous pipeline
gas, relief against risk of any disruptions, certain gas storage which the Philippines will be desperately
needing, continued gas supply to future generations, prolonging the life of indigenous gas resources,
and easier maintenance of stable conditions. A negative impact is a possible contribution to
deterioration of foreign currency reserves. But this point may be somewhat balanced by improving
employment, effective investment in infrastructure with net value added and environmental benefit to
the people.
Trans-ASEAN pipelines are also planned for another alternative to the future gas demand in the
Manila area as well as other regions of the Philippines after the introduction of LNG. This will come
from Manilas south western direction and will well supplement the role of Camago-Malampaya lines.
It is planned for a longer-term choice and is well promised in the framework of ASEAN. The plan will
guarantee the last resort for the Philippines to use the gas within ASEAN thereby benefiting the
residents along the lines and guaranteeing the usefulness of the current upstream Malampaya
infrastructure, since the Trans-ASEAN extension to the Philippines is supposed to run partly the same
route.
4.4 Economic Impact on the Philippines
The interest of the Philippine government in the gas promotion focuses on energy security,
economic efficiency, technology development and public benefit according to the statutes and
national plans.
The Philippine DOE conducted a gas master plan study incorporating the principles stated above
to project and promote the use of natural gas for a long-term plan with cooperation from the Japan
International Cooperation Agency (JICA), which has addressed estimated economic benefits of the
proposed natural gas network development on the Philippines, setting aside financial analyses which
are directly for potential investors and financiers. The economic benefit is shown in terms of
Economic Internal Rate of Return (EIRR), increase of Gross Domestic Product (GDP), Government
Revenue, and Effect on Employment, as well as the Debt Coverage Ratio to financiers.
Among several cases just for reference, assuming a High GDP case considered there, potential
economic and social benefits derived from US$ 9,900 Millions investment (with 0.3 to 1.5 %
wholesale inflation in US currency) in LNG receiving terminal, domestic pipelines and power
generation in 25 years are:
Net benefit of the project exemplified by 20 to 30% (or more) of economic internal rate of returns,
Employment improvement due to construction and operation of infrastructures,
Raising GDP or GRP,
Environmental improvement due to general replacement of coal and oil to gas, NGVs, conversion
of suburban power generation into gas,
Generally higher energy efficiency due to adoption of combined cycle generations and distributed/
de-centralized power generation (cogeneration),
Saving electric transmission networks due to de-centralized power systems,
Safety improvement (compared to LPG), and
Convenience of using gas to be enjoyed.
5. Characteristics of Pipeline and LNG for the Philippines in Gas Import

As stated in the previous chapter, the Philippines has two options of importing gas: Trans-ASEAN
pipeline gas and LNG.
From the Trans-ASEAN side, the Philippines is located in the farthest area from the center of
ASEAN region and of the gas rich area, e.g., about 2,000 km from Natuna field. The connection of the
network to Manila, may be on the long-term agenda to strengthen the regional supply as a whole and
the union of ASEAN, while the Philippines want natural gas within a robust system. The wide region
pipeline network offers some sense of robustness, with a stable gas supply. Pipelines might offer
benefit to the transit region, or countries like Brunei, with possible use of gas in the nearby
communities and transit fees, which may economically vitalize relevant regions. The extension of the
Trans-ASEAN Pipelines to Manila may augment the existing line from Camago-Malampaya to Luzon.
There are also issues, however. An example is that Manila may be connected to limited number
of countries and to gas sources connected to the pipelines only. Another issue is that pipelines
themselves cannot solve the need of storage, although high pressure lines have certain line-pack
storage function.
The option of LNG offers freedom of access to gas sources either within ASEAN or remote
countries. More flexibility is expected in choosing gas trade partners. LNG has certain storage
function especially in the country without geological opportunity for such a function. LNG can be
imported at a location opposite to the existing pipeline landfall points thereby increasing network
robustness.
The only question is economy. LNG has long been said to be costlier than pipeline gas and the
LNG price in Asia is locked to Tokyo Bay market and high. Also due to huge project costs, it has been
said that LNG contracts are rigid with high take or pay provisions. Today some aspects remain the
same but actually LNG contracts are gradually being improved for the market side responding to
recent glut situations. Sometimes LNG debaters forget that not only LNG but also long haul pipeline
gas contracts include take or pay or similar provisions.
Tokyo Bay c.i.f. LNG prices are market prices that people there have afforded to replace oil for
gas in power generation. When the LNG market expands to other countries, especially in developing
countries, market clearance level will have to be reconsidered and updated if markets are still viable
and suppliers want an expanded market. The real LNG cost will eventually determine this. LNG costs
are decreasing. How much lower than now and how close to a level that developing countries can
afford will be a question.
We have tried to calculate and compare the costs of LNG and pipeline gas on an imaginary case
in Tables 7 and 8, reflecting publicly reported information as well as such in the gas industry. These
here show only an example case while assumptions can be easily changed for simulations.
Table 7 Assumptions for Comparison of Pipelines and LNG
Assumptions
1. Physical Assumptions
2. Financial Assumptions
Assume off-shore transportation for both

Project begin:
1500 km
Period:
Distance (Base Case)
Gas quality gross:
10000 kcal/Nm3 (0dC)
Discount rate:
or =:
1063 Btu/Mscf =
39.69 MJ/m3(15C)
Physical life:
0.45 t/m3
Taxes & inflation:
LNG liquid density
Case :
3
Transport Capacity:
2.50 mta
=
317.6 mmscfd (15.5dC)
381.1
=
3.104 bcm/y (0dC)
3.724
Welhead gas price:
1.000 US$/mmBtu
FS or Preparation Costs:
2003 year
25
years
8%
35
years
neglected
million tons /yr. (mta)
mmscfd (15.5dC)
bcm/y (0dC)
15
$ million to either
3. Pipeline Conditions Base case

Pipeline Pressure (Max)
75
Pipeline Pressure (Min)
55
Initial Press.:
50 Final Pr.:
Distance btwn Compressors:
500
Compressor Stns.:
3
plus last section
0
Construction yrs.:
3
Demand buildup yrs.:
4
Pipeline Cost:
35000
Compressor Cost:
1000
Major pipe size:
30
Compressor Size 6,964
Non-distance/ Gas process plant:
One (1) pipe or Two (2):
1
bar
bar
40
km
stations after initial
km
years
years
US$/km/inch
US$/HP
inch
HP
98
mil. US$
Cost of 2nd:
70%
4. Conditions
Base case
Liquefaction Capacity 2.5 mta
Cost scaling: (X1/X2)^0.75+fixed term
LNG ship:
125000 m3 (kl) =
56,250 t
Cost= :
25 =155mil$
130 *Capa.+
US$ mil
Std. Capacity= 125000 Kl
Speed 19 -21 knots, Loading+unloading: 25 hrs.
Dry Dock: 40 days/ 2.5years

Receiving Terminal: Storage 2 tanks x
142,428 kl
I.e., Ship Capacity+ 10days + dead 10%
Cost= Storage cap (kl)x A2+ B2
O&M comprises: Fixed and variable costs
Construction:
3
years
Ship Build up:
4
years
Table 7 shows the common assumptions for examining the comparison as well as some cost
formulas. There are other assumptions specific to pipeline or LNG behind in the EXCEL worksheets.
Especially for LNG, 10 days stock holding is assumed. Most numbers in the assumption can be freely
changed in the actual program for calculation and the one shown here is an example only. The
transportation distance chosen, while it can be also freely selected in the program, here is 1,500 km
since the Filipinos expect a gas source of such distance from the Manila area for transportation
through the Trans-ASEAN. The pipeline cost specifically in this calculation is assumed simply as
US$35,000 / km-inch, a level considered lower than normally experienced in offshore pipelines, and
as proportional to the distance together with the consideration of compressor stations as shown in the
table. A single pipeline is assumed to be laid for the distance specified in the case; when alternatively
two parallel pipelines are considered the second one is assumed 30% cheaper as an example.
Based on these assumptions, economic long term average incremental costs are calculated in
the table of results, Table 8. The economic costs here do not count on, or identify in the costs, any
tax, duty, royalty, land acquisition cost, insurance, contingency and any permitting or acceptance
costs. Inflation is not considered either and the computation is based on net present value with 8%
discount rate.
Table 8 shows that for a project of, e.g., 2.5 million tons (3.1*10^9 cubic meters) per year for a
1,500 km distance, the physical costs are almost the same in terms of US dollar per thermal value at
less than 3 $/mmBtu. If two parallel pipelines are considered, the relative LNG cost will be definitely
lower.
Table 8 Results of the Pipeline and LNG Cost Calculation
Costs Summary:
Capital O&M Cost Total Cost Unit
Economic Cost (NPV) (NPV)
(NPV) Gas Cost
1500 km
2.50 mil. ton/y Costs US$million US$million US$million $/mmBtu
Long term cost: LNG
1,238
547
1,785
2.989
(Ave. levelized costs) Pipelines 1,496
249
1,746
2.842
Unit Gas Cost Breakdowns:

LNG:
$/mmBtu
Pipeline $/mmBtu
Wellhead
1.000
Wellhead 1.000
Liquefaction
1.292
Gas field 0.145
Shipping
0.170 Transmission 1.696
Regasification
0.527
2.989
2.842
A sensitivity analysis allows the comparison of pipeline and LNG as the function of distance. Fig.
6 shows the shape of such functions. The figure demonstrates that the two cost lines cross at 1,642
km where costs are the same in an economic term. Actual costs will be different since many real
conditions are neglected here. Ten years ago, LNG plant costs and LNG ship costs were, e.g., 40%
higher than today and LNG was definitely costlier at less than 4,000 km or so.
Fig. 6 Gas Transportation Costs versus Distance
Gas Transportation Cost vs. Distance

2.5 mil. t/y=
318 mmscfd
Cross at:
1,642 km
Gas Transportation Cost Comparison

6.000
$/mmBtu
5.000
4.000
3.000
LNG
2.000
Pipe
1.000
0.000
500
1000
1500
2000
2500
3000
3500
Distance km
We find from this example that LNG and pipelines are more comparable at a shorter distance
than in the past, but still more obstacles may come from other cheaper fuels like coal if they forget
global or local environment.
While a factor of ongoing decreasing cost of LNG is in a larger size of the liquefaction or shipping
facility, the same computer program can show that trading of very large volume of gas, like, e.g.,
1,000 mmscfd, still makes pipelines economically advantageous at a larger distance, though such a
case is not shown here. A larger size of an LNG project does not necessarily mean requiring larger
size of gas purchase to a buyer, since an LNG ship can go to plural receiving terminals from a large
liquefaction plant. A big pipeline normally connects two fixed points with some variations with branch
lines. This implies various possible strategies in combining sources of gas purchase. Especially in the
case of the Philippines, when security considerations require two gas sources from different
directions to accommodate the gas market of the Manila area, a big pipeline from a nearby big gas
source and an LNG ship transportation from a distant gas source will be ideally combined for the gas
supply to the market.
An important aspect for the Philippines is that LNG means import and the pipeline gas for the
time being means indigenous gas, the promotion of the use of which helps foreign exchange
reserves. The gas import has to have certain effect to eventually boost the economy to absorb the
negative effect of import. It is well recognized here that use of natural gas has such economic benefit.
Some countries are famous for high and double or triple taxes on LNG for the sake of indigenous
fuels; such high duties do not exist in ASEAN. A firm hope is that the ASEAN Free Trade Zone
effectuates an agreement on import duties: all duties be less than 5% by 2002 except for certain
clearly defined goods and economies. LNG may be taxed 5% or less as in Korea and Taiwan.
Financing is another issue that must be discussed comparatively somewhere but will not be
elaborated here. While pipelines are invested in the area along the route including transit countries, if
any, much of LNG investment is made in the liquefaction site, as well as areas relevant to
shipbuilding and receiving terminal. Economic effect is naturally different regionally.
The Philippines has some domestic coal production as well as a sizable amount of imported coal
which is effectively used for power generation, but limits its use due to environment. The Philippines
seriously respects both environment and economy even at some cost. It accepts 5 dollars per mmBtu
domestic gas price, and comparatively high electric power prices, said to be second only to Japan in
Asia, while complaining about them at the same time. Author understands in turn that a society or a
market accepting certain cost of energy may have comparable strength to accommodate
infrastructures for their own future. Filipinos await clean and economic growth necessitating the
building up of the gas infrastructure and market rejecting simple low, low and low political prices.
6 Possibility of Singapore to Select LNG or Pipeline for Future Supply

6.1 Singapore Economy and Energy Status
A fully developed country in the centre of ASEAN with a population of four (4) million, Singapore
is another country having the necessity of natural gas import. Among the ten (10) ASEAN nations,
five nations are gas rich and gas export potential countries, while others are of gas import potential, of
which Singapore and Philippines potentially have strong appetite for gas import.
With limited size in land, the country is remarkably growing as the economic indicators show in
Table 9. A city isle country, Singapore plans to expand the population from around 4 million to 5
million in 10-15 years and has strong appetite for clean energy to be added for domestic supply.
Singapore is the centre of oil trading in Asia. Oil products in the region are mostly priced as
indexed to Singapore international oil market and had long dominated the share of energy of
Singapore itself. Without any indigenous energy resources, the primary energy supply of Singapore
consists of imported oil and gas only. Table 10 shows how simple the structure of primary energy
consumption is and how oil has dominated the energy of this country.
Table 9 Economic Indicators of Singapore
Unit
Population
million
GDP at current price
US$ billion
GDP Real
billion '95US$
Real GDP growth
%/year
GDP/Capita at current prices
US$
Industrial Production
%/year
Exchange rate (annual ave.)
/ US$
Consumer price index
1990=100
FDI flow
million US$
1995
2000
2005
2010
2015
3.53
4.02
4.32
4.65
5.01
83.68
85.80
101.48
133.07
174.49
83.695
114.05
126.16
149.84
177.96
8.65
9.90
3.50
3.50
3.50
25,156
22,962
29.176
32.196
35.529
10.4
15.2
1.4174
1.724
1.695
1.695
1.695
113
119
125
138
153
59,837
4,197
Note) Actual through 1999; the balance being authors estimates.
6.2 Gas Status and Possibility of LNG Option

Nevertheless to the foregoing, Singapore seems to have strong interest in gas for environment of
its own and for that of the world. Not only that Singapore is in the center of ASEAN, but also it is
located in the center of Trans-ASEAN Gas Pipeline network. It embarked on importing natural gas of
135 mmcfd from Malaysia using the first international gas pipeline in Asia in 1995 as Table 10
reflects. The gas has been used for power generation.
Singapore began importing second gas of the amount of 325 mmcfd (at plateau) from the West
Natuna gas fields, Indonesia, in 2001, and plans to add another importation of 350 mmcfd (at plateau)
from Sumatra, Indonesia, in 2003, both through international pipelines which we deem part of the
Trans ASEAN. On the other hand, the gas purchase contract with Malaysia is going to expire in 2008 .
These gas contracts are going to satisfy around half of the countrys primary energy consumption.
Gas import contracts are with take or pay clauses, while there is no gas storage in the country.
Storage function depends on oil by use of dual fuel facilities.
Table 10 Primary Energy Consumption in Singapore

Million toe
1995
2000
2005
2010
Oil
13.98
18.25
16.21
17.35
Gas
Total
1.64
15.62
1.49
19.73
5.57
21.78
7.66
25.01
2015
18.97
9.74
28.71
Note) Authors estimates for 1995 and 99 taken due to discrepancies in the publicized data
Singapore is sensitive to security as any other countries especially with the culture and economic
level different from neighbouring nations in the region. While pipelines for gas import may be normally
physically robust, an incident of long black out such as happened due to some malfunctioning of gas
pipelines in August 2002, for example, may have made Singaporeans rethink about energy security.
It is reported in the media that Singapore potentially considers receiving LNG for a part of energy
supply in the future. Since the pipeline gas import will be satisfying most of the energy needs for
some time, the quantity of LNG import in the initial stage may have to be small; an economic question
arises from this point.
While the trend of the cost reduction of gas liquefaction and LNG shipping in the last decade is
clearly recognized in the world, that of receiving terminals is comparatively limited due to the
simplicity of the terminal structure. The cost for a small lot of LNG is still high in terms of thermal
value and how the public demand for security and environment can compromise with such extra cost
will be a key to evolution.
When Singapore establishes the pipeline gas and LNG importing plans, the plans will be a model
of how pipelines and LNG combined will be structuring an ideal gas transport system in an ideal
geographical region of the ASEAN archipelago.
7 Lessons and Conclusions

(1) The Trans-ASEAN Gas Pipeline Project that combines the large cities and scattered gas fields in
the archipelago by ring pipelines is simply an ideal scheme. While we have discussed the project
from the viewpoint of gas importing countries, supply side considerations also require such pipelines
to be ideally implemented to vitalize gas fields by connecting them eventually to end consumers.
Economic benefit of natural gas supply at large in such international community goes without
saying for gas export nations, but also significant for gas importing counterparts in the region.
(2) Effect of financing on economics makes difference between LNG and pipelines especially
regionally, since investment is made in different locations. Much of investment in LNG is made in the
area of liquefaction, a well as shipbuilding and receiving terminal, while that of pipelines is mostly
made along the pipeline route.
(3) From the viewpoint of gas importing countries in the region, however, while connection to such
pipelines are potentially beneficial to consumers, there may be alternative options, too, especially
when energy security and flexibility are issues and when new gas supply environment emerges.
Other options include LNG and other comparable methods like CNG and GTL, commercial
opportunities of which are still developing.
(4) Energy security considerations for a gas importing nation require having diversified gas supply
origins to a network as well as certain level of storage function. LNG can well complement the
pipelines in this regard.
(5) The comparative advantage of LNG versus pipelines is in the long haul transportation; the critical
distance at which they compete has drastically decreased for certain size of the gas project. With
shorter distances, pipeline is always advantageous. Still in a very large gas project, e.g., 1,000
mmscfd, pipelines are more advantageous at a longer distance. Consequently a combination of a
large volume pipeline gas from a nearby gas field with certain amount of LNG from a distant
liquefaction terminal will be an ideal one for a gas network.
(6)
New gas consuming countries will realize the lower cost of LNG delivery that was never
conceived for developing countries in the past, although such cost may not necessarily be easily
reflected in the price which is affected by other determinants, too.
(7) Ring pipelines and LNG may be able to coexist in the archipelago like ASEAN countries with
helping each other.
ACKNOWLEDGEMENTS
This report was initiated and schemed by the Working Committee 10 of IGU as a work of the
Study Group 10.1 (SG10.1) in the triennium of 2000-2003, and mainly written by H. Okimi, Osaka
Gas, with the help of the Japanese Team members, Shunjiro Yamashita, Tokyo Gas, and Toshio
Yamamoto, Saibu Gas. The author was also helped by the discussions with the Philippine
Department of Energy in the course of a contracted study on natural gas in the Philippines and of
course those in the SG10.1 Meetings, comments from which are reflected. Much literature such as
listed hereunder also helped this paper. The author thanks all who helped him either directly or
indirectly.
REFERENCES
[1]Farid Mohd. Amin, Review of ASEAN Gas Development, Petromin magazine (10) December1999;
[2] Farid Mohd. Amin, Southeast Asian Natural Gas Pipeline Project Masterplan Progress Update,
2nd TAGP Forum, Clark Field, Philippines, 3-4 October , 2000;
[3] Farid Mohd. Amin, Trans-ASEAN Gas Pipeline (TAGP) Project, Petromin magazine October 2001;
[4] Farid Mohd. Amin, Southeast Asian Natural Gas Pipeline Project Trans-ASEAN Gas Pipelines
Project, Seminar on Energy Security in Asia, Tokyo, 4 March 2002;
[5] Toru Hasegawa, Trans ASEAN Natural Gas Pipeline Network Plan, Oil/Natural Gas Review
(Japanese), JNOC, January 2001;
[6] H. Okimi, Natural Gas Promotion Policies, Chapter 3 of A Master Plan Study on the Development
of the Natural Gas Industry in the Philippines, JICA Study for the Philippines, January 2002;
[7] Hon. Vincent S. Perez, Philippine Energy Secretary, Developments in the Philippine Energy
Sector, a special presentation in Tokyo, July 3, 2002.
CASE STUDY :
Table of contents
Country overview
1.1 Main economic indicators
1.2 Energy intensity coefficients
Energy policy
Gas policy
Responsible body(ies) and policy making
Legal/regulatory framework
Energy/gas legislation
6.1 General part
6.2 Principles of the law
6.3 Regulation
6.4 Liberalisation and privatisation
6.5 Ownership
6.6 Licensing
6.7 Prices of energy and fuels
Natural gas outlook
New gas import projects

8.1 Import from Italy
8.2 Import from Hungary
8.3 Import from Austria via Slovenia
New possible gas export options
10 Analysis and comments on the impact of gas availability

on the economic development of Croatia
11 Conclusions

ABSTRACT
Croatia is quite a young country born in 1995 from the break up of the former Yugoslavian
Federation. Even if the population is expected to stay at todays levels in the next 20 years all the
main economic indicators show interesting perspectives of growth.
This growth will have a significant impact on the pro capita energy consumption, thus advantaging the
gas market too.
The growth of the natural gas market will be facilitated by the application of the energy legislation,
which is under definition, and by the new legal and regulatory framework; the share of natural gas,
presently at 26% of the total Croatian energy demand, is expected to be some 29-30% in the years
2010-2020.
Natural gas, which is the cleanest fuel at the moment, will play a very important role in reducing
pollution both in the residential/commercial sector and in power generation.
Although for the coming years Croatia will be able to face the internal gas demand with its domestic
production, starting from 2006 a contribution from new gas imports will be necessary.
At the moment, there are three main supply options under evaluation: from Italy, Hungary and
Austria (via Slovenia).
The supply option from Italy, in particular, may bring additional benefits to the Croatian gas market
having the possibility to cross regions, such as Istria and Primosko-Goranska; not yet served with
natural gas.
Croatia, by virtue of its geographical position, will have also the possibility to play a very important
role in assuring the security and diversification of supply to its neighbouring countries.
Projets de Gazoducs pour la Croatie

RSUME
La Croatie est un trs jeune pays qui sest constitu en 1995 suite la fracture de la
Fdration Yougoslave. Mme si lon estime que la population restera au niveau daujourdhui
pendant les vingt prochaines annes, tous les principaux indicateurs conomiques montrent
dintressantes perspectives de croissance.
Cette croissance aura un impact significatif sur la consommation dnergie par habitant,
favorisant ainsi, entre autres, le march du gaz.
La croissance du march du gaz naturel sera facilite par lapplication de la lgislation sur
lnergie, qui est en cours de dfinition, et par la nouvelle structure lgale et rgulatrice ; sur la
demande dnergie totale de la Croatie, la part de gaz naturel est de 26% et lon sattend ce quelle
augmente jusqu 29-30% dans les annes 2010-2020.
Le gaz naturel, qui est le carburant le plus propre que nous connaissions aujourdhui, jouera un rle
trs important dans la diminution de la pollution dans les secteurs rsidentiels/commerciaux et dans
la fabrication dnergie.
Bien que, dans les annes venir, la Croatie sera capable de faire face la demande de gaz
interne avec sa production domestique, partir de 2006 une contribution de nouvelles importations
de gaz sera ncessaire.
Trois possibilits pour lapprovisionnement sont en ce moment ltude : par lItalie, la
Hongrie et lAutriche (via la Slovnie).
Loption dapprovisionnement par lItalie, en particulier, pourrait amener des bnfices
supplmentaires au march du gaz croate, car elle prsente la possibilit de traverser des rgions
comme lIstrie et la Primosko-Goranska qui ne sont pas encore approvisionnes en gaz naturel.
La Croatie, en vertu de sa position gographique, aura galement la possibilit de jouer un
rle trs important dans le maintient de la scurit et de la diversification des approvisionnements
ses pays voisins.

1. Country overview
The Republic of Croatia is quite a young country being born in 1995 from the break up of the
former Yugoslavian Federation.
The country has an area of 56,542 square kilometres and about 4.5 million inhabitants.
The capital city is Zagreb, located in the North East of the country, which with 800,000 inhabitants is
the most densely populated too.
Since the new State of Croatia was established the economy has undergone important changes to
adapt and to integrate itself towards the world market trends.
Reforms, which are still in progress, have touched all the segments of production and will bring
significant improvement to the economy.
In the next decade GDP ( Gross Domestic Product ) is forecasted to grow with a rate in the order
of 5% in real terms.
Meanwhile, the inflation rate target is to reduce it to the level of the West European countries.
Also in consideration that the population is not foreseen to increase at least for the next decade, the
expected economic growth will have a significant impact on the pro capita energy consumption.
1.1 Main Economic Indicators
Population (million) 1
GDP at current prices (Billion USD)2
Real GDP change (% on previous year)2
GDP/Capita at current prices (USD)
Industrial production (% on previous year)2
Exchange rate (annual average) HRK per USD3
Rate of inflation consumer price index
(annual average)4
FDI flow (million USD)2
1995
4,7
18,8
6,8
4029
100,0
5,2
2,0
2000
4,5
18,4
4,0
4100
101,7
8,3
7,4
2005
4,45
22,3
3,9
5010
103,9
8,0
4-6
2010
4,4
28,8
5,2
6530
105,2
Na
4-6
2015
4,3
35,7
4,8
8290
104,8
Na
4-6
81
868
624,4
806,4
1000
Sources:
1
Croatian Bureau of Statistics and World Population Prospects
2
Croatia in 21st Century-Croatian Macroeconomic Strategy
3
Croatian National Bank in 2010 should be the new Croatian currency
4
Croatian National Bank
FDI : Foreign Direct Investments
1.2 Energy Intensity Coefficients
Population (million)
TPES/GDP (toe per 1000 90 USD)
TPES/Population (toe pro capita)
TPES : Total Primary Energy Supply
1995
4,7
0,40
1,6
2000
4,5
0,47
1,9
2005
4,45
0,43
2,1
2010
4,4
0,37
2,4
2015
4,3
0,33
2,7
2. Energy policy
The main objectives of the existing energy policy beside the balance of demand and supply are:
Realisation of the new strategy of the energy sector development
Definition of regional policy for the energy sector development
Rational use and conservation of energy
Improvement of energy efficiency
Security and diversification of energy supply, taking care of the regional aspects
Bringing the quality of energy products to EU standards
Environmental policy regulating the energy sector according to global standards
Financial support to the development of new more efficient technologies
The Proposal of Energy Strategy has been passed through the Government and now it is in the
process of discussion in the Croatian Parliament. Also, the Government has decided to support 10
national programs, such as: Program of Gas Development, Cogeneration Program, Energy Efficiency
Program, etc.
3. Gas policy
The fast and qualitative growth of the Croatian economy will need more energy, safe supply,
better efficiency of energy use, and greater environment concern. Therefore, an intensive
development of the gas industry is prospected through:
Increase of natural gas consumption, especially in urban centres and by households
Increase of LPG consumption, in its diversified applications as a precursor into the regions with
no gas network.
Increase of natural gas consumption in those sectors where it can substitute ecologically
inconvenient fuels, taking into account economic aspects.
Securing new sources of gas supply.
Investment in new natural gas fields in the Northern Adriatic Sea which is under way between INA
and AGIP.
Extension of gas distribution network from the northern part of the country to the new regions also
based on LPG supply in the first phase of gas network extension in some parts.
Application of new natural gas pricing policy.
Definition of natural gas regulation.
4. Responsible body(ies) and policymaking

The Ministry of Economy is the governmental institution responsible for energy policy (legislation,
annual energy balances, energy strategy, strategic decisions, export and import regimes,
development and organisation of the energy sector, approval of gas and electricity development
plans, tariffs, etc.)
The Ministry of Finance is responsible for some aspects of the energy policy (taxes, export and
import regimes, duties, etc.)
The Government Office for Environment is the governmental body responsible for energy-related
environmental policy.
The Energy Institute Hrvoje Pozar (100% owned by the Croatian State) is responsible for energy
analyses and forecasts, which are prepared on a contractual basis.
5. Legal /regulatory framework

General context / International obligations
The gas sector is regulated through some general laws, such as: Company Law, Law on
Privatisation, Customs Act, Law on Custom Tariffs, Value Added Tax Law, Competition Protection
Act, Law on Environmental Protection, Law on Air Protection, etc. Particularly important is the Mining
Law, together with the Law on Geological Exploration, the Maritime Code, the Concession Act and
the Law on Price Control which regulate various areas related to the gas business.
There are also two basic legislative documents at the state level determining the present-day
operation and development of natural gas distribution:
The Law on local self-government, according to which local governments have the right to
organise local gas distribution in municipalities and cities;
The Law on Communal Sector (Municipal Services Act) which defines the framework for
operation and introduces social obligations.
6. Energy/gas legislation
6.1 General part
According to the Proposal of Energy Strategy (document which represent the guidelines drawn by
the Government of Croatia in relation to the future development of the energy sector in Croatia) the
energy sector is being regulated through the Energy Law and three particular laws (on the gas
market, the electricity market and the oil products market), but also by the law on Regulation of Public
Services and by the Agency for Regulating Public Services (which is to be established).
The Energy Law will regulate the following: the definition of the energy sector and the conditions of
its activities and development, the management of energy resources, strategic planning in the energy
sector, obligations of energy organisations and institutions, technical conditions and legislation,
conditions of energy supply, the tariff system for electricity and gas, control of the energy sector, etc.
6.2 Principles of the law
The new legislation and regulation should facilitate an intensive development of the gas industry.
The main principles of the new legislation framework are:
protection of consumers,
free competition on the domestic market and prevention of creating monopolies,
free access to energy facilities,
equal conditions of investment for foreign and domestic investors,
restructuring and privatisation of state-owned companies (INA, HEP)
equal conditions for incorporation and operation of companies for foreign and domestic entities,
similar to those in developed countries,
liberalisation of energy prices.
6.3 Regulation
The Energy Regulatory Council (Government institution who is acting in the concessions) consists
of five Commissioners appointed by the Croatian Parliament upon the proposal of the Croatian
Government. The Parliament designates, amongst the five Commissioners, a Chairman and a
Deputy. The Commissioners are appointed for a two year term of office (first term), while in the future
the term of office should be five years, with the possibility of reappointment for an additional 5-year
term. The Energy Regulatory Council main responsibilities are:
supervision and control of electricity, gas, oil and oil/derivatives markets
granting and suspending licenses
authorisation for new generation capacity
approval and supervision of tariffs
settlement of disputes
According to the Concession Act and the Mining Law, concessions for exploration and production
of oil and gas are issued by the Government. The decision on concession is made on the basis of
public bidding for tenders or of public invitation. The concession for the gas distribution network is
under the municipal authoritys jurisdiction.
The legislation defines the same rights, obligations and legal status for establishing and doing
business for foreign and domestic entities. If a foreign person establishes a company it is considered
to be domestic legal entity.
The Republic of Croatia ratified the Energy Charter Treaty, and has the obligation to incorate in
the laws and legislation some principles, such as: the free access to energy facilities, market energy
prices, etc. Some legislation has been passed but the important items on technical, economical and
ecological regulations should be defined by the means of the Energy Law. The tariff system and the
new legislation on state, county and municipal level will be based on the Energy Law.
Moreover, the Republic of Croatia signed the Declaration of INOGATE Program which has the same
goals of the Energy Charter Treaty.
The technical norms are issued by the State Office of Standardisation and Metering according to
the legislation which is under the responsibility of Ministry of Economy, the Ministry of Health and the
State Office of the Environment, etc. Some technical rules are under the responsibility of local
authorities. The technical legislation and norms would be changed and become uniform through new
regulations according to European standards. In addition, some technical regulations would be
established according to the Energy Law and other legislation.
Environment regulations are under the responsibility of the State Office of the Environment, the
State Office of Standardisation and Metering, the Ministry of Economy and the Ministry of Health. The
fundamentals of environmental regulations are defined by the Law on Environmental Protection.
6.4 Liberalisation and privatisation
The liberalization of the electricity market will start with the largest consumers (over 40GWh/year),
who will be allowed to negotiate directly with the suppliers. There are about 15 such consumers in
Croatia. Foreign companies can also be suppliers, provided that they are registered/licensed for this
business activity in Croatia. For the time being, consumers using less than 40 GWh/year will have to
continue to buy electricity at the prices set by the present tariff system.
However, within the next few years, the 40-GWh/year-limit will be gradually reduced as market
competition develops and will ultimately disappear allowing all consumers to benefit from a free
market.
Although the de-monopolisation of the electricity market has progressed further than the gas
market, in principle the same considerations can be applied. For the successful development of the
gas market it is necessary to change the present procedures giving to the Counties the power to
confer the authorisation in setting new distribution companies whilst at the moment the authorisations
are given at the community and town level.
Main principles of the new legislation
Exploration
production of gas
&
Transport & storage

(Operator of the
Transport System)
Distribution
Maintain current production under state control , and for further

exploration enable the interested private companies through
concessions (Presently regulated by the Mining Law and the
Concession Law).
Permit wholesale for foreign and domestic companies.
Enable usage of the transport system to other customers in the frame
of possibilities under non-discriminating rules and reciprocity.
Develop a transport system in co-operation with companies
participating in gas supply.
Expand the network through concessions in ownership of the local
community at the county level.
In December 2001, the Ministry of Economy drafted the laws on the privatisation of the three state
owned monopolies: HEP, INA, and JANAF. The Ministry appointed the following international
consultants to be advised and assisted during this first phase of restructuring and privatisation:
for HEP: Norton Rose
for INA: PricewaterhouseCoopers and Deutsche Bank
for JANAF: ABN-AMRO and Zagrebacka bank
According to the current Government policy, HEP will not be privatized plant by plant. It could
remain more or less as it is, in the form of a holding company responsible for the generation,
transmission, distribution, and the retailing of electricity.
However, HEPs transmission division (400 and 220 kV network) could be separated and remain
state-owned. The government is going to look for financial investors in HEP (perhaps by an IPO in
2003), rather than for a strategic partner.
There are about nine options on the table for restructuring of INA. The most likely solution is that
the company will be kept integrated in its core business oil and gas production, while its two
refineries and retail network would be privatized separately (probably involving a Strategic Partner,
because of refurbishment works). As initial step, the government is looking for a strategic or financial
investors that would buy up to 20-30% of INA.
Since JANAFs oil transportation business is rapidly increasing due to the re-opening of the
Serbian market, foreign investors have expressed an interest in this firm. The government is looking
for a strategic partner to which assign a minority ownership rights in JANAF. Even though the JANAF
pipeline was built to transport oil from the Omisalj terminal, located in Krk island, to the refineries of
Croatia, Hungary, and Serbia, with marginal investments and a short time the pipeline could be
upgraded and operated in reverse flow. Omisalj harbour is equipped to serve supertankers with a
capacity of around 500,000 tons. By upgrading JANAF pipeline and considering two future large
international projects, Druzhb Adria for export of crude oil from Russia and SEEL (South East
European Line) to export oil from the Caspian Sea region, it would be possible to reduce considerably
the transportation costs of oil from the continent to the sea.
The implementation of the energy sector reform will gradually open numerous opportunities not
only for the customers but also for the people operating in the energy sector, which will have to
change their minds to cope with the new rules related to the new open market environment.
6.5 Ownership
The ownership in Croatian business and industries can be private, state or mixed. Foreign legal
entities are free to acquire and dispose of ownership rights in the Republic of Croatia. No restrictions
are imposed on movable property. There are no restrictions on real estate transactions provided that
legal requirements and conditions are met. Certain real estate categories are excluded such as the
case of agricultural land. If a foreign person establishes a company it is considered as domestic legal
entity.
6.6 Licensing
Generally, licensing principles are the same for both foreign and domestic entities and for both
private and state companies. A new entity willing to operate in the energy business in Croatia
(Distribution, Transportation, etc) must be authorised by the Energy Regulatory Council.
The licensing of mineral sources exploration is issued by the Ministry of Economy on the basis of
relevant documents.
6.7 Prices of energy and fuels
According to the Law on Price Control, the prices of gas are liberalised. The suppliers form prices
towards distribution companies and direct industrial consumers. Independent Energy Regulatory
Council is responsible for controlling of these prices. End-users prices are formulated by the
distribution companies and they have to inform the Independent Energy Regulatory Council and the
municipal authorities about gas price change. An official tariff system of gas is under preparation.
There are different prices for: the direct industrial consumer, the industrial consumer supplied
through the distribution companies, the households, the fertiliser industry, and the electricity sector.
Gas prices are slowly but steadily rising towards cost based pricing.
7. Natural gas outlook

The energy policy of the country is more and more oriented to use natural gas, mainly for the
production of electricity and in urban centres and households, in consideration of its characteristic of
environmental friendly fuel.
Natural gas is expected to increase its share in the Croatian total energy market passing from 26% in
2002 to about 29-30% in the decade 2010-2020.
The pie charts in Fig1. and Fig. 2 below represent the evolution of primary energy supply:
16%
2% 4%
48%
26%
4%
Oil
Coal
Gas
Hydro
Electricity
Others
Fig. 1 Croatia: Primary Energy Supply 2002
13%
2%
6%
44%
29%
6%
Oil
Coal
Gas
Hydro
Electricity
Others
Fig. 2 Croatia: Primary Energy Supply 2010
The activities concerning the production, import and storage of natural gas are under the
responsibility of the Croatian state Company INA, while the gas transportation activities are
performed by the State Company PLINACRO, which also owns the network.
Croatian gas demand is currently in the order of 2.8 Billion cm/year covered both by the domestic
production and the import from Russia (through a pipeline via Slovakia, Austria and Slovenia).
Domestic gas sources supplied 58% of the necessary gas quantities for the market. The remaining
42% was imported from the Russian Federation.
1.2
Domestic Production
1.6
Import from Russia
Fig. 3 Present Croatian Gas demand

Peak demands and seasonal fluctuations are covered by the use of the Okali underground
storage field, located about 50 kilometres from Zagreb, which has a working gas volume of 0.5 Billion
cm and a daily production of 5 million cm.
Most of the domestic gas is produced from the gas fields situated in the northern part of the
Republic of Croatia. The main gas production complex includes three gas fields: MOLVE KALINOVAC - STARI GRADAC. Due to the expected natural gas production decline from existing
domestic sources INA, in co-operation with Eni Exploration & Production, has started activities related
to the development of new off-shore gas fields in the Northern Adriatic. In this respect it is worth to be
mentioned the production from the new off-shore field IVANA which began in November 1999.
Ivana findings encouraged new initiatives in the Croatian off-shore and led to important
commercial discoveries both in the area of Ivana itself and South of Ivana in the so called Aiza/Laura
area.
The proven reserves of these new gas fields, amounting to about 12 Bcm, will allow to keep the
domestic production at the level of 1.6 Bcm/y at least for the coming 4-5 years even considering that
the existing on-shore fields are rapidly declining.
Natural gas imported from the Russian Federation is transported via Ukrainian, Slovakian,
Austrian and Slovenian gas networks to the off-take point in Rogatec (Slovenia), where the Croatian
gas network starts.
On the basis of the agreement between the Government of the Republic of Croatia and the Russian
Federation, the contract is in force up to 2010. The quantity of 1,09 Bcm/year will be delivered to the
Republic of Croatia up to 2010 at the off-take point of Rogatec.
The actual demand of natural gas for the domestic use in Croatia is expected to grow at a rate of
about 4% per annum.
Figure 4 below shows the forecast up to the year 2020 and the related supply options.
5
4
0,8
3
2
1
0
1,1
1,2
2002
2,8
1,1
2,2
1,6
1,9
1,1
1,9
2005
2010
Domestic
Russia
1
2015
1,1
0,4
2020
New supplies
Fig. 4 Croatian Gas Demand Forecast and Supply Options (Bcm/y)

In addition to the volumes necessary to cover the internal demand, additional volumes to supply
gas to Croatias neighbouring countries should be considered.
In fact Croatia, by virtue of its favourable geographic location, could become, in the near future, an
important crossroads to supply both the Republic of Yugoslavia and the Republic of BosniaHerzegovina.
Before entering into the analysis of the possible supply route options to Croatia it is necessary to
point out the peculiarities of the existing gas market in Croatia.
Importation from
Russia
Rogotec
Osijek
Zagreb
Okoli
Rijek
a
To Italy then back to
Croatia via Italian and
Slovenian gas networks
Karlovac
Slavonski
Gas fields
Ivan
a
Gas Storage
Existing pipelines
Fig. 5 Present Croatian Natural Gas Infrastructures

As shown in Fig. 5 above, natural gas is available only in the North East of the Country. This area
is characterised by the presence of many industries and is also the most populated one.
The high pressure natural gas network is of 1,750 kilometres long.
8. New gas import projects

New gas supply projects towards Croatia should take into account the European Union guidelines
in the framework of a wider interconnection of the gas networks.
Moreover, with the aim to reduce its dependence on a single supply source, it would be suitable that
new gas import projects to Croatia guarantee a real diversification of supply not only geographically,
but mostly for the origin of gas.
By adopting such precautions, Croatia could therefore increase its security of supply by providing the
necessary guarantees for the correct development of its gas market.
In consideration of the above, and taking into account the geographic location of Croatia the following
new supplies options could be envisaged:
From Italy
From Hungary
From Austria/Slovenia
Hungary
Rogotec
Slovenia
Zagreb
Okoli
Karlovac
Rijeka
Osijek
Yugoslavia
Sisak
Slavonski
Pula
To/from Italy
Zadar
Ivana
Bosnia
Herzegovina
Ida-Ika
Annamaria
Gas Fields
Existing
pipeline
To Italy
Pipeline under
construction
Fig. 6
8.1 Import from Italy

The development scheme of the new off-shore gas fields of Ida, Ika and Annamaria envisages
building a pipeline system, with pipe diameters ranging from 16 to 24, connecting all these fields to
the existing Ivana platform, while the fields of Katarina and Marica will be connected to the existing
platform of Barbara and then to the Italian shore. A new platform will be erected in Ivana and there
compressor facilities will be installed. After the compression, in accordance with the Production
Sharing Agreement, INAs equity gas will be conveyed to Pula (Croatian coast) and Enis equity gas
will reach Casal Borsetti (Italian coast) through the existing 16 pipeline connecting Ivana to the Italian
gas network.
The new project is called Mini Gea .
MEDIAN LINE
PULA
44 km 20
IVANA A
67 km 16
44 km 16
IDA
CASALBORSETTI
GARIBALDI
ANNAMARIA A
22 km 20 K
IKA
RAVENNA
53 km 16
ANNAMARIA B
MARICA
BRENDA
KATARINA
FANO
BARBARA T2
FALCONARA
ANCONA
FIELDS TO BE DEVELOPED
EXPLORATORY PROSPECT
EXISTING SEALINE
PLANNED SEALINE
Fig. 7 Mini Gea Project

It is necessary to highlight that the pipeline Ivana-Casal Borsetti is currently used to deliver the
production of Ivana field; INAs equity gas, after treatment and compression in Casal Borsetti, is
transported through the Italian and Slovenian networks, and then delivered to Croatia at Rogotec.
The Mini Gea project, in addition to the off-shore transportation system connecting the fields, will
also consist of a treatment plant in Pola and pipeline from Pula to Karlovac which is the
interconnecting point with the existing Croatian gas network.
The on-shore section will be built by the transportation Company PLINACRO.
The Mini Gea will be ready in 2005 and have a capacity of 1.5 bcm/y.
In the initial years the pipeline capacity will be used to transport to Pula the gas produced by the offshore fields; in a second phase when the production profile will begin to decline and the consumption
in Croatia increase there will be an integration from Italy up to 1.5 Bcm/y. This integration will require
building a 22 Km, 24 new pipeline between the treatment plant at Casal Borsetti in Italy and the
existing Eni Garibaldi K platform.
The strategic and political importance of Mini Gea has be highlited. Its landing point in Pula, while
offering the possibility to supply natural gas to the Istria and the Primosko Goranska regions, will
significantly contribute to the Croatian economic growth.
8.2 Import from Hungary

There are two main plans for connecting the Croatian an the Hungarian gas systems. One
connection can be made in the northern part of the Croatia near Gola, and the other can be made at
the north-eastern part of Croatia at Donji Miholjac. There are several medium and long-term import
and transit options via Hungary. They are:
North Sea -Austria-Hungary-Gola
North Sea -Slovakia-Hungary-Gola
North Sea -Austria-Hungary-D. Miholjac
North Sea -Slovakia-Hungary-D. Miholjac
Russian sources-Slovakia-Hungary-D. Miholjac
Russian sources-Ukraine-Hungary-D.Miholjac
All these options are still under evaluation, and the decision on the new supply route from Hungary
to Croatia will largely be influenced by the development of the gas market not only in specific parts of
Croatia but also in the neighbouring countries.
EXISTING PIPELINES
PLANED PIPELINES
POTENTIAL ROUTES
LPG AIR MIXTURE
Fig. 8 - Import from Hungary
8.3 Import from Austria via Slovenia

Since 1978 the pipeline route along the SOL (Sd-Ost-Gasline) in Austria and the M1 in Slovenia
is providing Croatia with Russian gas with high reliability and without any major deficiency. At present,
this route with an exit point from the TAG (Trans-Austria-Gasline) has reached to some extent the
limits of its capacity.
Fig. - 9 Import from Austria

____ Existing pipelines
- - - - Planned pipelines
In consideration of the importance of this gas supply route for Croatia, Austrias OMV Erdgas and
Slovenias Geoplin have decided to carry out a joint study with the main objective to assess the
technical feasibility of upgrading the existing pipeline route in order to increase the gas transport
capacity between Austria, Slovenia, Croatia and possible other South-Eastern-European countries.
This study has been co-financed by the European Commission, which underlines the significance of
this particular route not only for the present situation but also for the future role that such an extended
pipeline system may have for the gas markets of all such countries.
The results of marketing studies give a firm idea of possible future gas demand, up to the years
2010/15, particularly in Croatia and in the other above mentioned countries.
Taking into account different future gas demand scenarios, the conclusion has been made to limit
the technical design of future gas infrastructures up to a maximum capacity of 3 bcm per year. In
addition to this, all the appropriate technical, financial and economic aspects for upgrading the above
mentioned pipeline system have been studied and evaluated.
The assessment of the existing gas pipeline systems made it clear that the transport capacity of
the Slovenian system is almost fully committed and that at the same time the Austrian system has a
limited capacity too.
Hydraulic calculations of the complete system, with respect to the increasing future gas demand
and to the optimisation of the resulting investments, generated eight scenarios, based on four main
cases.
These scenarios open up various possibilities to cope with increasing additional gas quantities up
to the already mentioned 3 bcm per year. Technically speaking, this means that these scenarios
cover a further development of the existing pipeline system, starting with very few technical
adjustments up to a 24 loop along the total length of the system. Consequently, this has a strong
impact on the necessary investment costs depending on how much gas and within which period of
time is needed. Investments therefore will only be effected for the envisaged capacity needs.
To sum up, the extention of the existing SOL/M1 pipeline route offers the possibility to increase the
capacity step by step and thereby to follow the increasing gas demand in the whole region in a
suitable economic way.
9. New possible gas export options

Croatia, due to its geographical location, and in consideration of its new supply options, could play
in a medium-long term a very important role in the development of the regions gas market, by
allowing to the neighbouring countries:
to diversify their supply sources
to strengthen the security of supply
to benefit from the synergies achievable through swap and back-up agreements, coping with gas
demand fluctuations.
Considering the possible evolution of the neighbouring countries gas markets, one can imagine
the export options in two different horizons:
Medium term ( up to 2010 ) : connection with the Bosnia Herzegovina to supply natural gas
mainly for power generation
Long term (from 2010-15 ) : wider connection with Yugoslavia, and commercial agreements with
Slovenia, Hungary and other potential countries located in the Balkan Region.
The possibility to build new gas interconnections and to establish new commercial agreements,
mainly with the Balkan countries, could also strengthen the process of political stability of the region
in a wider European contest.
The envisageable new projects are summarised in Fig 10.
Hungary
Rogotec
Slovenia
Osijek
Zagreb
Yugoslavia
Okoli
Rijeka
To/from Italy
Karlovac
Pula
Sisak
Slavonski
Brod
Bosnia -Herzegovina
Zadar
Ivana
Ida Ika
Annamaria
Split
To Italy
Gas fields
Existing Pipelines
Import options
Medium term
Export options
Long term
Export options
Pipeline under
construction
Fig. 10 Possible Import/Export Options
10. Analysis and comments on impact of the gas availability on the economic
development of Croatia .
It is expected that natural gas will have a significant overall impact on the Croatian and
neighbouring countries economy and on the ecological situation as a whole. Given the fact that the
introduction of the so called green or CO2 taxes is expected to have, we can anticipate an even
bigger role of natural gas both in the economic sector and in the other consumption sectors as well.
The following cases of energy use in different counties will show the impact of natural gas use
increase in both areas where the systems are well developed and in areas without such systems in
place.
The use of primary energy products for meeting heat demand, directly at customer level, with no
energy transformation for generating secondary energy products (such as electric energy) to meet the
same heat needs, allows an increase in the energy system efficiency. Taking into account the
Republic of Croatias commitments regarding the green house gases mitigation, the energy products
discharging the least CO2 emission will have the preference. In this case the best primary energy
products are natural gas, as it has the lowest carbon content out of all hydrocarbons, and biomass
(fuel wood, wood waste, etc.). However, the use of biomass requires the use of a certain amount of
electrical energy for meeting a part of heat needs (hot water preparation), while at the same time the
comfort of use is lower, which should also be taken into account.
This paper focuses on three Croatian counties, i.e., Istria, the Split-Dalmatian County, and the city
of Zagreb. The aforementioned sections have been chosen for a number of reasons. First, each of
these counties is a typical representative of its broader region. The County of Istria represents the
north-western part of Croatia, the Split-Dalmatia County its southern part, while the city of Zagreb
represents the north-east of the country.
Istria
City of Zagreb
Split-Dalmatian County
Fig. 11 - Istria, Split County, City of Zagreb
In addition to the climatic conditions, there are different levels of gas penetration.
Zagreb has a long tradition in the use of natural gas and city gas. In Istria the tradition of city gas
use exists in the area of Pula (and until 1950s in the areas of Portoro, Rovinj and Pore as well).
The other areas do not have experience in the use of gas (except for LPG), natural gas included. In
the Split-Dalmatian County, apart from the use of bottled LPG and a minor number of small
reservoirs, there is no tradition of using gas.
The value of natural gas for the entire energy system (of the observed area) comes from the
supply reliability, the fact that network systems can complement each other, and the ecological
acceptability of this energy product.
10.1 Istria
In Istria a gas system was in place in the first half of the last century in the areas of Portoro,
Pore, Rovinj and Pula in accordance with the technological capacities of the time. At that time, city
gas was produced from coal. Due to a small number of users, high production costs and outdated
equipment, the system was shut down in Portoro, Rovinj and Pore between 1950 and 1960. The
users switched to electricity or fuel wood while only a few of them started to use bottled LPG. All this
was reflected, for a long time, in an unfavourable structure of used energy products. Figure 12 shows
the structure of energy use in Istrias household sector.
1994
2001
LPG
10%
Extra-light
fuel oil
16%
Fuel wood
38%
LPG
7%
Extra- light
fuel oil
18%
Fuel wood
38%
City gas
3%
City gas
3%
Electric
energy
34%
Electric
energy
33%
Fig. 12 - Structure of the energy products used in the household sector in Istria County in
1994/2001
It should be noted that electricity use, shown in the figure above includes non-heat uses as well,
which represents about 17% of the total end use in households. The following figure gives the
electricity use for the various heat needs separately, and is based on the results of research
conducted by the Energy Institute "Hrvoje Poar" and by the consulting company Exergia.
LPG
2%
LPG
2%
Heating
Extra-light
fuel oil
13%
Fuel wood
Extra-light
fuel oil
27%
15%
City gas
4%
City gas
2%
Fuel wood
57%
Electric
energy
12%
Electric
energy
66%
Hot water preparation
Non-heat
electricity
use
17%
Fuel wood
25%
Cooking
9%
LPG
57%
Electric
energy
7%
City gas
11%
Cooking
Heating
62%
Hot water
preparation
12%
Energy use
by needs
Fig 13 - Energy use structure in households in Istria in 2001
What should be noted is a high share of electricity in the total final household energy use ranging
from 33 to 34%. The participation of electrical energy in the total direct use sectors (households,
services, construction industry, and agriculture) in the Republic of Croatia was 28.2% in 1994 and
28.6% in 2001. During the same period, the share of final electricity in the total direct use sectors in
Istria was 36.2% and 36.8%.
40
35
30
25
Istria
% 20
Republic of Croatia
15
10
5
0
1994
2001
Fig 14 - Share of electricity in the total final energy use in direct consumption (households,
services, construction, and agriculture) Comparison
The given data indicate that in Istria the direct use influences the electric power system to a larger
extent than is the case for Croatia as a whole. If we look at the data on electricity use in the period
from 1970 to 1995, and especially the data on peak loads, it can be noted that the electricity use in
Istria County was constantly increasing. The peak loads regularly occurs in August, which leads to a
conclusion that the most important user is the services sector or, for heating, in December and
January. Although more recent data are not available, we can assume that electricity consumption,
and especially peak load, are still growing due to a wider use of electricity for cooling.
Table 1- Electricity use in the period 1970 to 1995
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
MWh
264.371
291.285
324.254
334.449
366.298
291.711
409.131
446.080
478.171
512.863
556.395
609.854
615.422
Peak load
MW
Month
52,188
VIII
57,870
VIII
64,238
VIII
64,944
VIII
72,240
IX
73,273
VIII
78,790
VIII
84,550
VIII
89,880
VIII
94,181
VIII
97,488
VIII
109,183
VIII
104,781
VIII
Year
MWh
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
634.403
689.662
747.122
787.756
827.436
836.274
849.352
847.563
786.680
788.285
795.937
802.872
818.907
Peak load
MW
Month
104,888
II
116,519
VIII
124,040
I
129,557
XII
133,532
I
135,832
XII
145,530
VIII
146,078
VIII
157,900
II
138,800
I
138,105
III
144,000
II
147,000
XII
900.000
180
800.000
160
700.000
140
600.000
120
500.000
100
MWh
MW
400.000
80
300.000
60
200.000
40
100.000
20
MW
0
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
0
19
70
MWh
Fig. 15.- Electricity use and capacity growth in the Istrias electric power system in the period
from 1970 to 1995
In order to lower the electric power system loads, some DSM (Demand Side Management)
measures were put in place 1997 in Istria in the form of remote control over large electricity users.
Natural gas can be a good solution for this problem because all peak loads in the system appear
in August, although in the last years of the observed period they appear in the December-January
period as well. Nevertheless, with the increase of consumption in the summer months, due to
increasing needs for air-conditioning caused by growing number of tourists, the summer months
peaks will continue to grow.
This situation is favourable for the gas system. The use of natural gas for cooling appliances in
large establishments during the summer period enables an increase in the gas system utilisation
factor due to equalising the seasonal load curve. At the same time the electric power system can be
relieved and savings made, since it is possible to calibrate the system at a lower capacity level. This
is possible, especially in the case of some users switching from electrical to natural gas heating.
Namely, the results of the analysis showed that households using electricity for heating are placed
mainly on the coast and they would be encompassed by the future gas network. But the households
away from the coast use fuel wood. In this way one network system supports the other (the systems
are complementary).
It can be noticed (Fig. 16) that coal consumption in the industrial production in Istria is far above
the national average due to several reasons: the low-cost delivery by maritime routes, the existence
of coal mines in Istria (today disused) and the lack of other energy products, e.g., natural gas.
Practically, the entire coal consumption in the industrial sector takes place in the production of
construction material (according to the Istria County energy balance). The electricity consumption is
at the level of Croatias average. By switching to natural gas, it is possible to lower the share of coal,
which is very important for a region focused on ecology and the tourist industry.
1994
60,0
60,0
50,0
50,0
40,0
40,0
% 30,0
% 30,0
20,0
20,0
10,0
10,0
0,0
2001
0,0
Istria
Republic of Croatia
Coal
Liquid fuels
Gaseous fuels
Electric energy
Istria
Republic of Croatia
Fig. 16 - Final energy use structure in the industrial sector of Istria in relation to the Croatian
average.
This is also a way to achieve security of supply, because most of the boilers in areas with the gas
network are double-fuelled.
10.2 The Split Dalmatian County

For the Split-Dalmatian County the data are extrapolated at 2001starting from the analysis done in
1996. At that time, the share of the Split-Dalmatian County in the total energy use in Croatia was
10.3%. Figure 17 below gives the structure of total energy use with comparison to Croatias
structure. The general consumption sector includes users from the household sector, services
(including catering and tourist industry), agriculture and the construction industry. The insight into the
2001 general consumption structure reveals a high participation of households (somewhat below
75%), followed by services (somewhat below 20%).
Agriculture
3.3%
Construction
3,6%
construction
4,0%
Agriculture
8,5%
services
19.2%
Service
19,5%
Households
68,0%
Households
73,9%
Republic of Croatia
Fig 17.- General consumption structure in Split-Dalmatian County and Republic of Croatia
Comparison - 2001 .
Figure 18 shows the comparison of the energy use structure in the Split-Dalmatian County and in
Croatia in 2001.
We can note a significantly higher share of electricity (46%) in relation to the national average
(27.4%). The general consumption structure shows that the share of households is somewhat above
the national average, while the services sector is approximately at the same level.
2001
50,0
40,0
30,0
%
20,0
10,0
0,0
Fuel wood
Extra-light fuel oil
Coal
Natural gas
Republic of Croatia
Electric energy
City gas
LPG
Steam and hot water
Fig 18 - Energy use structure in general consumption Comparison of the Split-Dalmatian

County to the Republic of Croatia in 2001.
Taking into account the almost 70% higher electricity share, respect to the national average, as
well as the fact that households and services make up 93% of the general consumption, all that was
said for Istria applies to this situation, too. This refers to the further rise of electric power systems
peaks because of the high share of electricity for heat generation, including the growing use of
cooling appliances. The use of natural gas would take the pressure off the electric power system and
would create a parallel energy source for heating/cooling, thus improving the supply security as well.
As for the industrial sector, unlike the Istria County where coal prevails (somewhat below 50% of the
total energy use by sector), in the Split-Dalmatian County medium and heavy fuel oil prevails (about
60%), and the share of LPG is very low. Given the importance of the Split-Dalmatian County as a
tourist industry region, natural gas could have a significant impact on changing the present energy
use structure in the industrial sector of the County, primarily for ecological reasons. The share of
electricity is approximately equal in both counties, i.e., it is at the Croatian national average.
To illustrate the improvements in the ecological picture of an area where natural gas is in use, a good
example can be found.
10.3 The city of Zagreb
In the city of Zagreb, where during the 1960s SO2 and smoke concentrations were four times as
higher than today. Thanks to an intensive gasification, supported by an extensive heat main
development as an equally efficient measure, the air in Zagreb has reached category one quality
even in the city centre.
Figure 19 shows the changing trend in ground-level concentrations in orieva street in the
centre of Zagreb. The data are taken from the Institute for Medical Research, which was one of the
few in Europe to start carrying out such measurements over thirty years ago.
Figure 20 shows the growing trend of natural gas use in households (number of connections) and
in district heating consumption in Zagreb (data from City Gas Works and EKONERG). The sharp
improvement occurred in mid-1970s.
In the last ten years, despite steady growth in gas use, the concentration has stabilised at a
certain level, which indicates a significant impact of traffic on pollution. The identical declining trends
have been seen in many other European cities.
The air pollution problem in the cities of the developed world today is mainly due to traffic and
refers to high concentrations of NO2, ozone, small inhaleable particles and smoke (< 2,5 m and < 10
m), as well as to hydrocarbons, some of which are hazardous and carcinogenic. The use of natural
gas in motor vehicles would significantly reduce the pollution.
Natural gas can be used in motor vehicles, generally as pressurised natural gas (PNG). The PNGrun vehicles do not discharge SO2, and have a much lower CO emission. The NOx emission is at the
level of petrol vehicles or a bit above it.
The important fact is that the emissions of volatile organic compounds (NMVOC) by gas powered
engines which add to the creation of ozone and city smog, are very low compared to petrol. Also, the
emission of some very hazardous and carcinogenic substances such as benzene, formaldehyde and
heavy metals is lower. The use of gas in diesel motors eliminates the smoke emission as well, which
is the most serious problem in urban settlements.
Air quality in Zagreb center (orieva street)

400
350
SO2
Smoke
Floating particles
300
200
150
100
50
Years
Fig. 19 - Air quality improvement in the city of Zagreb.
94/95
93/94
92/93
91/92
90/91
89/90
88/89
87/88
86/87
85/86
84/85
83/84
82/83
81/82
80/81
79/80
78/79
77/78
76/77
75/76
74/75
73/74
72/73
71/72
70/71
69/70
68/69
67/68
66/67
65/66
63/64
0
64/65
g/m3
250
Source: IMI
Household gas connections increase

140000
Number of households
120000
100000
80000
60000
40000
20000
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
Heat consumption increase in the district heating system

500
450
TE-TO
EL-TO
400
350
300
MJ/s
250
200
150
100
50
0
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Fig 20.- Gas use increase (number of connections), and district heating consumption increase
in the city of Zagreb (from CHP plants TE-TO and EL-TO).
11. Conclusions
The Croatian gas market has entered a crucial phase of its development.
The coming years will be characterised by a significant increase of the internal demand as a
consequence of the Croatian Governments decision to boost an energy policy more and more
oriented to using natural gas, mainly for the production of electricity and in the urban centres and
households, in consideration of its environmental friendly fuel characteristic.
After several years of dependence from two supply sources, i.e. the domestic production and the
importation from Russia, now the Croatian gas industry is willing to pursue a policy of diversification
of supply to face the forecasted growth of the internal demand.
Although at the moment no contracts have been undertaken, Croatia has started to evaluate new
possible supply options from Italy, Austria and Hungary.
The new tariff system which is going to be set in the Croatian gas network, based on a regulated
postal stamp principle, will ensure transparency and equal competitive conditions among the gas
suppliers.
The diversification of supply , together with the new tariff system will allow both a higher security
of supply and a stronger negotiating position for the Croatian gas industry, thus leading towards the
liberalisation of the gas market which represents the paramount condition for its further
development.
The new tariff system could, furthermore, be considered as an important tool for the development
of the Croatian gas industry which could take advantage of the transit of natural gas to its
neighbouring countries.
The envisaged use of natural gas, mainly in the residential sector of Istria and Primosko Goranski
counties where it will substitute polluting fuels such as oil and coal, will contribute significantly to
improving both the economy and the quality of life of the coastal towns populations.
Report of Study Group 10.2

Smaller Customers Markets
in Developing /Transitional Countries
Coordinator
Yannick Guerrini
Switzerland
OVERVIEW
Development of smaller customer markets is the theme of the report made by the Study Group
10.2 within the general context of the Working Committee 10 namely: enhancing the development of
the gas industry in the developing and transition countries.
Focusing on a specific gas market including small industrials, commercial, residential and public
services the survey deals with various matters such as macro-economic context, energy policy,
financing issues, gas pricing, regulatory constrains, environmental concerns and technical problems
which have an impact on the development of the downstream sector.
In many developing/transitional countries, governments have decided to rebuild the gas industry
regulatory framework in order to introduce competition. Consequently this sector has started to
undergo structural changes aimed to improve its economic efficiency. Implementing this process
authorities have to find an appropriate balance between reliance on the free market system and
intervention to address social and environmental policy goals.
An historical approach of two existing liberalisation experiences (USA, Europe) is presented in
the document. A country, which decides to implement a regulatory reform of its gas industry, needs
to have a clear vision on how a liberalised gas market should function and the political will if needed
to overcome difficulties that can arise during the process.
When comparing different countries, an interesting approach of the role of the state consists in
evaluating the degree of maturity of the gas industry and to analyse the current status and the roles
played by the government (e.g. regulator, investor). The result of this analyse allows to rank the
countrys gas industry in a maturity stage contained between emerging and decontrolled. It allows
above all envisaging the next steps to be implemented to reach a status where efficient market
prevails.
Today natural gas is the fuel of choice. On the one hand, gas demand is rising, stimulated by
economic and environmental factors, which are enhancing the importance and role of natural gas in
the energy mix. On the other hand, governments are opening up and liberalising natural gas markets.
At the same time the import dependence of many European countries is rising and will likely continue
to rise in the future. These trends are contributing to uncertainty and apprehension, with possible
serious effects on the level of investments which could have consequences for security of gas
supplies.
As a general rule, gas prices should at minimum reflect economic costs in order to enhance
overall economic efficiency. In many developing/transitional economies gas prices are still well below
economic level despite having been significantly increased in recent years. This is particularly the
case in the household sector where prices have been raised but at slower rate than in the industrial
sector in order to avoid eroding household incomes, depressing household expenditures on other
goods and services and contributing to inflation.
Today as a matter of fact, gas resources have to be developed at regional level and given the
constraints on public financing of energy infrastructure a substantial part of the investments will have
to come from the private sector. Institutional reforms to create an enabling environment for private
investments in energy are a prerequisite for developing the sector. Although private sector
approaches in the gas distribution are promoted in many countries, the responsibility of investors are
sizeable and many of them still want governmental support, either tangible or political, to ensure
sustained economic viability. The issue is to know how to cope with these difficulties and improve
these situations.
Taking into account opportunities to have reliable and relevant material to elaborate the Study
report the following countries were chosen: Argentina, Brazil, Cameroon, Poland and Romania.
Each group member designated to be a country responsible had the duty to elaborate a
comprehensive set of information and data that have been be actualised in the course of the
triennium. The group as a whole conducted analysis on this material in order to determine key
factors to develop a sound gas market for small consumers.
In addition a very interesting project regarding introduction of natural gas in low-income areas
within South Africa is presented. Following natural gas discoveries in Mozambique it is envisaged
laying an import and transmission pipeline that will bring approximately 120 MGJ of Mozambican
natural gas to South Africa annually. To investigate the feasibility and benefits from introducing
natural gas into low-income area in the vicinity of the planned gas pipe, a study has been carried out.
Natural gas will, in many cases, offset the use of coal or other fuels that produce large quantities of
greenhouse gases contributing to a reduction in global warming.
The country studies illustrate several situations and describe specific issues, which could arise in
these specific contexts. From each country case the main lessons learned are mentioned.
Argentinas case is characterised by the impact that an external shock could have indirectly on a
promising gas sector development. Brazil is a good example of a gas sector development starting
from scratch and driven by a diversification of electric power sources in order to ensure security of
supply of this energy. Cameroon illustrate the willingness of a government to develop gas reserves
under certain conditions which ensures positive consequences for the economy of the country as a
whole and contribute to solve some pending environmental issues. Difficulties encountered by
countries in transition toward a market-oriented economy are described in the Polish and Romanian
cases. These countries are currently transforming their economies and implementing more or less
advanced rehabilitation and modernisation of their energy infrastructure and facilities.
The key success factors that allow implementing projects in an optimised way that emerge from
this study are in theory already known. They are namely: stable macroeconomic environment,
transparent and reliable legal framework, independent regulatory body, market-based pricing and a
minimum of distortion in market mechanisms. But besides the political will, the timing of the reforms
is crucial. Some of them have to be implemented quickly in order to stimulate an efficient sectors
economy (collect of taxes, metering, issue of non-payment of gas bills, energy efficiency), and a
reliable banking system, others need steps (increasing prices, exchange of information) in order to
allow all stakeholders to be involved in the process.
Table of Contents
1.0 INTRODUCTION
2.0 PREAMBLE
2.1 Natural gas is the fuel of choice
2.2 Main development in the US gas market
2.2.1 Introduction
2.2.2 Key regulatory events
2.2.3 Transition Period
2.3 Main development in the European Union gas market
2.3.1 General context
2.3.2 Current status of the EU Gas Directive Implementation
2.3.4 Amended proposal for a directive amending Directives 96/92/EC and 98/30/EC
3.0 COUNTRY CASE: ARGENTINA
3.1 Introduction
3.2 Background data summary:
3.3 The Gas Law and License Contracts
3.3.1 Results of the initial years
3.3.2 Growth of the regulated sector
3.3.3 Defence of Consumers Rights:
3.4 The Economic Crisis and its Impact on the Gas Sector
3.5 Recent measures taken by the national government.
3.5.1 Within the frame of Economic Emergency Law 25,561:
3.5.2 Within the frame of Decree 214/02:
3.6 Immediate and Expected Consequences:
4.0 COUNTRY CASE: BRAZIL
4.1 Background
4.1.1 The Brazilian Energy Market
4.1.2 Natural Gas in Brazil
4.1.3 So Paulo & Comgs
4.2 Constraints
4.2.1 Supply Constraint
4.2.2 Cash Constraint
4.2.3 Company Culture
4.3 Regulation
4.4 The residential sector
4.4.1 Background
4.4.2 Skills
4.4.3 Capacity
4.4.4 Displacing LPG
4.4.5 Gas Water Heater Program.
4.4.6 Targeting New Residential Housing Sector
4.4.7 Expanding to other Cities
4.5 The commercial sector
4.6 The industrial sector
4.6.1 Greenfield Network Expansion
4.6.2 So Paulo Industrial Market
4.6.3 Displacing Existing Fuels
4.7. Natural gas vehicles
4.8 Co-generation
4.9 Power
4.10 The Comgs experience

4.10.1 Incumbent Energy Players
4.10.2 Legal & Regulatory Framework
4.10.3 Licensing & Permitting Issues
4.10.4 Natural Gas Culture
4.10.5.Technological & Health and Safety Improvements
4.10.6 Funding the Business
4.10.7 Understanding the Market
4.10.8 Long Term Planning and Sustainability
4.10.9 Conflicts with Associated Businesses
4.10.10 Phasing of Regulatory Targets
4.10.11 Legal & Financial Support
5.0 COUNTRY CASE: CAMEROON

5.1 Introduction
5.2 Some Economic Indicators
5.3 Energy Sector Overview
5.4 Natural Gas Sector Overview
5.5 New Gas Code
5.6 Gas Market Opportunities
5.7 Institutional Framework
5.7.1 Open Access & Unbundling of Accounts
5.7.2 Incentives
5.7.3 Tariffs
6.0 COUNTRY CASE: POLAND
6.1 Introduction
6.2 The Gas Industry
6.3 Regulation
6.4 Governments role
6.4.1 Policymaking
6.4.2 Ownership
6.5 Privatisation
6.5.1 Restructuring and Privatisation Programme of POGC (13 August 2002).
6.6 Tariffs
6.7 Development
6.8 Polution
6.8.1 Present Situation
6.8.2 CO2 Emission
6.8.3 Signature of the Kyoto Protocol
6.9 Pricing problem
6.9.1 Comparison of gas prices
6.10 Natural gas suppliers
6.11 Accession process to European Union
7. COUNTRY CASE: ROMANIA
7.1 Introduction
7.2 Energy Sector
7.2.1 Energy policy
7.2.2 Energy Overview
7.3.1 Main actors
7.3.2 Market and industry Structure
7.3.3 Local distribution companies (LCDs)
7.4 Legal and Regulatory framework

7.4.2 Opening the natural gas market
7.4.3 Regulation
7.4.4 Brief history on legal aspects of distribution networks
7.5 Gas pricing policy
7.5.2 End-user prices
7.5.3 Taxes
7.5.4 Tariffs
8. NATURAL GAS IN LOW-INCOME AREAS OF SOUTH AFRICA

9. PROBLEMATIC OF SMALLER CUSTOMERS MARKETS DEVELOPMENT
9.1 Evolving role of the government in the gas industry
9.2 Impact of an economic crisis on the energy sector.
9.3 Gas supply
9.4 Gas pricing
10. LESSONS AND CONCLUSIONS
1.0 INTRODUCTION
The strategy to convince the potential customer to shift from one style of consumption (and way
of living) to a new one with natural gas could vary from place to place but the essence and tools
remains similar regardless the country or economy. Nevertheless the realities and disparities among
developing or transitional countries deserve a comparison of the actual policies on place.
The Study Group 10.2 defined the focus of this study as addressing concrete questions such as:
What are the driving forces behind development: state or private initiatives, gas (energy)
supply or demand?
Interaction between regulatory framework and liberalisation process;
Main problems faced in setting a small consumers market, how to solve them (or not),
alternative proposals.
Should the environment considered as an issue?
Five countries have finally been selected to be included in the study namely: Argentina, Brazil,
Cameroon, Poland and Romania. They illustrate different environments, experiences, technical
contexts and various regulatory approaches.
The presentation of the USA, and Europe experiences based on an historical approach has been
included in a preamble as examples of reorganisation of natural gas sectors aimed at creating
integrated gas systems and decreasing costs for the benefit of the consumer. A country, which
decides to implement a regulatory reform of its gas industry, needs to have a clear vision of how a
liberalised gas market can function and the political will to overcome difficulties that can arise during
the process.
The country cases focus on key drivers (economics, energy context, role of the authorities in the
gas field; organisation and economy of the gas sector) and lessons learned when elaborating the
respective files. A summary of a study regarding introduction of natural gas in low-income areas of
South Africa linked with the building of a new gas transmission pipeline is also included.
Other topic belonging to the gas chain and having an impact on the downstream sector activities
such as role of the government, gas supply, and gas pricing are mentioned.
Finally taking into account the analysis carried out when elaborating the country files some key
success factors that allow implementing projects in an optimised way are presented.
2.0 PREAMBLE
2.1 Natural gas is the fuel of choice
Today natural gas is the fuel of choice. It is flexible to use, environmentally friendly compared to
other fossil fuels, relatively abundant, with supplies perceived to be relatively secure and reliable.
Consequently, it is being used in a variety of sectors and applications, and experiencing significant
growth as a fuel for electricity generation using Combined Cycle Gas Turbines or Cogeneration. In
the coming 30 years, 60% of the increase in gas supplies will be dedicated to new power plants.
According to the World Energy Outlook 2002, primary gas consumption will double between now and
2030, and the share of gas in world energy demand will increase from 23% to 28%.
For the future, European natural gas market is demanding already new infrastructures for long
distance transportation, given the decline in domestic European production in all countries belonging
to the European Economic Zone (four main EC suppliers: UK, Norway, Denmark and Holland). On
the more longer run it will result anyway into more long distance shipments over land from Russia and
Algeria and in a more longer time frame over land shipments from the Caspian region, including the
IR of Iran.
2.2 Main development in the US gas market

2.2.1 Introduction
Historically the American natural gas industry was divided in three segments: upstream,
transportation and local distribution.
The pipeline companies aggregated supplies purchased from a large number of producers,
transmitted it through their high pressure pipeline systems, stored it in their own storage fields,
performed load balancing, dispatching and other services. The pipeline companies delivered
this gas at the distributors city-gate measurement stations and in return the distributor paid
one regulated price for all these services, which were bundled, together into a firm, or noninterruptible sales service. Pipeline companies had the public service obligation or supply risk
for the distributors.
Some large distributors may have had the luxury of being supplied by more than one
pipeline or may even have their own gas production, most downstream customers had only one
supplier. In any event, distributors in turn re-sold this pipeline gas to their households,
commercial and industrial customers, using their own storage or other peak shaving facilities
when required in their own bundle services.
Supply-demand imbalances in the U.S market (winter 1976-77) together with a general
political movement to reduce the involvement of the government and increase competition in
regulated industry led to a series of deregulation measures.
2.2.2 Key regulatory events
In the late 1920s abundant supplies of natural gas were discovered in the new oil and gas
fields in the Southwest of the United States. At the same time improvements in pipeline
construction technology made long-distance gas transmission practical. These two events,
coupled with utilisation of the expansive manufactured gas distribution systems - put in place
for illuminating streets and homes - allowed the development of the natural gas as an important
domestic energy source.
The Natural Gas Act (NGA) issued in 1938 introduced regulation of interstate activities and
set up the Federal Energy Regulatory Commission (FERC). Under this act, FREC has broad
ratemaking powers with respect to interstate gas sales-for-resale and transportation, as well as
certificate authority. Any natural gas company seeking to engage in the transportation of gas in
interstate trade must first obtain a certificate of public convenience and necessity from FERC. It
should be mentioned that the gas pipes used for intrastate operation are regulated only by the
states in which they operate.
Post-World War II technological advances initiated a period of dramatic growth in the US
pipeline system that lasted until the mid-1950s. During the 1970s the industry experienced
significant change as the decline in proved reserves prompted acute shortages.
Price differences appeared between interstate and intrastate markets, these latter being
more flexible and price responsive. Large consumers tried to avoid pipeline companies bundle
(and expansive) products and started purchasing gas and transportation services separately.
In an attempt to deal with the energy crisis, Congress passed the Natural Gas Policy Act
(1978) (NGPA) through which both price determination and the regulatory environment were
changed. Producers were gradually allowed to increase their prices from the low below-market
regulated levels to free market levels. NGPA provided impetus for the transportation of natural
gas as it eliminated or placed into effect a phase-out of most Federal regulation at the
wellhead.
By the early 1980s as the crisis ended a surplus of gas supply emerged. Taking into
account the changes effected by the NGPA and the evolving natural gas market led the FERC
to issue in 1985 Order N 436 (a non-discriminatory open-access transportation programme)
and in 1987 Order N 500 perfecting the previous one, (by providing an opportunity for pipeline
companies to reform their contracts with producers) in order to establish a competitive natural
gas market.
Direct purchases by consumers from producers are allowed and pipeline companies, now
open access transporters, are required to provide non-discriminatory access to all shippers and
must offer both firm and interruptible service and within each category must provide service on
a first come first served basis.
At a time of excess gas supply and excess pipeline capacity, introduction of TPA resulted
in a dramatic expansion of the use of gas transportation services offered by pipeline companies
to move unregulated spot gas to market.
In 1989 the Natural Gas Wellhead Decontrol Act (fully implemented by 1993) cancelled
wellhead price controls.
In 1993-94, Order 636 required pipeline companies to unbundle the individual service
components of their all-in-one sales services. Thus, customers can select from a menu of
storage transport and load balancing services, choosing and paying separate rates for only
those services that they require without having to subsidise unneeded services whose costs
may have been embedded in former bundled rates.
2.2.3 Transition Period
Since the early 1980 the industry has moved from a highly regulated environment,
dominated by long-term contracts, to one where markets respond quickly to short-term shifts in
supply and demand.
The first basic change was the phased deregulation of wellhead sales of natural gas under
the provisions of the NGPA. An unintended consequence of the NGPA was that pipelines
companies entered into major commitments to purchase natural gas at prices well above
market-clearing level through long-term contracts including take-or-pay obligations.
Unable to market all the high cost gas they were obligate to take the pipeline companies
started to accumulate liabilities. These latter represented costs that cannot be recovered
(stranded costs) in the competitive environment generated by the restructuring of the gas
market. Some pipeline companies had tariff provisions requiring their customers to purchase
minimum volumes, but at levels well below their own commitments. In addition FERC issued a
rule that required the elimination of minimum bills from pipeline tariffs as being anti-competitive.
At this time gas deliverability well in excess of requirements led to active competition
among gas sellers for short-term sales of gas not already committed to pipeline companies.
Spot market gas was sold at very low prices while prices for gas purchased from pipeline
companies remained high. To deal with this situation special marketing programmes were
developed. They allowed pipeline companies to provide discount services to customers that
were serving markets subject to inter-fuel competition. Other markets were required to
purchase gas from the pipeline companies at significantly higher prices. These discriminatory
programmes were overturned.
The gas industrys accumulated total take-or-pay liabilities were estimated to about $50
billion. These liabilities were shared among the producers, pipeline companies, distribution
companies (LDCs) and end consumers.
Order 500 was issued and the pipeline companies that agreed to absorb a portion of the
costs of buying out or buying down take-or-pay contracts were allowed to pass through the
remaining stranded costs to their customers, primarily LDCs, through unavoidable fixed
charges.
Finally the FERCs preferred method of allocating stranded costs was based on customers
purchasing deficiencies during the time the take-or-pay costs were incurred. The parties settled
most of cases. For some pipeline companies Order 500 provided a sufficient measure of relief
to the take-or-pay dilemma; for others stranded costs continued to make gas sold noncompetitive with direct sales by producers.
The continuing decline in wellhead gas price highlights the competitive environment
domestic producers are facing: prices at half the level of a decade ago with a volatility that
requires careful planning by the industry to manage price risk. In reaction producers have
redirected drilling efforts, trimmed costs, reduce the reserve inventory (proved reserves from
which production is drawn) and continue to increase production. Nationally production rose by
15% between 1985 and 1994 while real wellhead gas prices and proved reserves declined by
45 and 3% respectively. This demonstrated ability to produce more gas from fewer reserves
despite lower real prices provides strong evidence that a combination of improved efficiency
and technology has fundamentally altered the gas supply process.
Greater flexibility in contracting arrangements while providing more option to companies
has added a new dimension of complexity to their operations. Many producers haven ties with
marketing companies in order to develop their customer base and with storage facilities to
manage flow requirements to their customers.
The distributors became free to buy cheaper spot gas directly from producers or marketers
at the wellhead, buying higher-priced regulated gas from the pipeline companies only on those
peak winter days when the spot gas supplies alone were not sufficient.
Because of lack of data on spot price behaviour buyers and sellers preferred short-term
import agreements. Spot gas was bought and sold almost entirely on a monthly basis at first.
Most spot gas was moved from wellhead to market under standardised interruptible
transportation contracts signed by the buyer or the seller with the pipeline companies. Greater
flexibility in contracting arrangements while providing more option to companies has added a
new dimension of complexity to their operations. Many producers haven ties with marketing
companies in order to develop their customer base and with storage facilities to manage flow
requirements to their customers.
Gas companies are diversifying into other energy services and forming strategic alliances
to increase business opportunities in both regulated and unregulated services. Market players
also began dealing with the rising transaction costs through the use of computer networks and
electronic bulletin boards to facilitate buying and selling of gas and to perform volume
nominations on transportation contracts.
After Order 636, all pipeline capacity and underground storage capacity previously used to
provide bundled sales services were allocated and given over to individual customers. They
could now use this capacity as they wished but were also now fully responsible for direct
management of their own gas supply, storage and transmission flows as well as related costs.
Distribution companies found themselves faced with increased complexity of their supply
options and rising transaction costs as new gas contracts had to be negotiated and combined
with new gas transportation and storage services.
Their gas contracting priorities involve trade-offs of supply, volume and price risk with the
higher insurance costs associated with higher levels of supply reliability and flexibility which
they sought.
As already mentioned, the different services formerly contractually offered by pipeline

companies and LCDs are now open to competition. Besides a large number of producers, the
restructured traditional players and new marketers provide services from hubs. In these
exchange markets, actors offer services such as wheeling, parking, loaning, seasonal storage,
balancing, title transfer and electronic trading. Those services present various features such as
priority (no-notice, firm, interruptible), term (intra-day, intra-month, seasonal, long-term),
number of cycles, etc. The operators can also benefit from value-added services such as the
possibility of covering (hedging) price risks (high seasonal volatility appears to have become a
regular feature of the market).
Recently storage operators started using UGS as physical support for financial derivatives.
Today more the two-thirds of the hubs operating in North America have access to high-delivery
UGS facilities.
2.3 Main development in the European Union gas market
There have been sweeping changes in the institutional framework for the energy markets
during the 1990s. Both the Federal Energy Regulatory Commission (FERC) in the United
States and the European Union (EU) have been driven by similar ideas of reducing energy
costs through market competition. But the implementation and results of these measures have
differed. The EU Gas and Electricity Directives have lead to controversy on the true level of
liberalisation and opening of markets. Former integrated gas companies are being unbundled
into separated transportation and trading companies. The stimulation of the entrance of new
players on the market, the opening of the infrastructure, the development of spot markets etc.
are in favour of an acceleration of market growth.
Almost all countries in the EU and also the accession countries and other countries in
Eastern Europe have set up regulatory body. The Council of European Energy Regulators
(CEER) currently chaired by Portugal gathers regulators from every country in the EU except
Germany. The regulators exercise control over transmission services and prices, as the
provision of these services tends to have natural monopoly characteristics. In the enlarged
Europe, both governmental authorities and regulatory bodies may also participate in tariff
settings and regulation of entrance of new players into the market by issuing licenses and
permits for performing energy activities.
The Madrid Forum of regulators is an event in which all actors of the gas market
participate: EU Commission, representatives of member states, regulators, European entities
acting for gas industries and associations of gas consumers. The Commission prepares most
of the decisions taken but this forum is a means to progress on certain topics through
consensual discussion (e.g. Code of harmonisation of the conditions requested to access to the
network).
In Central and Eastern European Countries, according to allowed revenue and predicted
natural gas demand, transportation tariffs are proposed by transportation company to
regulatory body (ex-ante in majority).
A consequence of present developments is that long-term character of the market is for a
part replaced by short-term aspects. In the ECE area spot markets are emerging but only on a
limited scale for the time being. A relatively limited number of natural gas producers and
transmission/transportation systems that are domestically adapted are the main reasons for
such limits. On the longer run maybe 10 to 20% of the total market could be based on spot
markets/hubs transactions.
Long-term take-or-pay contracts will likely stay as basis for a very important part of the
overall contractual portfolio of gas companies. Their continuing existence is a key element in
contributing to maintain security of supply and developing new supply services.
Within the framework of a generalised regulated Third Party Access the transportation
contracts have to be linked with supply contracts in order to guarantee over a long period the
effective transit of the gas quantities purchased.
For the time being oil-price indexation facilitates the development of remote gas sources.
In the future one can imagine that new indexation or reference to indices could appear as the
European gas market develops. Also with the Kyoto Protocol entering into force restriction on
CO2 emissions could lead to reconsider the fact that oil and gas are interchangeable to the
benefit of the natural gas.
Finally Public Service Obligation (PSO) is an arrangement imposed by national/local
authorities on gas industries for customer protection or protection of the integrity and safety of
the transportation/distributing system. Such arrangements can be acceptable, but PSO's
should not unnecessarily disturb the free market.
2.3.2 Current status of the EU Gas Directive Implementation
Austria
A new gas law has been adopted by the Parliament in July 2002 and became active at the
first October 2002. The market will be full opened and a gas regulator has been installed.
Access to the domestic network is regulated and storage access is negotiated. The Austrian
liberalised gas market is based on a highly sophisticated market model, so called "balance
group model" which has been copied from the Austrian electricity market. According to this
model, Austrian territory is divided into three control areas. A control area is defined as a part of
an interconnected pipeline system used for the supply of domestic customers in which load
balancing is possible and applied.
Belgium
Belgium has accelerated the opening process by bringing forward at 2001 the eligibility
date for customers consuming more than 5 Mcm/year, initially planned for 2006. As federal
regulator, the Commission for electricity and gas regulation (CREG) give an ex-ante approval of
network access tariffs following an annual notification by the Transmission System Operator.
Conditions of access to the gas transmission system, the underground storage (UGS) and LNG
facilities will be published by a Royal Decree as a code of good conduct.
Accounts unbundling is accompanied by legal unbundling for transmission activities.
Denmark
First January 2004 the market opening should reach 100%. The Energy Supervisory Board
(ESB) can require at any moment, adjustments regarding individual tariffs calculated by the
TSO. Access to storage is negotiated.
France
Implementing the Gas Directive in France the Law n 2003-8 of 3 January 2003 regarding
gas and electricity market has been adopted by the parliament. In summer 2003 the market
opening will increase from 20% to 28%. Today Gaz de France has lost about 25% of the
eligible market.
The Regulator CRE (Commission of Energy Regulation) is now in charge of both electrical and
gas sectors. As far as unbundling is concerned one should mention that this one is more than
an accounts unbundling since the management is also unbundled.
Declared
market*
opening (%)
Full opening
date
Unbundling
transmission
system
operator
Unbundling
distribution
system
operator
Regulator
Country
Austria
100
2002
Legal
Legal
ex-ante
Belgium
59
2003/6
Legal
Legal
ex-ante
Denmark
35
2004
Legal
Legal
ex-post
France
20
Accounts
Accounts
n.a.
Germany
100
2000
Accounts
Accounts
NTPA1
Ireland
82
2005
Management
Management
ex-ante
Italy
96
2003
Legal
Legal
ex-ante
Luxembourg
72
Accounts
Accounts
ex-ante
The Netherlands
60
2004
Management
Legal
hybrid
Spain
79
2003
Ownership
Legal
ex-ante
Sweden
47
2006
Accounts
Accounts
ex-post
UK
100
1998
Ownership
Ownership
ex-ante
NTPA=Negotiated third party access; no sectional regulator, instead of that Kartellamt.

(ex-post control of the application of the competition law ). Market opening since 1998
(demarcation agreements and exclusive concession contracts were abolished).
* The real % of opening are really below this theoretical opening %
Source EU Commission
Country
Transmission
tariff
Structure
Overall
Capacity
network tariffs booking
procedure
Balancing
conditions
favourable to
entry Y/N
Austria
postalised
n.a.
inflexible
favourable
yes
Belgium
distance
normal
flexible
moderate
yes
Denmark
postalised
high
inflexible
unfavourable
yes
France
distance
high
inflexible
moderate
yes
Germany
distance
high
inflexible
unfavourable
yes
Ireland
entry-exit
normal
flexible
moderate
no
Italy
entry-exit
normal
flexible
favourable
yes
Luxembourg
postalised
normal
flexible
unfavourable
no
The Netherlands
Entry-exit
normal
flexible
Favourable
yes
Spain
postalised
normal
flexible
favourable
no
Sweden
postalised
high
flexible
n.a.
yes
UK
entry-exit
normal
flexible
favourable
no
Concentration
in wholesale
market
Table:1 Implementation of the Gas Directive

Germany
Germany is showing an opening rate of 100%. Most parts of the EU Gas Directive are
implemented. An amendment to the Energy Industry Act that will fully transpose the Directive
to national legislation is under discussion in the Bundestag. There is no sectional regulator in
Germany. The country relies heavily on self regulation of the market participants based on socalled Associations Agreements (Verbndevereinbarung). Access to gas network and storage
is negotiated on the basis of the Association Agreement (VW). The Kartellamt acts as a
dispute settlement (as far as competition is affected: ex-post control of the application of the
competition law. It should be mentioned that the German gas sector is complex (decentralised
structure, three levels of supply, more than 700 distribution companies).
Greece
The Greek gas market is due to be opened in 2006. A law issued in 1999 has established
an Energy Regulatory Authority. The Greek gas network is not connected with the European
one.
Greek authorities launched on September 2, 2002 an offer for 35% of Depa (Public Gas
Corporation) unique gas supplying company which includes 6 subsidiaries in charge of selling
gas.
Ireland
Currently 75% of the gas market is open in Ireland. TPA is regulated and conditions and
tariffs for accessing the gas network (no gas storage but flexibility available through contracts
with UK UGS) are laid down in a ministerial decree. The Commission for Electricity Regulation
(CER) should be the regulator for gas matters too.
Italy
At the beginning of the liberalisation process the market has been immediately open at
65% with low eligibility thresholds. It is currently opened at 100% from January 2003. Price-cap
mechanism has been implemented and the independent regulatory agency for electricity and
gas (AEEG) determine ex-ante technical conditions and tariffs (proposed by TSOs) for
accessing gas grid and UGS. ENI sold 40% of the Snam Rete Gas (transport company recently
created) shares going further than unbundling.
Netherlands
An opening in three steps has been planned targeting 100% at the beginning of 2004. The
Gas Act manages access to the gas network and UGS with guidelines set by the regulator
(DTE) after consultation of market parties and network operators. Negotiated TPA is adopted
for transmission but regulated TPA applies for distribution.
New operators have taken 30% of market shares and the DTE has requested for transportation
tariffs decrease. An independent body has been created to accelerate the liberalisation process.
Essent and Delta are both owners of the gas pipeline and competes with the Gasunie
transportation division.
Spain
On January 1st 2002, all clients with consumption higher that 1.000.000 m3/year became
qualified customers and can negotiate supply conditions and prices with traders.
Having only an advisory role, the Regulator, - the National Energy Commission (CNE) - verifies
tariffs and conditions of access to network and storage, which are defined in a national law. The
Ministry of Economy determines tariffs and conditions ex-ante.
Recent legislation has unbundled the gas tariffs, establishing separate tolls for the transport
and storage of gas across Enagas' network and distribution to final consumers by Gas Natural.
The regulatory changes, which came a year behind schedule, allow Gas Natural to meet the
government's decree to sell the Enagas stake ahead of full liberalisation of the sector.
United Kingdom
Today the UK gas market is fully liberalised. About 30 regional independent new operators
have entered the market, 75% of the industrial customer changed their supply source and 30%
of the domestic customers have switched supplier. TPA to gas grid and LNG facilities is
regulated ex-ante by a strong and independent regulator (OFGEM). UGS access is not
regulated and provided on a non-discriminatory basis to any shipper. Gas transportation and
gas supply are independent sectors and there is a total separate legal ownership of the entities
which operate in these businesses.
At the beginning of the 90s, in a context of stable oil prices, the price of UK gas spot
decreased and services provided by the traders diversified. Once the Interconnector on stream
(end of 1998) gas price and oil price was again coupled.
Croatia
Energy law
Laws on gas
market &
Energy Act.
07/2001
Czech.
Energy Act
458/2000
Hungary
Gas Act 1994

New Gas Act
2003: 25%
expected for
2003
Latvia
Energy law
09/1998
Natural Gas
Market
Liberalisation
Concept
Poland
Energy Law
04/1997
2000 for
Amendments domestic
completed end suppliers
2002
Romania
Ordinance
41/2000 and
law 463/2001
Ordinance
60/2000 and
law 791/2001
Slovakia
Eligible
customers
Law 76/2001
Network
Industries
Regulation
06/2001
Under
discussion
07/2002>25 Mm3
01/2003 >15Mm3
01/2004>5Mm3
Energy Law
09/1999
Jan 2003:
42%
Jan. 2008:
78%
2003: > 25 Mm3

2008: > 5 Mm3
Grid access
system
Unbund.
Market
opening
(%) and
timing
Slovenia
Legal Status
Regulator
2.3.3 Current status of the Gas Legislation in the candidate countries
45% of market
sales, one
year after
adoption of
Gas Law
Power plants
Heat &power
plants
> 100 Mcm
Neg. TPA
2005: 28%
2008: 33%
2005: > 15 Mcm

2008: > 5 Mcm
Hybrid
Neg. TPA HP
ERO
and UGS
Reg. TPA LP
A.
Not yet defined
Hybrid?
HEO
Not yet defined
Not yet
defined
Public
Service
Reg.
Comm.
Not yet
defined
Energy
Reg.
Council
Reg TPA for

07/2000 > 25 Mcm
domestically
07/2004 > 15 Mcm
URE
produced gas
Dec. 2005 > all
only
08/2001: 10%
05/2002: 25%
04/2003: 30%
>5 Mcm
>4 Mcm
Comments
In 01/2001 PLINACRO was created

for operating gas transportation. The
A, L company became state owned in
03/2002
25% of INA is to be sold.
Transitional period for three years.

Transgas is public limited company
since 05/2001. RWE bought 97% of
Transgas at the end of 2001.
MOL has already unbundled its

transportation, storage and supply
activities.
Derogations according article 26 of Gas

Directive will apply
Gas sector privatisation process
completed
A.
POGC split up in view of privatisation
Restructuring of the former

corporation ROMGAZ into five
companies (ord. 334/200 & ord.
575/2001 for new ROMGAZ
company)
Reg. TPA for

captive and
eligible
customers
ANRGN
Neg TPA
(proposal)
Network
Industries
A
Reg.
Authority
Temporary derogation
Transfer of price regulation from
Ministry of Finance to Network
Industries Regulation Authority
01/2003
49% stake of SPP sold in 03/2002.
Neg TPA
Energy
Agency
No transitional period
Source UNECE, Gas Centre - A= Accounts, L=legal

Table 2 Gas legislation in the candidate countries
Since the announcement of the EU expansion in summer 1997 Central and Eastern
European Countries (CEEC) launched reform programmes largely inspired by the EU
Directives. They have generally been successful in orienting their economies towards Western
Europe.
As of mid-2002 the energy chapter in accession negotiations has been provisionally closed
with all candidate countries except Bulgaria and Romania. In all the countries progress has
been made in restructuring the gas sector on the basis of legislation that transposes majority of
the relevant provisions of EU Directives or is inspired by Energy Charter Treaty proposals.
In several countries transmission and distribution business have been unbundled and
private investors have acquired (minority or majority) shares in distribution and transportation
companies.
The CEEC authorities acknowledge the importance of the gas prices reforms however, to
all intents and purposes, energy prices are still under State control (except for petroleum
products) and below economic and international levels in several transition countries.
These price distortions impede structural adjustment and discourage investment in the
energy sector. The shortfall between prices and costs is currently covered by State subsidies,
but in some cases by the energy enterprises themselves through various cross-subsidization
schemes and depreciation of their capital assets. In Hungary for instance the average cost of
imported natural increased by 17% in 2001 compare to 2000. Government allowed MOL to
raise its average selling price by 15% (regulated selling price) and consequently suffered
significant losses in the year.
2.3.4 Amended proposal for a directive amending Directives 96/92/EC and 98/30/EC
Under the Danish presidency a political agreement has been reached the 25 November
2002. Common Position is expected at the beginning of February 2003. When this Common
Position is adopted the EU Parliament will be able to examine the proposal in second reading.
Main items of this document are:
Accelerated opening of the market: all the non-domestic gas and electric consumers
will be eligible on 01/01/2004, and at 01/07/2007 all consumers will be eligible.
Regulated TPA (ex-ante) will be imposed in all member states.
Legal unbundling is required for transmission 01/01/2004 and distribution activities

01/07/2007 at the latest;
The access to storage facilities has been decided. Modality of access (regulated or
negotiated) may be freely chosen by member states.
Regulation: regulators will be given new and various competences;
The Commission, the member states and the regulators will ensure the management and the
follow up of the investments necessary to build the infrastructures in accordance with the
development of the gas sector.
3.0 COUNTRY CASE: ARGENTINA
Main Lessons Learned

When considering a country, the national energy sector cannot be considered as
isolated. The general crisis of the Argentine affects this latter seriously, nevertheless it
has kept its operating service standards still in force and under reasonable control.
One of the reasons for this reality is that the crisis has not been generated intrasystem due to a flaw in any of the regulatory framework provisions, but rather it has
been brought about extra-system by the general economic measures that forced their
way into the industrial organisation, causing a sudden break of the internal economic
and financial stability of the sector.
An example of that has been the re-definition of the tariff system through a law passed
by congress against the regulatory frameworks. The transformation of the tariff
schedules took place by changing the agreed currency, the US$, for the Argentinean
currency with the same parity (1 dollar = 1 peso) but with totally different intrinsic
values. This situation came about due to the local currency devaluation process.
Further to this negative result there are others, which have had enormous repercussion in the
economy of companies.
In accordance with the new regulations, the service companies with debts in dollars,
because of their need to cope with the investments already made and an undergoing
improvement process, have to face payments with their peso income from the new
tariff scheduled. This generates substantial losses.
The main lesson learned is that once commitments made, legal security and
protection of the investors shall be honoured. Therefore one must bear in mind that
the companies, when investing huge amounts of money in the sector for better
services, relied on the governments promise to recover said funds.
Currently, we are witnessing the risk that this situation might continue unsolved for
more than a reasonable period, causing irreparable damage to companies, investors
and consumers.
For these reasons, the companies consider it essential to revert to the former income
belonging to the whole gas industry chain with the purpose of sustaining production capacity
and quality of life as well as the need to honour the international commitments taken on by the
country and regain the Argentine republics credibility before the international community.
3.1 Introduction
Currently in Argentina private initiatives are allowed both in the monopoly and the competitive
sectors of the gas industry. This is the result of a recent reform process - no more than a decade old
still in implementation that was launch by the privatisation of Yacimientos Petroliferos Fiscales
(YPF) followed by the passage of the Gas Law in 1992.
Third Party-Access (TPA), unbundling, split of the state-run monopoly, Gas del Estado, limitation
of cross-shareholding between companies acting in different segments of the gas chain, consumer
choice, removal of cross-subsidies were imposed in order to foster competition (upstream and
traders), and attract domestic and foreign private investors.
An independent regulatory body Ente Nacional Regulador del Gas (Enargas) was created as
result of the enforcement of the Gas Law. Enargas verifies the implementation of the TPA, protects
the consumer interest, promotes competition, and sets tariffs (price cap) for transmission and
distribution services.
In spite of all the progress that has been achieved and good results obtained, development and
consolidation are needed to study and solve economic and administrative issues which wear down
the confidence of potential investors.
3.2 Background data summary
Before studying the regulatory aspects related to natural gas transport and distribution in the
Argentine Republic, a summary of the situation that resulted from implementing the Regulatory
Framework and total privatisation of the company Gas del Estado SE (GdE SE) which, under different
legal and commercial denominations, carried out gas business in the Argentine Republic as from
about 1940, is detailed herewith.
For more than fifty years, this state company has monopolised the above activities bearing great
weight on the adoption of policies, planning and development of the natural gas industry as well as
taking part in the technical, legal and economic regulation of the same ones.
It should be mentioned that the production of hydrocarbons was in the hands of monopoly, the state
company Yacimientos Petrolferos Fiscales (YPF), its activities being regulated by different national
policies; Law 17,319, (at present partially in force), being the most complete and orderly of them.
This historical division between natural gas production, in the hands of YPF and its transport,
distribution and marketing ensured by Gas del Estado, can hardly be ignored as it influenced the
conception of the present regulatory processes of the natural gas industry.
44%
45%
40%
35%
30%
24%
25%
20%
15%
10%
4%
4%
5%
5%
7%
7%
5%
0%
H
OT
ER
TE
.
.
.
LC
OL
.A
S .A
S. A
TR
YL
LS
C
IA
PE
RG
RA
AN
RG
S
T
E
P
E
U
US
EN
PL
EN
OM
LA
AN
LL
ZC
IC
TA
HA
RE
R
O
S
E
E
T
P
ER
AM
N
NT
WI
PA
R
ET
CP
S
OL
.
.A
Argentinean Gas Producers Market Share
YP
.
.A
FS
As from the date a new government took over in 1989, the situation of the Argentine energy
sector, including hydrocarbons, was the subject of a long series of debates that consisted of political
statements and projects through which it was tried to attain structural changes within the scope of the
policies set by the legal standards passed by Congress and the Decrees issued by the National
Executive.
The object of this set of standards was to attain the deregulation as well as privatisation and
structural reform of the hydrocarbon industry to increase its degree of competitiveness in the different
markets by the free access, export and import of its products, to encourage investments of domestic
and foreign private capitals in the different segments of the oil and natural gas business in order to
reorganise and rationalise the big state-owned companies related to the industry.
The Economic Emergency and State Reform Law No. 23,696/89 provided the National
Government with the necessary tools to carry out this remarkable structural change. Annex I of the
above law, ordered the privatisation of the distribution network and the marketing of natural gas by
means of concessions granted for public works and services, a standpoint later ratified by Decree No.
2074/90.
The privatisation of the natural gas transport and distribution services demanded the restructuring
of GDE SE, in accordance with the framework stated in the above-mentioned decrees which cover
deregulation of the hydrocarbon industry. This process aimed at transforming a closed system of
state-run companies, into an open system, which favoured private participation and a higher degree
of competition based on efficiency and effectiveness in the supply of services.
Pursuant to Decree No. 48 dated January 7, 1991, the Strategic Plan guidelines for restructuring
GdE S. E. were approved based on the final report from the consultants McKinsey Co (11/29/90).
According to the Consultants conclusions, it was decided to divide transport, distribution and
marketing of natural gas which owing to the characteristics of the trade, constituted a natural
monopoly - and also to regulate the Transport and Distribution segments.
From there on, the urgent need to work towards the creation of a regulatory framework, including
that of a Federal Regulatory Agency (Ente Regulador) (Art. 4 and 7 of Decree 48/91) was stated. On
the other hand, the above regulatory framework had to be approved by the Ministry of Economy
through the Under-secretariat for Energy before submitting it to Congress in order to be passed as a
National Law.
As the strategic plan designed for GdE S.E. recommended the total privatisation of the
distribution services as well as of the trunk gas pipelines system and both activities as mentioned
before had to be regulated it was pointed out in Article 4, that the regulatory framework had to be
approved before tendering for the total projects. But, to this end, it was necessary to draw up and
complete the tender documents one of its conditions being to detail the contents of the regulatory
framework.
Another pre-condition of the tendering process was to carry out a valuation of the capital goods
and net assets to be transferred which was to be taken as an official estimate (Art. 19 of Law
23,696/89). This valuation was carried out by the Banco de la Nacin Argentina.
Article 9 of Decree 48/91 set a series of standards to which the process of privatisation of the
distribution and transport systems would have to conform; some of these standards were later
included in the final regulatory framework (Law No. 24076 of May 20, 1992). Even though the
concession model was not clearly defined. It had onerous features, the royalties having to be
determined in respect of the exploitation margins of each of the regional systems of distribution,
marketing and transport.
The documents and conditions of the tender had to state the minimum maintenance and
development investments necessary to guarantee an effective and efficient public service. The
duration determined for the concessions was forty-five years with the possibility of 10-year extension.
The consultants recommended a thorough revision of gas prices to customers these had been
fixed for political reasons as well as their break-down, to make the call for tender more attractive
and to be able to raise the royalty fees to be quoted by the bidders. They also pointed out the
existence of problems regarding gas supply due to the lack of incentives for exploration as well as the
existing regulated prices. The concern about a system that did not encourage competition and the
probable influence of a few producers on well-head prices (at the time this activity were to be
deregulated) was manifest.
In order to facilitate a better transport selection, the consultants considered three alternative
range and operating systems for the trunk gas pipelines. One that had only two systems (North and
Center-West; South and Neuba) which would facilitate shipment work coordination and ensure a
higher value of the business by facilitating an increased attraction of foreign investors. In the end, this
was the option selected for the Argentine case. In all instances, open access to third parties
(including consumers, retailers, producers and distribution companies) and the adoption of sound
economic criteria in setting tariffs were included as a requirement.
As regards distribution companies, the recommendation was to subdivide the biggest areas in
order to obtain a higher degree of regional competition per market area. Thus, competition through
comparison could be more easily introduced.
Regarding time and stages for implementing of the works, it was decided to establish a transition
period (of one year, as from 1st January, 1991, to be extended as a maximum for one more year) in
the course of which, prices at both ends of the system (well-head and retail) would be regulated by
the Ministry of Economy, in the same manner as transport and distribution tariffs. Article 8 of Decree
48/91, stated that upon termination of the transition period, prices of natural gas to end consumers
shall be deregulated, this price deregulation being subject to the existence of many bidders who
would be making more competitive quotations than the existing ones.
It was assumed that the changes that took place in this sector, such as YPFs privatisation, which
had already been started, and the sale of marginal areas (and later of some central ones) plus the
freeing of prices to end consumers, would be enough to weaken the position of the ruling company or
to produce a change in the behaviour of the other oil companies not related either to YPF or amongst
themselves.
The idea of concessions was seen under a bad light in Argentina and there was also the
additional risk that a subsequent government would try to annul them (a rather improbable fact) or recreate companies with the inclusion of government capitals, particularly in some provinces.
Hence the new techno-economic survey, ordered from Stone & Webster/ Pistrelli, Daz y
Asociados, where it was recommended to exchange the concession for a license model, where
ownership of the assets (to be transferred) and the exclusivity of the service (with some restrictions)
constituted the main elements of the new organization. This solution was not new, as it had been
applied to the Power Sector privatisations.
Regarding the creation of Distribution companies, it was advised to organize only eight
distribution entities and at least two transporting companies, including the aforementioned provisions
in respect of competition.
The division of activities (vertical and horizontal break up), free access to third parties, nondiscrimination, avoidance of cross-subsidies between customers, the achievement of a
permanent and subtle balance between the need for fair and reasonable tariffs for all services
and customers satisfaction (a very difficult feat) with prices that would ensure companies a
certain profitability, on a par level with their exposure to risk as well as protect the interests of
consumers, were points that were discussed and analysed at great length.
NOROESTE (1.6 +1.3 BCM)
GAS NEA
CENTRO (1.7 BCM)

LITORAL (3.2 BCM)
CUYANA (1.7 BCM)
BUENOS AIRES NORTE

(BAN 3.2 BCM)
METROGAS (6.5 +0.9 BCM)
PAMPEANA (3.5 +1.6 BCM)
2000
TOTAL = 31 BCM
SUR (3.4 + 1.9 BCM)
Argentina: Gas Distribution System

Under this new scheme the State abandoned its role of entrepreneur and planner to act as
Regulator in all those cases in which the defence of captive consumers, promotion and competition
simulation and the resolution of conflicts between the active subjects of industry arise. All the above
points, taking into account that the reasonable profitability is always stated in the regulatory texts
and that it is an essential condition for the continuation of this activity and for further future
development when incorporating risk capital.
Four months after Decree No. 48/91 was signed, Decrees No. 633 and 634 dated April 12, 1991,
through which the National Executive decided the reorganization of the natural gas industry and the
re-conversion of the power sector respectively, were issued.
3.3 The Gas Law and License Contracts
Bearing in mind the speed at which the privatisation and concessions program had to take place
for numerous groups of state companies, the Government stated 31 December 1992 as the final
deadline for the award and signing of contracts with private companies. For this purpose, the
Enforcement Authority (Ministry of Economy and Public Works and Services MEOSP) were granted
ample powers, to be used at their discretion, to approve regulations, general and special
specifications and conditions, to define the business units, to control tariffs, to call for international
tender, to approve the by-laws of the licensee and investment companies, to receive and evaluate the
bids (with participation of the Privatisation Committee) and to decide about them.
Considering that Law 24,076, (so called Gas Law), which states the Regulatory Framework for
the natural gas industry and GdE SE privatisation system (which are always related) could just be
passed on May 20, 1992 and was partially promulgated under Resolution No. 885/92 on June 9 of the
same year, the difficult and as yet uncompleted subtle task had to be carried out in six months to
meet the established goal.
The puzzle was assembled piece by piece. Regulation of articles 76 and 77 (of Law
24,076) had to be made in advance in order to define the business units in which the GdE SE
assets engaged in transport and distribution of natural gas would be divided and to order the
constitution and approval of model by-laws for the companies which would be awarded the
authorizations (licenses or concessions) for supplying the public with transport and
distribution of natural gas services. These companies would be transferred the goods
corresponding to each business unit (Decree No. 1189 dated July 10, 1992). This body of
laws regulates the standards under which GdE SE was at last fully privatised.
Against the suggestions made by the consulting firms, but applying similar arguments in respect
of higher competition and quality in the provision of services, it was decided that the natural gas
transport services were to be carried out based on the awarding of (only) two systems of integrated
trunk gas pipelines, whereas the liquids and GLP plants were transferred to companies controlled by
carriers themselves (Article 2, Decree No.1189/92).
Similarly, the Federal Capital and Greater Buenos Aires were divided into two areas that were
assigned to an equal number of companies, (detailed in Annex II of the above Decree) with the
purpose of developing the natural gas units, that, same as the previous ones were created pursuant
to Article 4 (Decree 1189/ 92).
Regarding privatisation of the GdE SE assets related to natural gas distribution services in the
rest of the country, it was decided to create six areas to be awarded, several of which not only cover
whole provinces but districts or areas belonging to other bigger venues (Article 3 and Annex III). In
the case of distribution companies the factors that had uppermost importance were not the political
borders and/or the results from negotiations with provincial authorities for the definition of areas, but
the creation of business units more technically and economically feasible which were very different in
scope and sales potential.
The participation interest offered to the two transport companies (Gas del Sur SA and Gas del
Norte SA) and to the three distributing companies (Metropolitana SA, Buenos Aires Norte SA and
Pampeana SA) was 70%. In the case of Distribuidoras de Gas del Noroeste S A, Centro SA and Gas
del Sur SA, the participation interest reaches 90%, while for Cuyo SA it is 60%. As it is
acknowledged, as a result of all these privatisations a variable percentage of the companies block of
shares was destined to comply with the Shared Property Program (PPP) and the remainder is kept
in the hands of the State (MEOSP).
Once the above-mentioned stages were carried out, Decree No. 1738 dated September 18, 1992
regulating Law No. 24,076 that created the framework was attached thereto (Annex I).
This decree also states that all subsidies in respect of natural gas prices previously awarded
were cancelled as from the beginning of 1993. In its whereas clauses, the above Decree states
that, the subsidies or privileges that the State might decide to grant to certain persons or regions for
general interest reasons, shall be explicit, with time limits and should also have the necessary funds
stated in the National Budget Law, their cost not affecting the good performance of the natural gas
industry.
Under Decree No. 2255/92 the model licenses for natural gas transport and distribution were also
approved (Annexes A and B respectively), including the corresponding sub-annexes I (Basic
Rules), II (Service Rules) and III (Tariffs). It is worth mentioning that the licenses, basic rules and
service rules are specific to each type of service (transport or distribution) and therefore very
important to the operational, administrative and regulatory fields.
Law No. 24,076 and Decrees 1738/92 and 2255/92 together with the Bidding Terms and
Conditions and the Award Contract are the standards to be followed by the successful bidding
companies.
The permanent regulatory action of Ente National Regulador del Gas (ENARGAS), an
independent commission with five board members and its establishing legal precedents in respect of
modification and interpretation of the above laws as well as resolving different conflicts that may arise
between different natural gas industry parties, has to be added.
Restructuring the national natural gas industry, has the objective of increasing the efficiency of
production, transport and distribution activities, guaranteeing that benefits are felt by consumers and
encouraging the participation of private risk capitals, to ensure an orderly process based on
competitive and equal conditions during the different stages of the said restructuring process and
defining the role of the State as Regulator of operation and development of the gas industry and its
markets (Art.1, Decree 633).
This Decree (Art. 2) emphasizes the creation of two markets, which will operate at wholesale,
and retail levels. To the first, belong the transactions between producers and distributors and
between producers and big consumers while, to the other, the transactions between distributors and
captive clients in their respective specialisation area. Article 3 states that the regulation shall (only)
apply to the retail market and to the transport services rendered by the trunk pipeline networks. These
services will run under free-access conditions, the sale and purchase of natural gas being prohibited.
Here it should be pointed out that provisions in Arts. 2 and 3 state that the transport companies
are only service providers and that the gas contracts shall be drawn up through distributors or big
consumers or directly with producers. This is an evident case of commercial by-pass. Tariffs applied
to transport and distribution of natural gas shall be stipulated according to the methodology
determined in the regulatory framework. Upon expiration of the transition period, the transactions
and prices to the wholesale market shall be totally free with the exception of publicity rights. Upon
verification of discrimination or monopoly practices in the course of these activities, the relevant
authority (SE) shall be entitled to regulate the transactions and prices of the said market.
The Ministry of Economy had thirty days to draw up a bill to be submitted to Congress, defining
the regulatory framework which should state the technical, economic, tariff and legal umbrella as well
as the control procedures to be applied to the natural gas industry. The Regulatory Agency shall act
as a self-governing body of the National Executive.
In the same manner, this Decree stipulated the role of producers, transport companies and
distributors (Arts.6, 7 and 8). Regarding the first, the Ministry of Economy committed itself to speed
up the plans and programs for exploration, production and transformation of the natural gas industry,
to create the conditions that will attract many bidders, thus facilitating competition and guaranteeing
efficient free prices in the wholesale market.
Transport Companies shall, comply with public transport services in open access conditions,
from the gas fields or the producers treatment plant outlets to the city gates or delivery points to
consumers. This section shall be regulated by the Regulatory Agency under the legal view that,
transport tariffs will strictly cover cost and a reasonable profit. The central dispatching of the
transportation grid should be the Transport Companies responsibility under strict control of the
Regulatory Agency.
Distributors were assigned market segments. Tariffs shall be in accordance with cost and
allocation methodologies between the established consumption mode () and shall be obliged to
make consumers participate in the savings generated by increased productivity. They shall make a
formal promise to this process under control of the Regulatory Agency.
Here one can clearly detect a principle of regulation through incentives and the X efficiency factor
record that shall apply for tariff revisions every five years. Finally, in Article 10, a transition period
(regarding economic conditions and prices) was established, until competition is guaranteed in the
wholesale market.
The organization of the Natural Gas industry in Argentina was a legal and regulatory
novelty. The Argentine State wanted to strongly proclaim the objectives or their
corresponding optimum achievements as well as the policies adopted for this sector, the
organisation and development of which is vital for the countrys economy and the welfare of
its people.
With this purpose, the State adopted the emphatic proclamation of said objectives and, as an
innovating technique, to incorporate them to the code of laws. Among the objectives the most
important is the one mentioned in the first place that states as the objective of this law, to
adequately protect the rights of consumers. That is to say that consumers protection is a
key point among the permanently searched ends due to the new organization system of the
Natural Gas Industry in the Argentine Republic.
Transportation System Argentina
PIPELINE CAPACITY - 2000

(Mcm/D)
PIPELINE CAPACITY- 1993

(Mcm/D)
La
Santa
Paz
Cruz
6.0
Rosario
Santiago
10.9
Buenos Aires
11.2
Rio
De
Janeiro
7.1
13.2
7.7
Santiago
31.9
38.4
41.2
36
14.2
Total Supply
21 BCM
Buenos Aires
Bahia Blanca
Total Supply
Domestic Demand 31 BCM
Export 5 BCM
17.3
4.90
15.4
PORTO ALEGRE
Rosario
15.6
Concepcion
Bahia Blanca
11.0
Sao
Paulo
22.4
4.45
29.0
29.5 18.3
11.2
Natural Gas Exports
40
35
30
25
Mcm/D
Concepcion
Porto
Alegre
Belo
Horizonte
3.7
Sao
Paulo Rio
De
Janeiro
13.4
7.2
La Santa
Paz Cruz
Belo
Horizonte
20
15
10
5
0
1997 1998 1999 2000 2001 2002 2003 2004
3.3.1 Results of the initial years

A lot can be said about State success as a consequence of applying the above-mentioned
policies. Here after are presented a selection of main indicators that show the relevance of the
measures taken by all the actors and entities having a role in the above-mentioned process.
Transport & Distribution Sectors

Direct Investments in US$ million
500
400
300
200
100
0
1993 1994 1995 1996 1997 1998 1999 2000 2001

Transport
Distribution
Ever since privatisations began in December 1992, the Argentine natural gas regulated
industry (Transport and Distribution) had to complete the compulsory direct investments in their
respective sector for a total amount of 493 million dollars in order to ensure maintenance and
security of the systems. Nevertheless and in accordance with the service needs, the amounts
stated exceeded expectations.
But, in order to meet quality service standards and according to the importance of what
was expected from the International Investor, this part of the gas industry paid additional
investments to a global amount of 7,120 million, which were paid for the purchase of assets,
and 4,000 million of total and real investments to improve, enlarge and revamp the system.
The natural gas privatisation was carried out through a clean concession process, which
allowed for efficient and competitive procedures under a specific legal standard passed by
Congress, the Gas Law No 24,076 and its subsequent legislation, always abided by the
Companies and the International Community of Investors. The prices and the quality of the
services provided are competitive at an international level.
3.3.2 Growth of the regulated sector

Regarding gas Transportation, the capacity of the sector increased from 67 million m3/day
in 1992 to 125 million m3/day in 2002. The distribution networks also grew 52.7% and, at
present, amount to a total of 121,000 kilometres of gas pipelines. The number of households,
industrial, and commercial consumers benefited by the natural gas supplied throughout the
country was increased by more than 1.3 million. The above figure shows that another 6.5
million inhabitants were connected to the pipeline network of natural gas permanent supply.
Total Natural Gas Consumers

6100000
5700000
5300000
4900000
4500000
1993 1994 1995 1996 1997 1998 1999 2000 2001
Gas meters
Source: natural gas distributors

Regarding service cuts and restrictions, these have almost disappeared, particularly during
the winter season (peak demand periods), as opposed to what would usually have taken place
before 1992.
As from 1993 to 2001, the natural gas regulated activity paid taxes and dividends to the
state for an amount of more than 5,800 million dollars, i.e., 67.9% of all funds distributed by this
activity during the period, whereas the remaining 32.1% was distributed among local and
foreign shareholders as well as those from the stock market whose main holders are Argentine
and foreign pension funds (AFJP).
As an additional fact related to the sectors growth, it should be mentioned that nowadays
Argentina exports natural gas for an amount of 350 million dollars per year. Before the
privatisation process the country was used to import for 250 million dollars of that same fuel per
year.
3.3.3 Defence of Consumers Rights

The Gas Law (Art. 66) states the previous and obligatory jurisdiction of ENARGAS on
every dispute between legal persons and interested third parties, regarding gas-regulated
services.
In order to follow-up cases of consumers claims against gas companies, a swift and simple
procedure was implemented. This procedure is based on legal, informal, quick, immediate and
verbal principles always trying, when possible, to achieve conciliation of the parties. The official
in charge who takes the claim made by the consumer must be responsible for it until settled.
This does not allow the follow-up responsibility to dissolve in mid-air and avoids the claimant to
have to explain his/her case several times before different people.
The decisions made by the official in charge can be appealed before the ENARGAS Board
of Directors.
Following is a detail of statistics for enquiries and contacts made during the year 2002.
Contacts made with ENARGAS January / September 2002

Head Office
Claims
Total
3,644
Enquiries
65,226
(5.3%)
(94.7%)
Committees and
Agencies
Claims
Enquiries
Totals
Claims
Enquiries
Contacts
664
15,308
4,308
80,534
84,842
(4.2%)
(95.8%)
(5.1%)
(94.9%)
(100%)
3.4 The Economic Crisis and its Impact on the Gas Sector
The crisis of the regulated energy sector belonging to the national economy was preceded, as
from 1999, by three issues that, owing to their financial importance, were anticipating a deep change
in the Government concepts about protection and rights of this sector:
1) The subject of tariff revision by applying international indexes (PPI);
2) The question of subsidies to Patagonian consumption;
3) Fiscal claims made by provinces and municipalities outside the regulatory framework.
Thus, the Companies had to face administrative and legal actions that, in clear contradiction to
the Regulatory Framework, denied their acquired rights with different political or interpretative
arguments, which supported financial claims made by provincial or municipal jurisdictions or
consumers associations.
Such questions took place at the same time with the changes experienced by the state and
anticipated the problems that would follow in the near future in face of the different economic beliefs
of the new Argentine authorities.
3.5 Recent measures taken by the national government.
Economic Emergency Law: asymmetric and general devaluation.

Unilateral modification of the regulatory framework and license contracts.
3.5.1. Within the frame of Economic Emergency Law 25,561:

The above-mentioned emergency law annulled, as from the date it was passed, the
following:
(i) all clauses related to adjustment to dollar prices or to any other foreign currency;
(ii) all indexing clauses based on the application of foreign indexes;
(iii) all indexing mechanisms; the prices and tariffs resulting from the application of said clauses
being fixed at a ratio of 1 peso = 1 dollar.
This in itself seriously affected the rights of the Gas Licensees whose tariffs, that were
fixed in dollars, were only stated in pesos for collection from the service companies and
payment by consumers, in accordance with the provisions contained in Articles 37 et seq. of
Law 24,076 and its regulations, approved under Decree 1,738/92 as well as point 9.4 of the
License Basic Rules approved under Decree 2,255/92.
Article 8 of the Emergency Law in itself created serious damage when it annulled the
adjustment mechanisms and the redefinition of tariffs based on international market indicators,
setting the ratio 1peso = 1dollar without fixing a procedure which, based on the methodology in
force, would allow the licensee, whose investment was made in dollars, to cover his/her costs
plus a reasonable income to be able to conveniently plan the Transport and Distribution of
Argentine Natural Gas return on investment.
The works and service companies lost protection due to the new legal concept and all the
weight of the emergency conditions was borne by them; they are in a special penurious
situation that was specifically forced upon them over and above everyday people and that,
owing to the companies providing a public service, they are not obliged or able to endure.
The damage caused to the companies operating public services as well as to investment
companies, holders of equity capital, and to their local and foreign investors as a consequence
of the sudden break-up with the dollar parity and the creation of a new convergence factor is
not in any way comparable to the damage resulting from the passing of Decree 214/02.
3.5.2 Within the frame of Decree 214/02

Decree 214 dated February 3, 2002, so-called conversion of the economy into pesos,
orders the conversion into pesos, by any cause or from any source, of margin requirements in
U.S. Dollars or any other foreign currency which were due at the time of passing Law No.
25,561(Arts. 1 and 8). The ratio established for the conversion of deposits is 1 dollar = 1.40
pesos (Art. 2) and, for debts, 1 peso = 1 dollar (Art. 3). Such liabilities (deposits and debts)
shall be applied, as from the passing of the above decree, a Reference Stability Ratio (CER)
that was published by the Central Bank (and that it is no other than a sort of variation of the
consumers price index issued by the INDEC and that in the past was used to update currency
liabilities). This Decree also establishes that the points stated in Articles 7 and 10 of Law
23,928, Article 4 of Law 25,561 version, which prohibit adjustments and price variations for
debts incurred after its passing, are not repealed.
As a consequence of the enforcement of the above mentioned Economic Emergency Law
No. N 25,561 that ordered pesos conversion as well as the freezing of tariffs, the natural gas
regulated companies had to bear as from January, 2002 an unusual increase in the
operating costs taking place at inflationary pace, with strong rises in the price of imported and
local inputs.
Also, the companies were to bear the losses caused by this lag and to absorb the
increasing level of customers in arrears and bad debts, to endure the enormous increase in
expenses and be responsible for the payment of foreign commitments for a value of 2,400
million dollars.
The regulated margins included in residential tariffs decreased in real terms as from 1992
to the moment devaluation took place as compared to the cost of living (consumers price
index). Industrial tariffs paid in cash experienced an even bigger decrease due to the
additional discounts applied to the maximum authorized prices.
Owing to this distortion in values, today the natural gas expense of a typical family is 0.70
cents (0.20 USD) per day (average yearly consumption 1,000m3). This value also includes
taxes that account for 30% of that amount.
Thus the daily gas expense in a home is minimum and is not beyond the reach of any
Argentine family.
It is worth mentioning that, regarding taxes, the pressure on the gas bill paid by Argentine
consumers add up to 30% at present, whereas taxes, fees, and contributions have grown 77%
since the 1992 privatisation.
Summarizing the economic impact of the decisions made regarding the companies
regulated economy we can mention the following factors which, even though incomplete,
represent the essence of what is affecting the sector.
They are as follows:

Loss of income equal to the devaluation that our currency (peso) is undergoing in
respect of the currency in which the investors made their estimates (U.S. Dollars) and as a
consequence made them decide on the venture.
Imbalance between revenues for distribution services (in pesos and not adjusted since
July, 1999) and operating and financial costs, an important part of which fluctuates in respect
of currency variations and internal price indexes.
Uncertain validity of the procedure to transfer cost variations to the producers purchase
costs variations (pass through) as well as undefined tax changes.
Increase in immobilized work capital, as in a frame of price distortion and inflation it
is impossible to keep on applying efficiency techniques to the operating input supply
management.
Destination of funds from fixed asset depreciation to support the operating costs
structure, consequently reducing the level of investments in order to make it consistent with
the generation of their own funds, given the impossibility of obtaining financing from outside
sources at reasonable terms and rates.
Imbalance between income in local currency and the financial compromise and financial
liabilities mostly in foreign currency which results in the impossibility of honouring capital
payments and interest services, placing the company in default with significant
consequences.
Impossibility of re-negotiating the existing debts with the financial creditors in view of the
lack of tariff definition.
3.6 Immediate and Expected Consequences:

Persisting in the economic measures mentioned could have the following negative results:
Suspension of the investment plans and a negative impact of leverage, which those
investments have on the general economics of the country.
Deterioration of the service quality and suspension of the incorporation of new technology as
well as modernization of the sector.
Reduction of personnel working for service providers, contractors, sub-contractors and
suppliers in this industry.
Loss of heart and running the undisputable risk that international investors, service providers,
operators or institutional investors could withdraw from the project.
General request made by international investors in the sector before international courts or
bodies of arbitration (ciadi case) for the application of international treaties signed by the
argentine republic for the defence and protection of foreign investors.
Marked loss of image of Argentina before the international community of investors on
account of non-compliance accusations.
As a final conclusion to this chapter, we can avow that the tariff adjustments, which are a product
of an arbitrary and discriminating price freezing on the sector as well as the unilateral suspension
decided by government regulations about the application of contractual adjustment clauses which
had been legally anticipated, place the Natural Gas Transport and Distribution companies in a
situation that involves certain danger of collapse of the system.
Thus, the systems captive customers are the ones which will have to bear the heaviest
consequences.
In view of the above, the Transport and Distribution companies are aware of the need to carry
out creative alternatives so as to adapt the tariffs to be applied to the poorest sectors but within a
framework of re-adaptation of high-consumption residential and industrial tariffs.
Southern Cone Natural Gas Production vs Demand
Brasil
80/100 Mcm/d
Bolivia Reserves: 503 Bcm

Noroeste: 153.4 Bcm
North Chile
8 Mcm/d
Chile - Santiago
12/15 Mcm/d
Concepcin
3 Mcm/d
Neuquina
Reserves: 358 Bcm
Campos y Santos
Reservas: 230 Bcm
Uruguay
4/5 Mcm/d
Argentine Market
100/120 Mcm/d
Golfo San Jorge
Reserves: 17.1 Bcm
Austral
Reserves: 158 Bcm
Natural Gas Basin

Main Demand
4.0 COUNTRY CASE: BRAZIL

The absence of a Brazilian gas law has created uncertainty and insecurity in the
investment. In the absence of a definitive legislative regime, the fostering of a
positive relationship with the regulator has become even more business critical for
the gas distribution concessionaires. The risk of unilateral regulatory reform on the
scale witnessed in neighbouring Argentina is a continuing concern
The scale of the planned development of gas-fired thermoelectric power
infrastructure to reduce the risk of future energy shortages within Brazil has not, to
date, materialised. These new plants were anticipated to provide anchor loads to
develop the natural gas infrastructure. The lack of regulatory and political clarity has
conspired to inhibit the diversification of the Brazilian power sector. This in turn has
impacted the commerciality of gas transmission & distribution companies, distorted
their business plans, reduced forecast revenues and hindered market development
across all sectors.
The delays in the thermoelectric power program and the consequent latent concerns
about the quality and reliability of grid electricity has acted as a stimulus to cogeneration.
The dominance of major, integrated energy companies in the Brazilian market place
has allowed them to support horizontally and vertically across respective energy
markets and to wield considerable political influence.
The absence of a significant gas culture within the Brazilian market has manifested
itself into a dearth of gas related skills to support market growth. The stimulation of
tertiary gas based services appliance manufacturers, retailers, contractors, sales
personnel, and technical consultants has had to be pursued complementary to the
physical growth of the gas network. The gas distribution concessionaires need to
encourage the development of sustainable and viable national gas industrysupporting services.
Securing debt financing to grow the gas business has encountered a lack of
sophistication in the Brazilian financial sector. Generally Brazilian financing is,
relative to the global economy, expensive and short term. A robust, balanced
financial plan is business critical in the Latin American market and the forging of cost
effective, secure hedging against continued volatility in the foreign exchange markets
is essential.
Marketing strategies used successfully in the operation of gas businesses overseas,
and even in Latin America, do not necessarily transfer seamlessly into Brazil.
Recognising the uniqueness of the market, having the appropriate marketing tools
and acquiring energy market data are essential in realising full market potential.
Early investment in the acquisition of comprehensive market intelligence is critical to
the creation of a successful marketing strategy.
The elevation of technical and health and safety standards has increased unit costs
of construction and operation. However, these improvements have enhanced the
reputation of the concessionaires and the gas industry as a whole; and fostered a
positive working environment, in which company and contract personnel feel valued.
This has filtered through to customers and has served to propagate a positive image
of both the fuel and the companies.
The environmental benefits of Natural Gas should continue to be promoted and
lobbying of the government and state can be rewarded with incentive for the usage
of natural gas. This will support natural gas market development across all sectors,
but may have added significant in the emerging markets of natural gas vehicles and
co-generation.
4.1 Background
4.1.1 The Brazilian Energy Market
Brazil has one of the largest energy markets in the world and by far the largest in South
America, with the Brazilian Total Primary Energy Consumption (TPEC) being twice as large as
the aggregated TPEC of Argentina, Bolivia, Chile, Paraguay and Uruguay.
The 1990s witnessed a significant growth in demand with a 48.2% increase in energy
consumption to an annual demand of 177.1 MTOE (million tonnes of oil equivalent) in 1999.
This rate of increase was one of the highest in the world and in material terms only exceeded
by the United States and some of the Asian Tiger Economies.
The risk associated with the countrys continuing dependence on hydroelectric power
generation was exposed during 2001, when Brazil experienced a severe energy crisis. A
power-rationing programme was enforced from June 2001 through to March 2002 and was
successful in that it averted rolling blackouts, but inevitably seriously hindered economic
confidence and advancement. The principal cause was indisputably severe droughts that
depleted the nations reservoirs; however, other significant factors including inadequate long
term planning, lack of investment, the indecision and uncertainty bred by the energy sector
privatisation process also conspired to bring about the crisis. The advent of this power shortage
was ill timed, coinciding as it did with the global economic slow down and the well documented
problems within its Latin neighbour, Argentina.
Natural
Gas
5%
Oil
48%
Coal
7%
Hydro
Electric
39%
Nuclear
1%
Energy Share of TPEC in 2000
However,
Brazil
has
fared
significantly better than all its Latin
neighbours and despite negative
economic growth in the first quarter
of 2002, has shown recent
promising signs of recovery. The
outlook for energy growth in Brazil is
extremely positive over the medium
to long term a 2002 study by the
American
Energy
Information
Administration (EIA) is forecasting,
even on a low growth case basis, a
TPEC growth of 50% over the next
20 years to 300 MTOE.
With current demand matching
existing installed energy capacity
and a further 130 MTOE required
over the next two decades, Brazil
continues to offer an inviting
challenge
and
an
exciting
opportunity for energy companies.
4.1.2 Natural Gas in Brazil

Natural Gas has, to date, played only a minor role in meeting the energy requirements of
the country, but has steadily grown in importance over the last decade and in 2000 accounted
for 4.6% of the TPEC1. This paucity in market share is due to the relatively modest indigenous
natural gas resources (reserves in 2000 were estimated at 228.7 billion cubic metres) and the
fact that more attractive alternatives existed to meet the developing needs of the country.
The role of natural gas will become increasingly more prominent in the future, driven by:
The pursuit of a more balanced energy supply portfolio to offset the risk of future
energy shortages
The construction of pipeline links to the huge gas fields of Bolivia.
The environmental advantages offered by natural gas
Vale de Paraiba
Gas from Santos Basin
Gas from Bolivia
Comgs -
C
oncessi
Interior
on Area
Gas from
Campos
Basin
4.1.3 So Paulo & Comgs

The South Eastern state of So Paulo is the most affluent and industrialised state within Brazil.
It has been nicknamed the Locomotive State as it is acknowledged to be the driving force of
the country. It is an attractive proposition for investment, especially for energy companies. So
Paulo generates 35% of the Brazilian GDP (US$94 billion in 1998), has a population exceeding
37 million and is home to some of the Countrys largest industrial energy consumers.
So Paulo Metropolitan area

(Population -16 million)
The history of Companhia de Gs de So Paulo (Comgs) began officially in 1872 with the
granting of a concession to provide public lighting in the city of So Paulo.
Over the next 127 years, through numerous changes of name and ownership, the Company
evolved into a state owned natural gas distribution company concentrated within the
metropolitan area of the city supplying 300,000 customers with 1.2 bcm (billion cubic metres) of
gas per annum.
In 1999, in line with the Brazilian Governments privatisation strategy, Comgs was offered for
sale as part of a concession whose boundaries encompassed the metropolitan area of So
Paulo, the Valley of Paraba, Baixada Santista and the Campinas region. One of three
concession areas in So Paulo state, it is by far the largest with 65% of the state population
and 80% of the GDP. The potential and scale of the opportunity appealed to many international
oil and gas companies, but it was the combination of BG (formerly British Gas) and Shell that
emerged as the successful bidders.
On May 31st, 1999 at the Governors Palace the concession agreement was signed and a new
era dawned for both the Company and for natural gas in Brazil.
4.2 Constraints
The competitive nature of the bid recognised the huge potential within the concession, but
equally the failure of the existing company to tap into this potential. As part of the due diligence
process and during the take over phase, a critical task was the identification of effective ways to
remove the barriers to growth which had precipitated Comgas stagnation since the 70s. There were
numerous and complex reasons why the market growth had plateaued, including the relative
strengths of competing fuels at various stages in the Companys history, but at the time of the public
offering, three principal inhibitors were recognised:
Supply Constraint
Cash Constraint
Company Culture
4.2.1 Supply Constraint

Ambitions of major gas market development in the past have been limited by the
availability of the natural resource. Although So Paulo is sited close to the largest indigenous
gas fields in the Campos and Santos basins, their development, which remained in the hands
of the federally controlled Petroleo Brasileiro AS (Petrobrs), has been conservatively pursued
in favour of oil exploitation. The majority of national gas production continues to be exploited
as associated gas, as the importance of oil remains pre-eminent.
The dynamics in the region have been altered by the discovery of huge gas fields in Bolivia
and the desire of major oil & gas companies to exploit these resources and export gas to the
most attractive market. The first pipeline to connect Brazil to these fields was the 3,000 km long
Bolivia Brazil pipeline, commissioned in July 1999 and linking Santa Cruz in Bolivia to So
Paulo. The completed pipeline has an initial delivery capacity capable of shipping 6.2 billion
cubic metres per annum (17mmcmd) and this is scheduled to be increased in 2003 to 10.9
billion cubic metres per annum. Petrobrs have a controlling interest in the pipeline and Shell
and BG have shareholdings, together with significant upstream interests in the Bolivian gas
fields.
This has invigorated the gas industry in Brazil and stimulated renewed interest in natural
gas. Exploration activity in the hydrocarbon rich, but as yet under explored, Atlantic Ocean off
the South Eastern coast of Brazil has increased and large discoveries in this area in June 2001
and April 2002 have positive implications for the future of Brazilian gas production.
The prospect of long-term secure and plentiful resources has enabled gas distributors such as
Comgs to broaden the horizons of their market development ambitions. The balance between
national and imported gas resources will be important to the overall competitiveness of natural
gas, as the transportation component in the Bolivian gas is significant in the unit commodity
cost.
4.2.2 Cash Constraint

As with many of the Brazilian utilities, Comgs had suffered from under investment and
with an ageing infrastructure the focus was on maintaining the existing network rather than
seeking new growth opportunities.
In 1995, the Brazilian government commenced a privatisation programme (which was one
of the largest ever carried out anywhere), but during this process federal and state utility
investment dwindled.
The advent of new owners in BG and Shell paved the way for access to capital. Investment
was conditional as part of the concession agreement, but to realise the undoubted potential in
the Company and to meet corporate strategic gas chain objectives, significant additional
investment was essential.
The international standing and the credit worthiness of the principal shareholders has
allowed Comgs to secure favourable debt financing from the European Investment Bank (EIB)
and Banco Nacional de Desenvolvimento Econmico e Social (BNDES) - The National Bank of
Economic and Social Development.
4.2.3 Company Culture

A successful transition from an archetypal state owned utility to a modern, progressive
private company was a fundamental prerequisite to meeting the aspirations of the new
shareholders and realising the potential of the company and its market.
The entire corporate structure of the company was re-engineered introducing streamlined
work processes, improved planning and cost control procedures, cohesive market development
programmes, optimised manning (in terms of numbers, skills and employment type) together
with an over-arching governance framework. Inevitably this transformation resulted in a large
turnover of staff and a reskilling of the existing workforce to meet the future direction of the
company. Wherever possible Comgs has drawn resources from the local market, but
inevitably recruitment of experienced gas industry personnel from outside Brazil has been
necessary and to this end Comgs has leveraged the advantages afforded to it by its principal
shareholders.
BG and Shell are two top performing international oil and gas companies with vast
experience in operating gas businesses across the world. They have brought not only financial
acumen, but also technical, business and marketing skills together with previous experience in
buying into and successfully developing existing gas enterprises. The new shareholders have
high expectations with respect to the performance and returns from their investment in
Comgs.
4.3 Regulation
Comgs operates under the terms of the concession agreement and under the auspices of the
state regulator, Comisso de Servios Pblicos de Energia (CSPE).
The Regulator provides a framework in which Comgs pursues the Brownfield development in
metropolitan So Paulo, the semi Greenfield development in the Vale de Paraba and the Greenfield
development of the Interior.
The basic features of this framework include:
The granting of a 30-year concession with a 20 year extension option.
30-year residential and commercial customer commodity and transportation exclusivity.
12-year exclusivity on commodity for industrial customers.
Revenue control through a price cap mechanism with a review every 5 years.
Annual inflation adjustment of the distribution margin.
Pass through of the cost of gas directly to the end users.
The establishment of a current (suspense) account to absorb and control the

fluctuating cost of gas and the tariff adjustment lag. This mechanism ensures that pass
through is managed equitably and any inflation and interest payments are applied
appropriately.
An RPI X review formula based on the return from asset to incite continually
improving operational performance.
A major strategic challenge is anticipating and shaping the future of this regulatory framework.
Although the pass through arrangements apply across all market segments, the difference in margins
is substantial. This regime, however, does constitute a relatively simplified basis on which to form a
marketing strategy and allows the company to prioritise market sector development based on the
relationship between unit margin and volume.
% Volumes Sold by Market
Sector 2002
10,9%
2,8% 2,4%
3,5%
% Gross Margin by Market

Sector 2002
0,7%
1,9%
6,6%
31,5%
73,6%
Residential
Commercial
11,1%
53%
1,8%
NGV
Industrial
Co-Gen
IPP
It has been known from the outset that the second regulatory cycle (2004-2009) would impose a
very different tariff structure. From 2004, the tariffs will be based on connection cost, commodity
charges and capacity charges for all market segments. Tariffs will be set from a single parameter
maximum average margin across all sectors. This will allow the company to set tariffs appropriate to
the competitive market conditions prevailing for each sector but must demonstrate to the Regulator
that these costs are non-discriminatory and cost reflective. Comgs must transparently show the true
cost of providing gas service to each category of end user. This will impose a requirement to
determine fully loaded unit costs for each supply type and this will demand strict control and
monitoring of cost and activity.
Following the implementation of SAP and cost modelling techniques that have nurtured a greater
understanding of cost components and overall cost control, Comgs is well placed to meet the new
regulatory demands. This will allow Comgs to redefine its marketing strategy and adopt a more
sophisticated analysis of true gross margins for each market segment (rather than gross margins
which reflect only the cost of gas). The outcome will be a redefining of market priorities and a change
in the margins in each sector appropriate to the competition.
Another example of the uncertainty and impact regulation will have on market strategy may be
found in the loss of exclusivity clause, whereby Comgs will lose exclusive right of supply to large
customers from 2011. The opening up of third party access and the uncertainty of customer retention
need to be reflected in net present value project evaluations of new capital investment decisions.
The Brazilian government and by implication the Regulator are keen to support the development of
the gas industry and relations between the company and Regulator have been positive and
encouraging; but it is an aspect that needs to be managed as part of the overall market development
strategy.
4.4 The residential sector

4.4.1 Background
At the end of 2002, Comgs had approximately 370,000 residential customers, all within
Metropolitan So Paulo. Traditionally gas utilisation is restricted to cooking loads and as a
consequence the loads are comparatively low averaging 230 m3 per annum. However,
because of the tariff structure the market segment is extremely important to the company. The
segment accounts for only 2.8% of the volume but provides 31.5% of the gross margin. There
is extremely strong competition in the residential market segment from liquid petroleum gas
(LPG) and electricity.
There are 6 million residential electricity customers within the boundaries of the concession
area and it has been postulated that the terminal potential natural gas market could be as high
as 2 million residential clients.
4.4.2 Skills
One of the impediments to developing this market for natural gas has been the lack of
skills in the sector from sales personnel, to installers through to retailers. Comgs has
encouraged professional accreditation and training through its membership of ABEGS
(Associao Brasileira das Empresas Distribuidores de Gs Canalizado) and its relationship
with training bodies such as SENAI (Servio Nacional de Aprendizagem Industrial). The
scarcity of qualified, dedicated natural gas installers has manifested itself in additional costs of
supervision and quality control. The impact of any high profile natural gas related incident due
to faulty workmanship or installation malpractice could have serious consequences for what is
essentially a fledgling industry. To assist in managing this risk, Comgs has employed external
quality control companies to independently verify and assess the performance of all contractors
involved in this activity and to support in house managers.
4.4.3 Capacity
The cost of connection is an impediment to exploiting this sector. To make as much gas
available to this sector (and other sectors) as economically as possible, Comgs have reengineered traditional approaches to network design and construction.
The terms of the Concession Agreement oblige Comgs to replace 250 km of cast iron main in
the first 5 years and a further 150 km in years 6 10. Taking advantage of the flexibility in the
selection of the mains for replacement, but still adhering to the principle of risk reduction,
Comgs have implemented a strategic mains replacement process, whereby judicious
selection of mains has allowed the progressive elevation of distribution pressures from the
traditional operating pressures of 25mb to new operating pressures of 4 bar. This has enabled
mains to be replaced at a lower cost permitting the insertion of smaller diameter polyethylene
mains inside the existing cast iron mains as opposed to employing more costly open cut
installation methods. In addition, the pressure elevation has significantly increased network
capacity in the urbanised areas where the cast iron mains predominate, paving the way for
greater utilisation and facilitating co-generation opportunities. The capacity increases have
been achieved at incremental cost and are significant; for example a 63mm polyethylene main
operating at 4 bar has a capacity over 40 times as great as that of 4 cast iron main operating
at 25 mbar (into which it could be inserted).
A large proportion of the residential housing is high rise and from the early 1970s all new
constructions have been compelled to have gas infrastructure installed, irrespective of whether
the properties were initially supplied with gas or not. Penetration of this market has been
impeded by some of the installations being inadequately sized for typical natural gas delivery
pressures (25 millibar). LPG has the advantage of higher delivery pressures. A study is
currently underway to evaluate the feasibility and assess the safety implications of using
elevated natural gas delivery pressures (75 -100 mbar) in high-rise buildings. Dependent on the
outcomes of this study, another 1 million residential premises could become viable customers.
4.4.4 Displacing LPG

The growth of the residential natural gas market is partly dependent on challenging the
LPG market position. LPG, assisted by continuing but diminishing governmental subsidies,
currently has the advantage of a lower commodity price, but the marketing message from
Comgs has been centred on safety and convenience. As natural gas is unfamiliar to much of
the population it is important to ensure that the safer fuel message is communicated
successfully. This theme plays a pivotal role in selling gas to condominiums.
In the higher social class condominiums, LPG is supplied in bulk, stored below ground in
tanks and distributed to individual apartments through risers and laterals. Individual clients pay
their respective fuel costs through the condominium charges. The Comgs marketing message
targets the respective safety performance of both fuels, the lower distributed pressure of
natural gas, the dangers inherent during the LPG filling process and the space taken up by the
bulk tanks and the hazard that these tanks represent. Even with respect to commodity costs,
natural gas has a positive message each apartment will only pay for their own use and not
subsidise others. In the case of late or default payments, with LPG these costs are passed
through to all the customers in the condominium, whereas with natural gas the consumer is
protected from these pass through costs (effectively Comgs takes on the risk). The
combination of the safety message and fair cost apportionment has been well received and
natural gas continues to displace LPG in these markets, even in the face of higher (apparent)
unit costs.
In lower social class condominiums, individual apartments have their own bottled LPG
supply and the capture of this market is more difficult both technically and commercially. The
benefit of natural gas safety remains equally valid for this market and the convenience of not
having to renew and replace bottles of LPG in favour of continuous supply is attractive.
The more modern blocks may have gas infrastructure installed (although not in use);
Comgs experience to date has shown that these riser systems are no longer gas tight and are
often unsuitable for adoption. The cost of installing new riser systems in these circumstances is
often prohibitive and consequently penetration of this sector has been difficult., Through its
shareholders (principally BG) and via its own efforts, Comgs is evaluating innovative riser
repair & renovation techniques. If a technology can be identified that can cost effectively
resurrect the integrity of the installed riser systems, then the conversion and sales potential in
this area will be greatly enhanced.
4.4.5 Gas Water Heater Program

There is very little potential for space heating, but an utilisation opportunity that remains
under-exploited is that of water heating. A concerted effort has been made to introduce natural
gas water heating as the first choice amongst consumers. This initiative has been targeted at
both new and existing customers with the key message to consumers that gas water heating
provides improved water heating performance at lower operating costs than electricity. This
initiative has been supported by the technical and marketing expertise within BG, who have
used their experience in the UK and their relationships with appliance suppliers to source
competitively priced appliances. Comgs has in turn supported external installers and help
foster the secondary service market to support retailing and installation activities.
4.4.6 Targeting New Residential Housing Sector

Comgs has had significant success in the new residential housing sector and has
increased penetration to over 80% (with the water heaters achieving penetration rates in
excess of 50%). The new residential market also affords the opportunity to supply gas heating
for swimming pools this is an attractive proposition for developers keen to entice clients in a
highly competitive housing market.
Improved performance in this sector has been achieved by deploying 2-3 marketing
development managers to work full time with the major constructors in So Paulo.
4.4.7 Expanding to other Cities

The residential customer base has, to date, been confined to metropolitan So Paulo but
substantial network expansion into the Interior and the Vale of Paraba anchored by industrial
loads has placed infrastructure adjacent to major population centres. Campinas for example,
with a population in excess of 2.5 million is one of the fastest growing cities in South America
with a vibrant economy and one of the highest GDPs per capita in Brazil.
To successfully develop these areas, it will be vital to leverage the experience, skills and
knowledge harvested over the last few years. Barriers such as customer intransigence and
unsuitable (for natural gas) building infrastructure will undoubtedly feature equally prominently
in these Greenfield markets.
4.5 The commercial sector

At the end of 2002, this sector comprised of over 7,600 supply points and accounted for 2.4% of
the sales volume but over 11% of the gross margin for the company. There is tremendous potential in
this market because of the favourable tariff and the fact that there are 50,000 potential customers in
the Metropolitan So Paulo area alone.
This segment of the energy market place is highly price sensitive but also places some value on
convenience and reliability. The smaller commercial enterprises share similar characteristics to those
exhibited by the residential customers whereas the larger customers tend to share the characteristics
displayed by industrial customers.
This is a high growth sector but also extremely competitive and to date utilisation has been based
upon traditional uses. Market segmentation and analysis has been completed to identify high
utilisation customers and high growth segments.
This has evolved into a targeted market plan for this sector, enabling gas sales packages to be
constructed to meet specific customer aspirations, e.g. the displacement of electric heating in
bakeries. Resources can be concentrated on meeting the needs of an individual group of consumers
with the assurance that the sales packages, the technical know how and the hardware are all
available and proven.
To stimulate this market, Comgs have developed a take, pay and transfer scheme. Comgs
have fostered relationships with commercial gas appliance manufacturers to identify best-fit
appliances /suppliers for specific areas of the commercial market. Leveraging these relationships,
Comgs have targeted particular segments of the market where natural gas has demonstrable
advantages over competing fuels. Comgs will then procure the equipment on behalf of the customer,
install and convert and the customer will sign a take or pay contract that will guarantee Comgs a
monthly return that will offset the equipment, installation and gas costs and include a small margin.
The term of these contracts is typically 5 years, after which time the equipment reverts to the clients
ownership.
This has been a successful approach and enterprises with good stability such as bakeries have
been targeted initially. There remains plenty of scope to broaden the customer type, appliances and
flexibility of the contract in the future.
4.6 The industrial sector

4.6.1 Greenfield Network Expansion
The industries of So Paulo state have underpinned the major network expansion projects
to date and essentially provided the platform for the development of the business. This sector
represents substantial shareholder investment and the anticipated volume growth has been
reflected in the terms and conditions of newly negotiated upstream gas supply contracts. Any
failings to meet volume growth in this sector will be reflected, not only in lower NPV project
returns, but also in exposure to sizeable take or pay liabilities.
Driven in part by environmental pressures, there has been, over the last decade, a
migration of larger industries away from the city of So Paulo to more favourable sites, (in
terms of land cost and space), in the Interior and the Vale of Paraba. The Bolivia-Brazil
pipeline dissects the Interior and a Petrobras transmission pipeline passes through the Vale of
Paraba providing a backbone for high pressure expansion. There has been a successful
expansion into the Interior in the face of competition from heavy fuel oils, and industrial gas
volumes outside of the So Paulo metropolitan area now exceed 0.55 billion cubic metres per
annum.
The growth of the high pressure gas network has presented one of the greatest technical
challenges for the newly privatised company. Unprecedented levels of high pressure steel gas
pipeline construction demanded internationally recognised standards of technical, HS&E and
quality management. As a company, industry and a country unfamiliar to this intensity of
activity, external support of experienced engineers, suppliers, manufacturers and managers
was vital. Comgs have been able to tap into the vast commercial and technical acumen of its
shareholders through mechanisms such as operating and technical support agreements. These
allow Comgs to access technical and managerial support and to achieve fast track knowledge
enablement of its engineers, managers and contractors. In the absence of such support, the
gestation period for this massive infrastructure development would have been significantly
greater.
4.6.2 So Paulo Industrial Market

Comgs supplies almost 700 industrial customers with more than 2.1 billion cubic metres of
gas per annum (73% of the total sales volume in 2002) and there is an upside potential within
the concession area for 4,000 industrial customers with an aggregated gas load of 5.3 billion
cubic metres per annum.
This sector has high expectations towards gas with respect to quality, reliability and
especially price. The industrial customer is generally well informed with an appreciation of the
energy market, regulation and the monopoly represented by the concession.
The major energy consumers by segment in So Paulo state are the food & beverage industry,
which accounts for 35% of the total state industrial energy consumption, Iron & Steel (12.6%),
Pulp & Paper (10.7%), Chemicals (10.6%) and Non Ferrous metal industries(9.3%).
4.6.3 Displacing Existing Fuels

There is fierce competition in this market segment from heavy fuel oils, which are able to
wield significant competitive advantage through comparatively lower commodity prices.
Historically, Brazilian refineries were established on imported light crude but as these
feedstocks have been supplanted by heavier crude (including indigenous production) the
output of heavy fuel oils (HFO) has risen. The current market place is saturated and
consequently margins for the oil companies are extremely small or even non-existent and this
is reflected in the market price. A major modernisation programme for the refineries is
underway to introduce secondary refining processes to extract greater proportions of higher
value distillate products. This will incidentally reduce the HFO production and permit market
prices to normalise. The impact of this modernisation process will only become apparent in 5
10 years and in the meantime natural gas will continue to face stiff competition.
The largest industrial segment energy load - the food and beverage industry - will not
necessarily translate into the largest natural gas load. The sugar and alcohol industries
continue to use organic sugar cane waste as their primary fuel source (equivalent to 4.4 MTOE
in 2000) and this provides a very inexpensive, readily available, functional (although low
quality), fuel source. The displacement of these fuels by natural gas is likely to be very limited
as premium fuel quality and positive environmental benefits are more than offset by the higher
commodity price
Discounting the bias introduced by sugar cane as a fuel source with the acceptance that its
market position is virtually unchallengeable, the major industrial segments in the competitive
energy market are iron & steel (17.3%), pulp & paper (14.7%), chemicals (14.6%), non-ferrous
metals (12.6%) and the food & beverage industry (10.7%). Other competing fuels for the
industrial market include liquefied petroleum gases, diesel and coke. The use of imported, low
quality coke from the United States has grown in significance over recent years and has
displaced HFO in the cement industry in particular, impacting a target area for Comgs in the
process.
Textiles
Bricks &
Ceramics
Other
Metals
10
chemicals
15
Paper
20
Iron &
Steel
25
Food &
Beverage
30
A number of market studies have been carried out to identify the factors that will influence a
decision by an end user to substitute his
primary energy source. The dominating
NATURAL GAS ENERGY MARKET
factor for each individual enterprise will be
SHARE (%) BY INDUSTRIAL SECTOR
dependent on the industry type, its location
and the competitivity of its market. The
principle driver may be purely economic
(cost of the energy commodity) in energy
intensive industries or may be more gas
technology
based
(where
energy
substitution affords reduced expenditure on
personnel and raw materials); or security of
supply may be critical for industries where
energy cost is relatively low with respect to
production cost, but continuity of supply is
all-important.
These studies have provided a basis for developing action plans to secure contracts and
encourage conversion from other fuels and allowed Comgs to develop packages tailored to
meet the aspirations of particular customer groups. One of the challenges facing full market
development of this sector is the dearth of gas utilisation skills, knowledge, equipment in
country and the cost of importing these technologies. In the case of small-scale co-generation
for which this is equally true, the way forward has been to forge an alliance with a manufacturer
and develop a joint venture company. This approach facilitates quicker access to the market
but maintains the commercial focus on building the load. The prospect of joint ventures in a
wider industrial context is under constant review.
The market approach has not been based solely on the commercialisation of natural gas as a
commodity but as a fuel to facilitate the modification and enhancement of industrial processes
that realise indirect benefits in the cost of production; as well as environmental and process
control benefits. Recognising that industrial customers may have difficulties in accessing
financing for conversion, a fully flexible, customer specific approach has been adopted and
markets have been secured by offering the optimum solution for a particular customer, whether
this is discounted commodity prices, direct investment in equipment or assistance in financing.
Trade associations and industrial federations have been approached to highlight the
advantages and also to assess interest and co-develop sectorial pricing policies. Individual
potential high yield customers have been offered free energy use audits and support has been
offered to tertiary gas industry service companies and organisations.
The widening of the industrial load base is critical to reducing risk in the business. At the
beginning of 2002, the top ten customers consumed over 32% of the entire industrial volume.
This concentration of volumes has increased the companys exposure to specific market
fluctuations.
The high pressure Greenfield network expansion programme has been founded to date on
the industrial customer base. Residential and commercial loads have generally been excluded
from the project evaluations on the basis that these marginal loads would not in themselves
sway the project economics. However, once the major transmission infrastructure is in place, a
cohesive and structured expansion plan to serve these markets is being developed to leverage
maximum value from the investment.
4.7. Natural gas vehicles

So Paulo has experienced increasing air pollution problems as a consequence of rapid urban
development and increased motor vehicle emissions. A 1999 study determined that 10% of the citys
pollution derived from industry and 90% was generated by motor vehicles. Environment has emerged
as a more potent political issue over the last decade, although paling in significance when compared
to the social problems of poverty, homelessness, crime, health and education. So Paulo has
followed other major cities such as Santiago and Mexico City by introducing vehicle use restrictions,
where each vehicle must remain idle during certain parts of a week.
Although Brazil is classified as a developing country under the Kyoto protocol and therefore not
required to reduce carbon emissions, there is state and federal support for environmentally friendly
energy solutions. Against this background, the environmental benefits that result from the conversion
of vehicles to natural gas are welcomed. Natural gas powered vehicles offer the promise of higher
efficiency, less carbon dioxide emission and fewer nitrous and sulphurous particulates. A favourable
tax regime in comparison to competitive vehicular fuels is somewhat offset by relatively small
permitted margins, however, the growth in natural gas vehicle (NGV) demand to date has outstripped
internal projections, and sales volumes in this sector now exceed the aggregated combined sales
volumes for residential and commercial customers.
This market sector will become increasingly more important to Comgs in the second regulatory
cycle with the prospect of greater margins and the sizeable volumes supporting the companys take
or pay commitments.
The current tariff has resulted in the NGV market price being very aggressively priced the cost
of gas fuelled car travel per kilometre being approximately 30% of that for petroleum. Fleet targeting
has been an obvious and successful tactic and over 90% of all cars converted to date have been
taxis. The main areas of resistance revolve around the cost of converting the vehicles, the perceived
safety implications and the loss of space within the vehicle itself. Comgs plays an active role in
promoting the safety of this form of transport. Following the regulatory review in 2004, consideration
may be given to stimulating the market further by subsidising the conversion costs of its own or
partner garages funded from higher margins from the gas sales.
Initially, this market sector was catered for from within the business, with Comgs seeking clients
and attempting to energise the market. The acquisition and provision of gas compression equipment
is a key component to the introduction of compressed natural gas on the forecourt. This was
facilitated by Comgs on behalf of its clients, but it was recognised that this was incidental rather than
core business. As a result, NGV compression services were effectively spun off and a 100% BG
subsidiary Iqara assumed responsibility of attracting independent and franchised fuel outlets to
participate in this sector. Comgs benefits from the additional gas volumes sold, while Iqara are a
stand alone commercially successful entity focused on expanding the NGV market. Iqara are one of a
number of participants in the market place and have contributed to a doubling of NGV outlets in the
concession area from 67 to 140 in 2002.
The development of this market has imposed additional technical challenges for the company
and pipeline construction, quality control, risk assessment and management improvements have
been essential to ensure that NGV stations are supplied safely with 7 & 17 bar gas in urban
environments. The market has been enhanced by Comgs employing holistic market identification
strategies to transform sub-economic NGV projects into commercially viable projects by identifying
other sectors with complementary loads that could take advantage of any proposed network
extension.
4.8 Co-generation
The emergent market of co-generation is prospectively one of the most important sectors for
Comgs and one that is particularly suited to the So Paulo market place. It is a sector that shares
some common ground with NGV in that it possesses high volume potential but under the current
tariffs the margins are relatively small. One marked difference, however, is the cost of gas to this
market sector the NGV sector has been stimulated by the large differential between compressed
natural gas and conventional fuels and this has been reinforced by the allocation of cheaper National
Gas by the Brazilian government to this sector. Co-generation, although offering similar
environmental advantages, has not received the same encouragement and its commodity gas price,
including gas from Bolivia is 35 50% higher than that for NGV.
The major stimuli for investment in co-generation are the unreliability of the energy grid combined
with the general poor quality of the electrical supplies, which exposes commercial and industrial
customers to outages, voltage drops and impacts production and efficiency. Although many end
users have invested in standby or peak shaving private generation to reinforce the security of their
supplies, the additional operating and maintenance costs are undesirable.
Natural gas powered co-generation faces substantial competition from grid electricity in the
commercial and industrial markets; this is reflective of the influence of hydroelectric generation but
also significantly the crosssubsidies that exist in the electricity market (commercial and industrial
customers are effectively subsidised by the residential sector).
Continuing deregulation of the electricity sector should assist in diminishing these cross subsidies
and the competitiveness of natural gas in the medium term is anticipated to rise. Electricity
commodity prices are expected to gradually rise as cross subsidies are eliminated, while the
increased capacity in the Brazil Bolivia pipeline and more national gas production will help in reduce
the unit commodity prices for natural gas.
In the existing market conditions, natural gas co-generation has a small competitive advantage in
terms of R$/kWh in a relatively small sub-sector approximating to the larger commercial and smaller
industrial end users. The identification of this niche market has spawned a business opportunity that
has manifested itself as a joint venture company.
BG has agreed to fund the development of a small number of co-generation units to establish the
viability of the approach. This initiative has been undertaken with a UK based power generation
solutions company that manufactures 1.3-MW co-generation units that can conceivably be banked to
serve up to 6 MW of electrical demand (beyond this the economics would favour the construction of
purpose built co-generation plant). The nascent company has attracted plenty of interest and
revenues from energy sales covers both commodity costs and the capital costs of the plant
infrastructure. In commercial environments the customer purchases the gas under a tolling
arrangement but in industrial projects the joint venture company is the gas purchaser this allows tax
efficiency with respect to sales tax and maintains competitiveness in both sectors.
Power generation through co-generation transcends some of the problems that have been
encountered by the conventional power markets. The thermal generation program has encountered
obstacles in the lack of regulatory clarity, the poor creditworthiness of utility companies and the
uncertainty over whether or not sustained demand will persist over the lifetime of the asset. Cogeneration is more manageable in that it is sponsored by a substantial private enterprise, the loads
are predictable and committed, the funding requirements are much lower and a power purchase
agreement of 15 years is normally sufficient to guarantee returns on the investment.
The market in general would benefit from a greater differential in commodity price and will
undoubtedly be assisted with electricity price reforms. However, the environmental benefits should
continue to be promoted and Comgs has a key role in continuing to lobby the nations decision
makers. The allocation of less expensive gas, favourable tax treatment, preferential financial support
from government supported institutions and the Kyoto Protocols Clean Development Mechanism
(CDM) should all be pursued in the interests of the environment and the fledging natural gas market.
4.9 Power
The 2001 Energy crisis was the catalyst for the Brazilian governments Thermoelectric Priority
Program with the very ambitious target of increasing the installed electricity capacity by 25% on 2000
levels by 2005, mainly through the construction of natural gas fuelled power plants.
A long term strategy developed by Electrobrs (the national power generation holding company)
and the World Bank at the end of the 1990s identified that a mix of hydroelectric and thermoelectric
plants provided the optimum cost and supply solution to Brazils power requirements for the next 30
years. Gas fired plants have the advantage of lower capital costs and increase the proportion of
energy available for secondary markets. Hydroelectric plants are characterised by the installed
capacity being far in excess of the minimum guaranteed delivery capacity - as this will be set by the
lowest water levels in the reservoir. The hydro-thermal generation power mix allows a block of
secondary energy with low economic value to be converted to firm energy of a higher economic
value.
The commodity value of dispatched electricity from a thermoelectric plant is less than that for a
hydroelectric plant when the capital costs of construction are included in the evaluation. Additionally,
thermoelectric power stations can be sited near to the centres of demand and thereby reduce
transmission costs. The construction and operation of a thermoelectric power station is an
economically viable solution to meet new energy demand gas for power is competitive against new
hydroelectric alternatives but cannot compete with the existing hydroelectric plants.
Nonetheless, when hydroelectric availability is greater than market demand, this is preferentially
dispatched. Only during the periods where demand outstrips installed hydroelectric capacity, will
thermoelectric power plants be called upon.
Conventionally thermoelectric plants operate at high load factors but in the Brazilian context for a
large proportion of the year these plants will stand idle; but operate at full capacity during periods of
drought. To facilitate the development of the gas power market a flexible and unique energy trading
environment may need to be developed to allow both the power generator and the gas distributor to
operate commercially. With the power generators committed to paying pipeline capacity and gas
commodity charges irrespective of whether or not the plants are running, a secondary (industrial)
market could be created. This market would differ from the conventional interruptible contracts used
across World gas markets. These contracts do not conventionally include reserved pipeline capacity
within the gas price, however Brazil offers a novel opportunity for the secondary market to share this
charge with the power plants.
A possible contract scenario envisages the power plants being charged a small priority fee when
they are idle and the levying of a charge to the secondary consumers equal to the full firm gas price
less the priority fee. Power plants would be given priority in using the supply and industrial users
would be incentivised to accept interruption if required. When the power plants were running they
would incur the full firm cost of the gas supply and industrial customers would switch to an alternative
fuel. Comgs could work with the regulator and politicians to help develop this secondary market
which will in turn support the market, increase thermoelectric viability and maximise utilisation of the
gas infrastructure.
In the Comgs concession area, one new thermoelectric power station has been constructed
under the program at Interlagos, So Paulo City (the original Thermoelectric Priority Program
envisaged a total of 19 new plants within the Comgs concession area alone). Power plants are
usually seen as anchor loads in Greenfield developments but in the Brazilian context where tariffs are
regulated and the thermoelectric plants are competing against the economics of hydroelectric plants,
volumes and revenues are considerably diminished.
The plant was scheduled for operation by the end of 2002, but an easing of the power shortage
and the falling exchange rates have moderated the rate of progress. Although the physical
construction of both phases is substantially complete neither phase is currently in full commercial
operation. The principal reason for this being the readily available hydroelectric power which is
capable of meeting current levels of demand. Contractual concerns have also been encountered due
to the conflict between the imposition of ICMS (sales tax) on the Bolivian gas and the ICMS
exemption of power plants constructed under the Thermoelectric Priority Program.
Petrobrs is the major shareholder of the Piratininga plant at Interlagos and has effectively
underwritten the construction. Petrobrs is also the gas supplier and under the terms of the
concession, Comgs is obliged to buy the gas and then re-sell at the point of sale (this is an
extremely unusual obligation for a local distribution company under regulation). The upstream and
downstream counter parties are effectively identical and the back-to-back upstream and downstream
gas sales agreements are fully complementary in respect of take or pay, ship or pay and other key
terms and conditions. An important issue in negotiating the contracts was the recognition that the
potential risk to Comgs was vastly disproportionate to the gross margin. Mitigation needs to be built
into the terms and conditions of the contracts to limit the exposure failure to do so, could result in
Comgs being liable for very large damages in the event of failure of its network with the value of
these damages outstripping any margin.
4.10 The Comgs experience

Between privatisation in May 1999 to the end of 2002, annual sales volumes have increased
245% (from 1.2 to 2.95 bcm per annum) and the total number of customers across all sectors has
increased by 28% (from 295,000 to 378,500). These statistics represent significant market
development success and the company are rightfully proud of many of its achievements in So
Paulo. However, there have been numerous obstacles to overcome (none more so than the scale of
the economic down turn in Latin America) and some profound lessons learned.
4.10.1 Incumbent Energy Players

The dominance of major energy companies in the Brazilian market place has presented a
major challenge for a new entrant into the energy market . Competitive behaviour is inevitable
as Comgs endeavour to secure new markets and displace competing fuels. However, the
dominant position of large vertically integrated energy companies has allowed them tosupport
horizontally and vertically across respective energy markets and to wield considerable political
influence.
Comgs have employed a number of strategies to meet this challenge including fostering a
positive relationship with the Regulator, participating in industry related institutional forums and
lobbying the nations decision makers. Undertaking a detailed analysis of competitors profile,
strategies and business culture corporately and not just from a gas industry perspective has
been invaluable. This analysis has imparted an understanding of motives, drivers, prospects,
areas of weakness and even areas of potential co-operation. This has allowed future behaviour
of these enterprises to be more predictable and facilitated intuitive interface with competitors,
the Regulator and the Government.
4.10.2 Legal & Regulatory Framework

The absence of a Brazilian gas law has created some uncertainty and insecurity in the
investment. An overarching legal structure would formally set out the regulatory powers,
develop the concept of utility and establish the obligations, powers and rights of the industry
stakeholders. This has manifested itself in practical issues concerning rights of way, statutory
rights and from a consumers perspective the right to be supplied.
The relationship with the Regulator is all the more important in the absence of a legislative
framework and Comgs have made every effort to foster a positive atmosphere and engender
mutual respect and trust. Regular contact is maintained and the approach has been one of
positive engagement, professionalism, technical competence, transparency and the avoidance
of conflict. The current regulated environment lacks some clarity, especially with respect to the
new tariff structure and the loss of exclusivity in 2011. Comgs is working with the Regulator in
a constructive way to bring definition to the concession and with it reduce uncertainty and
business risk.
4.10.3 Licensing & Permitting Issues

The absence of statutory status has contributed to problems encountered in securing
permits and environmental licences for network expansion both inside and outside of
Metropolitan So Paulo. Severe delays in securing licences have impacted project phasing,
costs and the commissioning of new networks, especially in the first two years of the
concession. The problems were of a greater magnitude than was anticipated at the time of the
public offering. A major obstacle to securing the licences in a timely and expeditious manner is
that submissions must be made to the various local authorities in whose jurisdiction the
proposed gas infrastructure is to be installed. A major project can spawn as many as 50
separate licences, authorisations or permits. There is little consistency in the information, the
data, the format of submission, the detail or even in the timescales demanded by these
authorities.
Comgs have been diligent in capturing all the experience gained in obtaining these
licences and permits, so that repeat submissions can be made with a degree of certainty that
all the requirements of each specific authority will be met. The intricacies involved have
encouraged Comgs to contract a specialist third party to act on its behalf and secure the
necessary authorisations.
This has proven to be extremely beneficial and significant improvements have been made
to the entire process. This has enabled forward planning of projects to be carried out with a
greater degree of confidence and gas availability to be more accurately forecast.
4.10.4 Natural Gas Culture

The Brazilian economy has no significant history of natural gas in any market sector. This
has created a lack of gas related skills to support market growth. There is a dearth of gas
appliance manufacturers, retailers, installers, contractors, engineers, sales personnel and
managers. There is a pervading lack of understanding of natural gas, its applications and
advantages.
In developing the gas market, Comgs has simultaneously needed to energise the gas
industry. The need to inform and educate prospective clients is implicit, but the forging of
relationships with manufacturers has been important in extending the value proposition to the
customer. Growing the market is more than simply supplanting an alternative fuel but ensuring
that there is service and technology back up.
Comgs have actively encouraged external gas industry service providers to invest in and
extend their operations into Brazil. An example of this is the support afforded to feasibility
studies carried out by Advantica, a gas technology solutions company that evolved from the
research & development arm of British Gas. Comgs provided logistical, office and market
intelligence support to assist Advantica in determining the potential for establishing a new
business in Brazil.
Comgs has awarded a period-type contract with a Brazilian Company that is backed and
supported by established European gas contractors. The work force is Brazilian but the
management, technologies and governance are to the highest international gas industry
standards. This has reaped the benefits of high levels of technical and health and safety
performance in the construction of new and replacement infrastructure.
To ensure sustainable quality in construction, Comgs have been the catalyst for the creation
of a gas engineering training programme through the training body, SENAI. This has
established a gas distribution specific engineering training scheme that will help support the
growing industry and swell the number of skilled contractors in the market.
4.10.5.Technological & Health and Safety Improvements

To enable Comgs to satisfy its market development ambitions, it has been crucial that
new technologies have been introduced and that health and safety standards have been
raised. This was fundamental in assuring; asset integrity; the safety and security of company
and contract personnel; the well being of members of the public; the preservation of the
environment and for protecting the reputation of the company and the product.
New technologies have been introduced across all activities and their value has been
augmented by the implementation of complementary planning and project management
processes and techniques.
The improvement in health and safety performance has been impressive; as an example,
the lost time injury frequency (LTIF) immediately before privatisation was averaging 16
occurrences per annum, but during January 2003 the company completed 1,000 days without a
single LTIF.
This has not only eliminated the distress of an injured party and their families, but also
generated a positive atmosphere amongst the companys employees who take pride in the
achievements and are made to feel highly valued; this permeates into all realms of the
companys activities and enhances the companys standing in the community. Comgs
believes that the quality in managing health and safety is a barometer of the quality in
managing the overall business.
This commitment to high technical and safety standards, together with investments in new
information systems and technology, has inevitably been reflected in increased construction
and connection costs. It was important to factor in these additional costs during the early
stages of network development. The typical construction costs that existed at the time of
acquisition reflected lower expectations and consequently a lesser cost. Comprehending the
incremental costs of revised standards of operation and construction was essential in the
formulation of forward-looking market development plans.
4.10.6 Funding the Business

Securing debt financing to grow the business has encountered a lack of sophistication in
the Brazilian financial sector, which has limited the options available. Brazilian based funding
is, relative to the global market, expensive and tends to be comparatively short-term.
The advent of September 11th, the economic problems in Argentina and the falling exchange
rate have made balanced financing absolutely critical to the success of the business. A great
deal of effort has been expended to forge secure, cost effective hedging against continued
volatility in the foreign exchange markets.
4.10.7 Understanding the Market

The structuring of the company with departmental responsibilities for the industrial,
commercial, vehicular, residential and power markets is designed to recognise the very
different characteristics of each market segment. However, it is critical that any network
development within any one sector is assessed to identify any complementary plays that may
be invoked in any or all of the others. This could make the difference between a sub-economic
and an economic project. The organisation of the company must allow free flow of information
and permit a holistic market development strategy. The processes, procedures and IT
infrastructure must promote cohesive decision-making.
The growth of residential and commercial markets in particular, has not been as great as
anticipated by the preliminary business plans. A significant impediment to realising projected
volume growth was the lack of suitable marketing tools and strategies. The introduction of
modern geo-marketing tools and the carrying out of extensive market studies have coincided
with increased rates of customer acquisition and volume growth. The Brazilian market has
some unique characteristics and is critical that these are identified and recognised marketing
strategies that have worked in other parts of the world (even other parts of South America) will
not necessarily be successful in So Paulo.
4.10.8 Long Term Planning and Sustainability

The future of the gas industry in Brazil depends upon securing long-term, reliable and
competitive gas commodity and transportation prices. This is critical, particularly with a
changing balance between imported and indigenous gas supplies, where the competitiveness
of natural gas in Brazil is extremely sensitive to gas transportation charges from Bolivia. It is the
role of the government and the regulators to ensure that a keenly contested competitive
environment exists upstream of the City Gates.
In a Brazilian context there are further complexities in that there is one regulator for
transportation and import (Agncia Nacional do Ptroleo) and one for downstream activities (for
So Paulo State this is Comisso de Servios Pblicos de Energia, CSPE).
4.10.9 Conflicts with Associated Businesses

It is important that any associated gas growth businesses, such as NGV compression
services, which are spun off have their business drivers and objectives carefully aligned with
those of the core business of gas distribution. The potential for commercial conflicts must be
minimised. The example that could be cited is that Iqara NGV Compression services receive
their revenues from rental of compression equipment, whereas Comgs receive their revenues
through gas throughput. There is, therefore, a potential conflict that in a fixed market, Iqara
would seek to saturate the area with NGV outlets but this would not add any additional volumes
for Comgs. Controls and balances need to be imposed so that both companies achieve their
objectives symbiotically.
4.10.10 Phasing of Regulatory Targets

Regulatory targets can provide incidental opportunities to support market growth. The
temptation has been to initiate activities to meet these targets early within the regulatory period.
However, in some cases it has been prudent to defer, so that any opportunities to add value
and grow the market incidentally can be evaluated.
4.10.11 Legal & Financial Support

The value of best available legal and financial advice should not be underestimated. The
Brazilian economy and context is unique and gas sales and other agreements should be
compiled with due deference to the characteristics of this market.
5.0 COUNTRY CASE: CAMEROON

Cameroon has sizeable gas reserves. The development of this asset will be accompanied
by arbitration, which will have consequences for the expansion of the Cameroonian
economy as a whole. Budget revenues coming the gas sector should be used to develop an
efficient banking system, a domestic entrepreneurial class and a diversified economy able
to create employment.
When envisaging developing the energy sector in order to stimulate industrial sector
growth, a regional approach is needed to define an optimal action plan.
An adapted legal and regulatory framework has bee put in place by the authorities in
order to facilitate expansion of the upstream sector by offering attractive conditions to
potential investors.
An independent regulatory body has to be created to check that all the key activities are
carried out in accordance with the conditions allowed by concessions, authorisations and
licenses. It also will ensure that competition between actors, participation of the private
sector, and consumer protection are effective.
Fiscal incentives intended to favour the first steps of gas sector development have
been targeted, adapted and made to benefit all actors, including gas consumers, involved
in the natural gas business.
5.1 Introduction
The Republic of Cameroon, a modest oil producer (110.000 bbls/d) is situated on the Gulf of
Guinea. Its producing oil fields of the Rio del Rey and Douala basins are sandwiched between the
prolific oil bearing fields of Nigeria, Equatorial Guinea and Gabon. The major cities are Douala the
economic centre, and Yaounde the political capital. Cameroon is principally an agricultural country
with a predominantly rural population of over 15 million people for an area of 475 000 km2.
Oil production which started in 1977 peaked in 1985 and has since been declining. The
remaining reserves are estimated at over 200 million barrels while the reserves-to-production ratio
(RTP) approaches a low 10 years. The countrys unexploited certified gas reserves stand at 110
Bcm.
Of late, constant electricity supply in Cameroon has become one of the most important worries of
the urban Cameroonian. The predominantly hydro-based supply of electricity has been adversely
affected by climatic conditions (harsh dry seasons) and the consequent demand has now outpaced
supply, leading to rationing and consequent blackouts.
This report attempts an overview of the energy sector in Cameroon and identifies natural gas as
an appropriate solution to the present energy problems as well as a basis for other envisaged
projects.
5.2 Some Economic Indicators

The economy of Cameroon is being liberalised and competitiveness has improved since 1977.
The annual economic and population growth are 5 % and 3 % respectively. The gross national index
per capita is USD 600 with an inflation rate of 3 %.
Since June 2000, Cameroon has been involved in a three-year growth and poverty reduction
programme and an IMF supported debt relief initiative since November 2000. The country therefore
fulfils the necessary conditions to attract investments in the natural gas sector.
5.3 Energy Sector Overview

In Cameroon, less than 10 % of the population has access to conventional energy. From the
energy perspective, firewood, charcoal and kerosene are the most widely used by the population,
being the cheapest and often the only accessible products for rural consumers. The excessive use of
firewood and charcoal has led to deforestation, resulting in desert replacing what was hitherto green
lands.
It is estimated that over 675 000 tons of wood are used annually as fuel in Cameroon for cooking
only; making wood the countrys principal energy source.
Electricity in Cameroon is 90 % derived from hydro sources within the Sanaga Basin. The
installed capacity is 800 MW while effective current production is only 450MW due mainly to lack of
efficient maintenance, old equipment and facilities, and climatic conditions. Steady growth registered
from further electrification and population growth puts the present demand above 500MW and this
demand is expected to double in ten years. The demand due to growth from industrialisation requires
that present electricity production be doubled. The lack of sufficient energy is therefore hampering
industrialisation in the country.
In terms of petroleum, the deltaic package of the Rio del Rey producing basin is mature and in a
stage of decline. The northern Logone Birni Basin (Cameroonian portion of the Chad Basin) and the
Douala/Krib-Campo Basin are under aggressive exploration programmes. The deeper horizons of
the Rio del Rey are being explored for new discoveries. There is no commercial natural gas usage
yet.

Exploration in Cameroon was, and has always been oil-driven. Gas was therefore
disappointingly discovered accidentally, and was consequently not well appraised. Proved nonassociated reserves, established on a few wells, were certified in 1982 and stand at 110 Bcm. 70
Bcm of these reserves are contained in over 40 small to medium-sized fields in the Rio del Rey Basin
while the other 40 Bcm are located in 10 small to medium-sized fields in the Douala/Kribi-Campo
Basin. Despite this, scattering reserves are somewhat concentrated in some fields namely KITA
ISONGO, SANDY, SANAGA SUD, MATANDA, LOGBABA and KRIBI-B fields.
Current use for associated natural gas is limited to in-field electricity generation on platforms,
gas-lift operations in producing fields and field re-injection to assist oil production. The quantity of
flared gas is currently less than 1Mcm/d and is declining.
Gas fields discovered after 1982 were neither appraised nor certified so the reserve figure of
110bcm is quite conservative. One good characteristic of the Cameroon natural gas is that it is quite
rich in heavy components and located close to the main energy consumption centre, Douala. The
dilemma however has been that the reserves are substantial for local projects but not completely
sufficient for classical export scheme projects. Past efforts at mounting natural gas projects like LNG,
Ammonia and fertiliser were thwarted by this situation as well as the absence of a legal framework
for natural gas development and the fact that the electricity sector was not yet privatised.
Currently, the sole electricity corporation has been privatised, a power regulatory body has been
created and rural electrification is being encouraged and promoted. A new incentive Gas Code to
supplement the 1999 Petroleum Code has been enacted to initiate and regulate the downstream gas
activities in the country.
5.5 New Gas Code

The New Gas Code is being introduced at a time of major infrastructure developments in the
Cameroon oil, gas and electricity sectors. The ongoing construction of a 1070 km long pipeline is
designed to transport crude oil from the Doba fields in Chad to the Cameroon port city of Kribi for
export to international markets. This project requires an investment of around USD 3.7billion. The
introduction of the gas code coincides with the process of liberalisation and privatisation of the
electricity sector. The code will cover the downstream gas activities of transportation, distribution,
storage, processing, import/export and marketing. The code is intended to fit-in with the 1999
Petroleum Code at the downstream segment of the chain. The accounts of these activities could be
bundled during the five-year transitional period provided by the Code.
The two-fold objective of the Gas Code is:
To encourage investment through a simple, clear and stable legal framework; and
To protect large customers to facilitate the expansion of the gas market beyond industrial
projects.
5.6 Gas Market Opportunities

For most industrial activities in Cameroon, natural gas is definitely a better alternative to the
various fuels currently in use, especially as oil production is declining. The advantage of natural gas
lies in the fact that reserves are located close to proven potential markets of the main urban centres
of Douala, where 90 % of the countrys industrial activities are located, and in Kribi, Limbe and Edea.
Although the residential and commercial markets are not a priority for now, it is anticipated that
demand in these markets may develop once the distribution system for the industrial sector becomes
operational. The emerging gas industry will first concentrate on power generation and industrial uses.
It is hoped that the development of projects like gas-generated power plants will initiate the
development of the sector as a whole, as was the case in other emerging markets.
With the expanding gas markets in the sub-region (methanol and LNG plants in Equatorial
Guinea and the West African Gas Pipeline Project (Nigeria-Ghana), Cameroons options are open to
possible regional cooperation through gas sales to its neighbours.
5.7 Institutional Framework

Though the overall responsibility for policy-making and supervision will be vested in the Ministry
in charge of Hydrocarbons, the new legal regime institutes a Gas Regulator to oversee the
implementation and application of the new rules for the gas sector within Cameroon, namely:
To enforce the provisions of the Gas Code and its enabling acts;
To ensure the protection of the rights of customers;
To manage the selection process for concessions, licences and authorisations;
To ensure application of norms, security and environmental protection; and
To monitor compliance with competition and play the role of alternative dispute resolution
authority.
5.7.1 Open Access & Unbundling of Accounts

The New Gas Code offers a fifteen-year transitional period during which eligible customers
would not be permitted to purchase gas directly from either gas producers or traders, but will be
required to purchase their requirements through a distributor.
This method is intended to promote and secure the initial gas investments. After this fifteen-year
period, and under objective, transparent and non-discriminatory terms, transporters and distributors
are required to provide producers and eligible customers with open access to their networks. This
access would however be denied on grounds of lack of capacity or where access would constrain
contractual and regulatory obligations or adversely affect certain buyers take-or-pay obligations.
At the end of the fifteen-year transitional period, operators are required to maintain separate
accounts for their transportation, distribution, processing, storage, import, export and sales activities.
5.7.2 Incentives
The New Gas Code provides investment incentives notably through:
1. Tax write-offs (10 years);
2. Guaranteed convertibility of currency;
3. No government subsidies;
4. Off-shore and on-shore US dollar accounts;
5. Freedom of fund transfers; and
6. Complete exemption from custom duties for imported project goods/equipment.
5.7.3 Tariffs
Tariffs for transportation and distribution are regulated for non-eligible customers. Tariffs
are set in such a way as:
To reflect cost of services;

To enable users to obtain a fair price; and
To enable investors to recover costs and earn a good return on their Investments.
Tariffs are reviewed according to the frequency and procedure agreed in the concession
contracts.
In summary therefore, the introduction of natural gas usage in Cameroon will provide an
environmentally clean energy source to improve the living standards of citizens, check deforestation
and put a halt to the desert encroachment thereby protecting the environment. It could stimulate
regional cooperation through gas sales to the Methanol/LNG plants in neighbouring Equatorial
Guinea and/or the West African Gas Pipeline (WAGP) project (Nigeria-Ghana).
It will also diversity the sources of energy, contribute to rural electrification and spare the country
from over dependence on hydro sources whose regularity is determined by climate most of the
time beyond human control.
6.0 COUNTRY CASE: POLAND

In Poland and other countries in transition towards a market oriented economy, the
implementation process of politically independent regulation faces situations which
are specific compared with those encountered in countries where a free market has
been practised for a long time.
During the implementation of the EU Gas Directive provisions, the two key priorities
will remain security of gas supply and the economic viability of the gas industry.
The introduction of third party access (TPA), a key element for creating a
competitive gas market, should be carried out in such way that any actor along the
gas chain benefits from a dominant position.
The regulation of the gas sector is a very important aspect covered by the Energy
Law. The preferred approach for the regulatory body is to have real independence.
Gas prices that do not reflect costs often result in cross-subsidies between
customers. In certain cases, for social reasons this policy could be justified
temporarily but it is not appropriate in the long run. If the distribution companies do
not have a correct income, they cannot attract investors (except strategic ones that
have long-term plans) or make the needed investments and would face serious
difficulties.
Energy subsidy reform needs to be undertaken as part of a broader process of
economic and institutional reform. Policymakers, however, should where possible
seek to incorporate the external costs of energy production, supply and use in the
price of energy services, using market-based instruments such as taxes or
regulations such as limits on airborne emissions.
1. Introduction
6.1 Introduction
After the Second World War, as a result of border changes in Central and Eastern Europe,
Poland lost its oil and natural gas resources in the eastern Carpathians, receiving instead the Silesian
region with huge coal resources. Subsequently, the coal-dominated structure of energy supplies in
Poland has differed from most highly industrialised countries. Currently, coal constitutes almost 70%
of primary energy production, in contrast to the EU average which is 21.3%. Natural gas accounts for
about 11% of Polish primary energy production.
The development of the Polish gas industry can be traced to the early 1960s, when natural gas
supplied through the domestic transmission network began to replace local supplies of coking and
urban gas (produced from coal). The network developed dramatically in the 1960s and 1970s, due to
growing imports of Russian gas and the discovery of new domestic fields. Based on local gas
resources the extension of the system was strongest in southern and central Poland. Recently
important gas fields have been discovered in western Poland.
Until 1980, the use of gas for industrial purposes reached its peak at 8.6 Bcm annually, with a
further 2.9 Bcm supplied to households, and the trade and services sector. Gas consumption by
industry remained on a stable level throughout the decade until the early 1990s, when economic
recession brought it down to 4.2 Bcm. In 2001, the demand for gas from Polish industry was about 6
Bcm. Simultaneously, natural gas consumption by households and the trade and services sector
steadily increased, reaching around 4.79 Bcm. About one-third of the 10.9 Bcm of gas supplied to
customers in 2001 originated from domestic sources.
6.2 The Gas Industry

The Polish Oil and Gas Company (POGC) is so far the sole producer of natural gas in Poland.
The enterprise has the monopoly of gas importation, trade, transmission, storage and distribution to
all categories of consumers i.e. it controls the whole gas chain on the basis of licenses obtained from
the Energy Regulatory Authority.
The state-owned company Polish Oil and Gas Company (POGC) was established in 1976 as a
result of the merger of numerous exploration, production and downstream enterprises. On 30 October
1996 POGC was transformed into a Joint-Stock Company owned by the State Treasury. Conducting
its activities pursuant to the Commercial Code and the Act on the Privatisation of State-owned
Companies of 13 July 1990, the entity operates nationwide through a network of several dozens of
subsidiaries specialised in various fields.
POGC actively pursues prospective customer groups (including communes and industry), strives
to reach them, implements restructuring and modernisation programmes, and develops more efficient
technologies which require the use of natural gas as the basic fuel. The company considers the
above-mentioned activities as particularly important for the energy sector, being aimed at replacing
coal with natural gas.
Huge investments in all the segments of the gas chain are necessary to improve the availability of
gas and to allow the development of new markets. The Polish gas network will continue to be
supplied both from domestic sources and imports. It should be mentioned that priority has been
attributed to the development of domestic sources, whose share in gas consumption amounted to 37
in 2001 Regarding imported gas, security of supply will be ensured by the diversification of gas
sources with deliveries through direct connections to Polish territory and based on long-term
contracts.
Following the adoption by the Government of the Guidelines of Polands Energy Policy up to
2020 which provide for the expansion of gas storage capacity, POGC has specified, on the basis of
detailed and comprehensive analyses, the systems needs for underground gas storage facilities (by
force of the decision of the POGC Board in 2000). The working volume and the deliverability of the
Wierzchowice, Mogilno and Husw underground gas storage facilities are continually increased in
order to cover seasonal swings and consumption peaks.
POGC currently serves about 6101 industrial customers, 153 000 customers from the trade and
services sector, and 6 600 000 households. In 2001, households accounted for about 33% of
POGCs sales in terms of gas sales volume, and 40% of sales in terms of revenue, while industry and
the trade and services sector accounted in the same period for about 55% and 12% in terms of gas
sales volume respectively, and 47% and 13% in terms of revenue.
The Company is developing its Strategy for the coming years, based on the Programme of
Restructuring and Privatisation of the Polish Oil and Gas Company adopted by the Government on
13 August 2002.
6.3 Regulation
Created in July 1997, the Energy Regulatory Authority (ERA) operates as a State central
administrative body. The President of the ERA is nominated by the Prime Minister for a period of five
years with limited possibilities to be recalled and carries out his tasks with the assistance of the
Energy Regulatory Authority.
The Regulator supervises regulates activities of energy companies according to the Energy Law
and the provisions of the States Energy Policy, aiming at balancing the interests of energy
enterprises and customers. His responsibilities are the following:
granting and withdrawal of licences for activities in the energy sector;

approving and controlling tariffs (electricity, gas, district heating, lignite);
controlling the quality of customer service in the field of energy;
preventing excessive use by companies of its monopolistic position;
resolving disputes within the scope of the Energy Law;
publishing information aimed at improving the efficiency of energy consumption.
ERA promotes competition in the entire energy sector and regulates areas where natural
monopolies exist, but where a competitive market exists or emerges the tariffs applied by the
companies do not have to be approved by the ERA. In this case supervision of the companies
activities is under the responsability of the President of the Authority for Protecting Competition and
Consumers.
Consultative Council, whose members are nominated by the Prime Minister from among
candidates representing the energy sector and energy consumers organizations, is in charge of
reporting relevant opinions emitted by the people in the profession to the Regulator. All decisions of
the Regulator may be appealed to the Anti-Monopoly Court in accordance with the Administrative
Procedure Code.
6.4 Governments role

6.4.1 Policymaking
The main body of state administration competent for energy policy issues was the Minister
of Economy, who from 7 January 2003 because of structural reorganisation is Minister of
Economy, Labour and Social Policy. Among his principal tasks is the preparation, in
consultation with respective ministers, of the provisions of state energy policy and coordination
of its implementation.
On 22 February 2000 the Government adopted the Provisions of Polands Energy Policy
up to the year 2020 presented by the Minister of Economy, quoting the following key elements
of Polish energy policy: energy security, improving competitiveness and protecting the natural
environment. The Provisions envisage an evolution of the structure of the primary energy
consumption in Poland. Accompaning the implementation of the governmental programme of
restructuring of coal mining, a gradual decrease in demand for coal with a simultaneous more
than doubled increase in demand for natural gas is anticipated. As a result of this scenario the
share of natural gas in the primary energy balance would rise from 10% in 1999 to 18-20% in
2020. (nowadays about 11%).
6.4.2 Ownership
The Polish Energy Law does not impose a form of ownership on the energy enterprises. It
provides equal treatment for all types of companies (state, private, cooperatives and
communal), by establishing non-discriminatory principles for their market functions.
Currently, the oil mining and gas sector is undergoing a phase of organisational
restructuring whose objective is to adapt the sector to the requirements of the market economy.
For the gas sector the purpose is to increase its competitiveness and strengthen the position of
natural gas on the energy market.
As a result of the above-mentioned transformations, POGC has been a stock company
since October 1996, 100% owned by the Ministry of State Treasury (first phase of
transformations).
In the second phase, background units not related to the companys core activities were
separated from POGC; they have been transformed into commercial entities and most of them
have been privatised.
6.5 Privatisation
6.5.1 Restructuring and Privatisation Programme of POGC (13 August 2002).
Once restucturing is completed, POGCs activities will be split into three main areas:
(1) upstream; (2) wholesale trade including imports, storage and transmission; and
(3) distribution. Subsequently, imports, transmission, storage and wholesale trade will be
carried out by POGC, while other areas will go to a single subsidiary dealing with exploration
and production starting its activity not later than 1 January 2004, and six regional distribution
subsidiaries started their activities on 1 January 2003. This structure will enable specific groups
to focus on their respective targets.
Currently POGCs handles three customer groups: industry, trade and services sector, and
households.
Gas supplies to consumers fall under the provisions of public service and are subject to
obligations relating to security, reliability, quality, price and environmental protection
(Article3(2) of the Gas Directive). These principles are included in the Energy Law.
In the future the company (as in the current transmission area) will handle industry and
some major customers from the energy and commercial sector. Smaller industrial customers
and the corresponding commercial sector, also households, will be served by the distribution
subsidiaries.
Six distribution subsidiaries (Carpathian Gas Company, Upper Silesian Gas Company, Lower
Silesian Gas Company, Great Poland Gas Company, Pomeranian Gas Company, and
Mazovian Gas Company) supply gas purchased from POGCs transmission network to end
customers through the regional distribution networks.
The duties of the distribution subsidiary towards its regional market include, inter alia:
Selling gas on a regional market;
Operating the low- and medium-pressure gas distribution system;
Operating local high-pressure networks;
Expanding the capacity of natural gas distribution systems by increasing the profitability
of assets, reducing operational costs, reorganising the staff and rationalising
operational activities;
Managing internal gas turnover and technical equipment on the specific regional
market.
Distribution subsidiaries sell natural gas and provide supply services using low- and
medium-pressure gaslines, supply gas to households, to the trade and services sector, and to
smaller industrial customers, including small and medium-sized enterprises, as well as urban
and regional heating plants.
The following table illustrates the changes in the length of POGCs distribution network
since 1970.
Year
1970
1975
1980
1985
1990
1995
1999
2000
2001
Length
12.9
19.1
22.4
30.0
45.9
91.3
94.6
96.3
97.5
10 km
Source: POGC
Anticipated performance for 2002 is 102.4
The distribution subsidiaries also operate sections of the network of a very different age, of
below five to above 40 years . Despite the good shape of most gas pipes older than 15 years,
POGC expects a large part of them to be replaced or improved in the next 15 years.
6.6 Tariffs
The Energy Law has imposed upon the companies dealing with supplies of gas fuels the
obligation to establish tariffs for licenced activities according to the principle of covering justified costs
entailed by supplies of gas to specific customer groups.
Since March 2000 consumers have been classified into 10 tariff groups. The first four groups are
consumers using up to 10 cm per hour (mainly household consumers). The other tariff groups include
consumers from the industrial and commercial sectors, using over 10 cm per hour.
All consumers from groups 1-7 are supplied from the distribution network. The last three tariff
groups are supplied from the high-pressure networks. Tariffs are established for one year and for all
customers they are published. Prices are confidential only for the biggest industrial customers (e.g.
Fertilizer producers, CHP). There are also some examples of direct sales between local gas
producers and medium-sized customers outside the national gas system.
A Decree by the Minister of Economy of 20 December 2000 has introduced the possibility of a
quarterly correction of tariffs in the case of an increase of imported gas purchase prices by at least
5%, thus providing an opportunity to directly transfer gas purchase costs to customers.
6.7 Development
POGC, as 100% owner of the gas grid, determines infrastructure and investment needs on the
basis of geographical localisation of existing and potential customers. However these needs should
be coordinated with the Government policy and priorities related to gas supply security, diversification
and environmental protection. Gas development plans (short-term) are approved by the Energy
Regulatory Authority (ERA), and at that time a necessary adjustment can be made of the
infrastructure and investments needs, if any.
The opening of the POGC gas transmission system for the EU gas market will require substantial
modernisation and extension of the following components: (i) former coke oven gas pipeline with at
present very low working pressure, (ii) main gas grid - to make reversible flow possible,
(iii) measurement stations, (iv) dispatching centres, (v) installation on-line of gas quality control
devices.
6.8 Pollution
6.8.1 Present Situation
The Polish power sector is one of the largest in Central Europe with a total capacity of
approximately 33 GW. It is predominantly coal based, since coal is readily available locally as
either hard coal or lignite (brown coal). Though the latter is potentially more polluting, a
substantial proportion of electricity generation is based on it. The power sector is among the
main contributors to pollution in Poland, with a number of plants being on the list (set up in the
early 1980s) of most polluting companies. Large investments have been made which have
alleviated some of the problems. Nevertheless, air emission problems still remain, with few
industrial facilities not holding valid air permits.
Emissions Reduction Commitments / Programme (fuels, technologies, incentives...)
The changes in Polish legislation, introduced by the transposition of EU Directives, have had a
substantial impact on their structure, implementation, and enforcement. A recent World Bank
study estimated that in order to reduce air emissions from large power plants, Poland will need
to spend between 1.5 and 10 billion USD by 2010. Since EU legislation is a moving target,
present requirements may become more stringent by the time Poland enters the EU.
6.8.2 CO2 Emission

Poland signed the UNFCCC in 1992, ratified in 1994, and became a full party to the convention
on 26 October 1994. 1988 was chosen as a baseline year for GHG emissions. Under the
Convention, Poland committed not to exceed 1988 GHG emissions by the year 2000.
6.8.3 Signature of the Kyoto Protocol

Poland signed the Kyoto Protocol on 15 July 1998 and until now has not ratified it. According to
the document Poland should have reduced greenhouse gases 6% below its 1988 levels by the
2008/2012-commitment period. The total of Polands CO2 emissions in the base year 1988 as
given in the Second National report amounts to 477,584 Gg. By 2010 analysts estimate that
Polish CO2 emissions will level off at a rate 20%-25% lower than in Polands baseline year of
1988.
6.9 Pricing problem

6.9.1 Comparison of gas prices
The process of raising prices to economic level really started in 1991/1992. Household
prices have risen almost 20-fold since the beginning of 1992. Depending on their consumption,
household consumers pay* USD 0.23-0.25 for each cubic metre (beginning 1998). In terms of
burden this means household consumer spend 2-10% of their average income paying the gas
bill. Energy prices have become a hot political issue in Poland. The price reforms have to be
incorporated in the framework of a broader strategy, which would enable consumers to reduce
their energy bills by increasing the efficiency of energy use.
Industrial consumers pay* 0.15 USD/m3. Commercial customers pay* USD 0.17/m3.
Since 2000 energy prices are regulated, established individually by companies and are
subject to approval by ERA. However, gas prices have continued to remain below the
economically profitable level due to the limitation of their growth (in 2000, 12.5% by the Energy
Law). This made it impossible to transfer to customers the gas purchase prices, which in 2000
rose dramatically.
Currently the increase of gas prices is restricted by the president of the ERA. This is part of
the policy of protecting customers against the excessive price increase. In a given group of
customers, the rise of gas prices cannot exceed 5% above inflation level.
Moreover, the gas distribution costs are still not yet covered. Their increase of no more
than 15% above inflation level is guaranteed by the Ordinances to the Energy Law.
In 2001 the ERA twice did not approve tariffs proposed by POGC which, in view of the
significant rise of gas prices, had a negative effect on the financial situation of the company.
In 2001 the Company submitted three tariff applications to the Energy Regulatory
Agencies, but only the last one, filed in February 2002, which provided for distance-based
tariffs and lower commodity charges coupled with increased monthly subscription fee, was
finally approved by the President of ERA. The tariff proposed in this application become
effective as of 15 March 2002.
Prices in the transmission and distribution area are confirmed by ERA on the basis of
justified costs for both: end- and wholesale consumers. Customers from the distribution area do
not cover distribution costs, this is the reason why they are cross-subsidised from transmission.
Moreover, for the moment the costs of billing and metering are not covered.
*Average price including costs of fuel, transmission, storage and distribution.
6.10 Natural gas suppliers

Currently, natural gas supplies to Poland are covered by the following contracts:
25-year contract (until 2021) with Gazexport (Russia) for a total of 250 BCM natural
gas supplies;
6-year contract (until 2006) with Ruhrgas/VNG (Germany) for a total of 2,4 BCM natural
gas supplies;
6-year contract (until 2006) with GFU (Norway) for a total of 2,7 BCM natural gas
supplies;
*8-year contract with DONG (Denmark) for a total of 16 BCM natural gas supplies from
2004 through a new pipeline (Baltic Pipe) to be built.
*16-year contract with GFU (Norway) for a total of 73,5 BCM natural gas supplies
starting from 2008 through the new built pipeline BalticPipe.
*The two latter contracts still require ratification by both parties:

Norwegian Contract
The ratification of the Norvegian contract was to take place by the end of 2002 and was
postponed by one year.
Danish Contract
The ratification of the Danish contract was to take place by the end of 2002 and was postponed
by one year.
6.11 Accession process to the European Union

The Polish Energy Law, which came into force in December 1997, and related executive
ordinances take largely into account the requirements of EU legislation regarding the energy
industry, including natural gas.
In the course of accession negotiations, Poland resigned from applying for the three
years transitional period. During the previous period, the authorities planned that access to the
Polish gas network would be restricted to those entities supplying domestic gas. The
withdrawal from applying for this derogation is equal to an obligation to open the Polish gas
market at the level required by the Gas Directive on the day of accession to the EU.
The Energy Law was amended on 24 July 2002. Gas Directive requirements are met in the
provisions of the Energy Law. Executive Ordinances are under preparation.
On 13 December 2002 the European Council in Copenhagen took a decision on
completion of the EU membership negotiations with Poland. Poland will accede to the EU on 1
April 2004.
7. COUNTRY CASE: ROMANIA

Adopting a slow pace of necessary reforms hinder the development of a truly
market-based economy and prevent investors from entering the gas market.
Romanian government should take the necessary measures to ensure the full and
timely implementation of legislation in the gas sector. The administrative capacity
of the Regulator has to be strengthened.
Transmission and distribution system are the most developed in the region but are
mature and in need of investments. A modern, efficient and balanced gas network
is a prerequisite for providing good services and reducing functioning costs.
Norms and standards have to be defined in order to enforce the Energy Efficiency
Law. Energy saving has to be defined clearly as a priority by the authorities.
Upstream investments are really needed to meet growing demand without
increasing imports.
Gas metering and non-payment of gas bills issues has to be tackled in priority as
they hamper the development of an efficient gas market.
7.1 Introduction
From the beginning of the 1990s the Romanian authorities launched a reform process consisting
of tree majors streams of activities: liberalisation of foreign trade and prices, planned privatisation of
State-owned enterprises, and development of the banking and financial sectors.
The policy of the government aims at diminishing State involvement in economic decisionmaking. In accordance with Ordinance No. 30/97 the autonomous Regies of national interest within
the public sector were converted into commercial companies subject to the privatisation process. The
restructuring and privatisation of the energy sector, still including inefficient facilities for primary
energy production and power generation, is the key objective of the current government within 20012003. Romania's old power system, combined with difficulties in securing supplies of primary fuels,
has resulted in periodic energy shortages and shutdowns in power generation, prohibiting any moves
by the State electric utility to export significant amounts of electricity.
Romania has the largest gas market in Central Europe and was the first to utilise gas for
industrial purposes (1917). The market penetration for natural gas reached high levels in the early
1980s due to a government policy driven to achieve self-sufficiency. One consequence of this drive
was an overuse of domestic production capacity and the resulting decline of this latter.
7.2 Energy Sector

7.2.1 Energy policy
In August 2001, the Romanian Government promoted the National Strategy for
Development of the Romanian Energy Sector for the period 2001 2004. The main objective of this
Strategy consists of development of efficient energy markets, characterized by sustained growth,
high quality and security of energy supply, in accordance with European Unions standards regarding
efficient use of energy and environmental protection.
Several objectives derive from the Strategys main goal:
Interconnection of the National Energy System to the European System;

Discovery of several stable supply sources of coal, oil and natural gas and setting up of
adequate inventories of raw materials that will ensure safe functioning of the energy
system;
Environmental protection;
Improvement of the legal framework regarding the energy sector;
Promotion of a competitive energy market.
The Energy Strategy aims to:

1.
2.
3.
Solve the financial blockage affecting the energy sector;

Start the privatisation of the energy production and distribution sector;
Stimulate new investments in the energy sector.
The objectives concerning the gas sector refer to:
Providing the financial resources for exploration and research activities in order to
discover new reserves of oil and natural gas and to ensure the estimated production
levels. 55% of the total funds necessary to ensure energy production will be allocated
to the oil and gas sector. 93% of these funds will be represented by own sources of
the companies involved in the sector.
Ensuring safe supply of natural gas by rehabilitation and optimisation of
transmission system and distribution networks, by increasing storage capacities from
1.4 Bcm in 2000 to 3.5 Bcm in 2004 and by regional interconnection of transmission
systems, such as the Arad, Romania Szeged, Hungary interconnection.
The Ministry of Industry and Resources intends to launch a project for setting up the
National Energy Observatory. The Observatory will collect and synthesise data regarding
energy production and consumption and will estimate energy indices using a unique database
and correlation between national and international data.
7.2.2 Energy Overview

The primary energy supply of Romania amounted to 37.8 Mtoe in 2001. Gas dominated the
primary energy balance, with a share of 41% in total primary needs.
Energy use in Romania declined during the period 1990-1999 due to industrial sector
restructuring, policy immobility and periodic economic crises. After three years of recession,
the Romanian economy started to recover early in 2000, led by industry. The increase of
industrial production noted during the first half of 2001 largely reflected a strong, broad-based
boosting in domestic demand. This industrial recovery resulted in a growth in energy
consumption in 2000-2001.
Energy conservation is a hot topic in Romania. The main issue of concern was the recent
Energy Efficiency Law, which appears difficult to implement. This law requires all sorts of norms
that have not yet been written. Currently energy efficiency is mainly being increased through
using up to date equipment and assistance programmes.
Romania - Energy share of TPES in 2001
11%
27%
41%
Oil
21%
Coal
Gas
Others
Romania was the first country in Central and Eastern Europe to establish an energy efficiency
agency, the Romanian Energy Conservation Agency (ARCE). Despite a number of initiatives in
energy efficiency, progress has been slow. It is expected that increasing energy prices will
create an economic incentive for energy efficiency investment projects, but this incentive
cannot be fully exploited due to a number of financial, technical and institutional barriers. These
include difficulty in obtaining financing, communication problems among and within institutions,
and lack of experience in developing market-based bankable project proposals on energy
efficiency.
In April 2001 the ARCE stated that three quarters of Romania's $2.5bn energy bill is just
money going down the drain. Thermal energy consumption per flat in Romania is 60% higher
than the European average, although the revenues are 10-15 times lower and 95% of
Romanian investments were directed to the production, distribution and transport sector, while
the end energy user was not helped to eliminate losses and energy waste according to the
above-quoted source.
The lack of 'real time' market information is an important issue. Specialists use the data
provided by the Statistical Yearbook and the energy balance issued by the National Economic
Studies and Sciences Institute (INSSE), which are only general and rather old, for instance, the
latest values of the energy parameters released by INSSE are those registered in 1999.
Statistics show that Romania continues to register energy intensity 2.5 higher than the values
recorded in EU countries. According to IEA, energy intensity and GHG emissions in the country
are approximately three times higher than those registered in advanced country such as the
United Kingdom, France or Germany. The Government decided to take steps to reduce energy
consumption by 16-25% by the year 2010.
In order to eliminate the States monopoly in the sector, Conel, the national electricity
company, was split into four independent units in July 2000:
Transelectrica, responsible for electricity transport through eight main lines branches
across Romania and ensures connection with neighbouring countries. The company
is carrying out a project aimed at integrating the Romanian network with the west
European electricity grid;
Termoelectrica, responsible for production and supply of electricity by thermal power
plants (40% of the total Romanian electricity needs);
Hidroelectrica, responsible for electricity hydroelectric power production (12% of the

total);
Electrica, responsible for electricity distribution;
Nuclearelectrica, in charge of the Cernovoda nuclear plant (12% of the total).
These companies supply more than 8 million customers and account for 96.5 % of the total
electricity produced in the country. Total installed production capacity greatly exceeds domestic
consumption.
They are State owned companies, subordinate to the Ministry for Industry and Resources
(MIR) which intends to set up four holdings of (2200-2300 MW) associating thermal power and
hydropower plants. This restructuring of targets to attract foreign investors as the part of the
energy price (12-14%) dedicated to refurbishing the 30-year-old thermal units is not sufficient.

7.3.1 Main actors
In April 2000, the Romanian government approved the reorganisation of Romgaz, the natural
gas utility owned by the State, in order to comply with European Union regulations and to
continue the liberalization of its energy sector. Following Government Decision No. 334/2000,
Romgaz was restructured into five companies:
S.N.T.G. TRANSGAZ (national company), in charge of natural gas transport,

dispatching, international transit, research-design in natural gas transport;
S.C. EXPROGAZ (commercial company), having as a main area of activity geological
research to discover natural gas deposits, natural gas production, supply and
underground storage, terms of quality, safety, economic efficiency and environmental
protection;
S.C. DISTRIGAZ NORD (commercial company), with headquarter in Targu Mures,
deals with natural gas acquisition from domestic production and from imports, and
distribution.
S.C. DISTRIGAZ SUD (commercial company), with headquarters in Bucharest,
operates the low pressure system and distributes domestic and imported gas applying
regulated prices and tariffs.
S.N.D.G.N. DEPOGAZ (national company), has as its main activity natural gas
underground storage and production, as well as geological research to discover new
natural gas deposits.
In June 2001, after analysing the activities of EXPROGAZ and DEPOGAZ, Government
decision No. 575/2001 started to merge the two companies into a single entity S.N.G.N.
ROMGAZ S.A. (national company), carrying out exploration, production and underground
storage.
Starting in 2002, the Government intended to launch the process of privatisation focusing on
the distribution companies.
The shareholders general meeting and the managing board manage these commercial
companies. All companies are subordinated to the Ministry for Industry and Resources and the
State representatives in the shareholder general meeting and the members of the managing
board are appointed and revoked by its order.
The reorganisation of the sector aims at ending monopoly situations and enhancing the
introduction of real competition within the gas market.
In addition to the above-mentioned State companies the following players are on the market:
Petrom (Oil and Gas producer - about 5-bcm/year production). This company and the new
production company Romgaz S.A. will compete with any potential gas producer that may enter
the market. Petrom and Romgaz jointly provide 80% of domestic gas requirements. The
complement is covered by imports which come by various trading companies;
On the Romanian natural gas market, the major importers are:
WIEH which is a subsidy of the German gas trading company Wintershall, having longstanding contacts with Gazprom, and dealings with Termoelectrica, Distrigaz Nord and
Distrigaz Sud;
Wirom Gas, a joint venture company owned by Wintershall and former Romgaz (now
Transgaz) each with 50% shares, composed of former employees of the State ExportImport Company and Romgaz;
Transgaz which imports natural gas from the Russian Federation as payment for transit
services. In addition, Transgaz has contracted a loan in order to develop the transit
capacities for Turkey. One of the clauses of this loan stipulates that Transgaz will
receive natural gas instead of currency. These quantities of natural gas are therefore
considered imported.
7.3.2 Market and industry Structure
A first attempt to open the Romanian gas market was carried out in 2000 by the MIR. A
share amounting to 15% of the gas market was declared free. But this opening of the market
covered the import share only and was uncontrolled and without sufficient legal background to
run efficiently.
Within the framework of implementing the main steps to meet the criteria for EU
membership, the Romanian Government approved in mid-2001 the Position Statement for
Chapter 14 related to Energy, issued by the EU Commission. According to this statement the
Romanian gas market should be opened 30-35% within 2001-2006.
The Ministry of Industry and Resources and the National Authority for Natural Gas
Regulation (ANRGN) decided to open the Romanian gas market by 10% beginning 1 August
and consequently the Regulator approved a list of 17 eligible consumers. A consultation
process between the MIR and ANRGN was established in order to verify compliance of
decision-making by ANRGN with the overall governmental energy policy to maintain security of
supply.
In January 2002 the market was opened with an additional 15%. Currently (as of 1 May
2002) 25% of the free market is covered by 41 large eligible consumers whose take off is over
5 Mcm / year / location. In April 2003, 30% of the market will be accessible to additional eligible
consumers.
Romania experienced continuous increases in natural gas production until 1986, when it
reached the highest level of domestic production amounting to 36.3 Bcm. After 1986 domestic
gas production decreased from 35.7 Bcm in 1987 to 12.7 Bcm in 2002. The drop in production
is a direct consequence of the natural decline of reserves due to intense production during the
previous period and to the high cumulative withdrawal from the recoverable reserves.
Gas production in Romania is shared between the three subsidiaries of the recently formed
Romgaz S.A., (by merger of Exprogaz and Depogaz), i.e. Targu Mures, Medias and Ploiesti,
that withdraw gas from the gas fields and Petrom extracting gas from the oil fields. Gas
production is obtained from over 140 gas fields (already in depletion phase) and 3600
production wells situated mainly in the Transylvanian Basin, the Moldavian Platform, the Brlad
Depression, Muntenia and Oltenia.
In accordance with the Energy Strategy promoted by the Government, in 2002 Romgaz
carried out seismic campaigns, discovered four structures with commercial gas accumulations
and put on stream 16 new wells. In addition it carried out workover operations to enhance
productivity in mature reservoirs. It should be mentioned that all this work was possible
because the companys income in 2002 was higher than the previous years.
The Romanian gas market is considered attractive for companies that want to produce gas.
In 2001 to cover financial efforts and risks related to upstream activities, Romgaz concluded
with Wintershall an agreement on joint exploration and development of a block in the
Transylvanian Basin. The prospecting work lead to discover a structure close to Sighisoara with
a gas reserve of about 1.5 Bcm
Production and Imports of Natural Gas
in Romania (Bcm)
40
20
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
IMPORT
7.2
5.2
4.4
4.5
4.4
4.7
3.2
3.3
2.9
3.2
PET ROM
9.1
7.7
6.4
6.6
6.2
6.1
6.2
5.7
5.2
4.6
5.3
4.8
4.9
8.1
7.8
9.5
9.2
8.2
8.3
New ROMGAZ
Former ROMGAZ 19.1 17.2
15
14.7 13.3 12.8 11.2
The economic decline has stifled Romania's natural gas consumption. From 1990 to 2002,
the country's natural gas decreased 2.2 times from 35.4 to 15.9 Bcm. As consumption has
dwindled, production has followed suit, nearly mirroring the decline and continuing to leave
Romania to have recourse to imports to meet its natural gas needs. With declining domestic
production not balanced by new sizeable discoveries it is likely that Romanian imports will
increase to 12 Bcm in 2010.
In Romania all importers supplying the gas market are dependent on one single main
supplier: Gazprom. As the gas sellers are not interested in increasing significantly the number
of gas deals, which implies spending additional time, efforts and means to reach agreements,
face administration issues and carry out risk evaluation, it is not expected that this oligopoly will
be changed to a great extent in the foreseeable future. Liberalisation of gas trade and gas
importing is the decisive step to achieve a high level of competition.
Licensed companies dominate gas trade and importing. Gas is currently imported
exclusively through trade relations with the gas-trading subsidiary of Gazprom. The Russian
giant company having an arrangement with the gas producers in Kazakhstan, controls also
natural gas exports from this country. Among the gas importers only WIEH and Wirom signed
major long-term contracts. The prices resulting from these contracts for the further distributors
and consumers are between US$95 and US$130/1.000 Nm depending on the season. It
should be mentioned that those prices are more or less at the same level as these prevailing
on the European gas market (trading hubs Zeebrugge, Bacton, Waidhaus).
Based on the existing infrastructure Romania is considering several potential options in
addition to new supply contracts with CIS countries. Projects under consideration include the
following:
-
Short-term options:
- Interconnection of the Romanian and Hungarian gas transmission systems in
the western part of the country. The aim will be to enable Romania to receive
gas for its northwest provinces.
- A link to the Transgaz system via a 60 km pipeline from the transit gas
pipeline from Uzhgrorod in Ukraine to the Romania transmission system in
the northwest of the country is already in operation starting with 1999.
- An interconnection of the gas transmission system with the one from the
Republic of Moldova.
Long-term options:
- Participation in building the high-pressure pipeline Iran-Turkey-Europe and
gas imports from Central Asia and the Middle East.
- Interconnection with the Bulgarian and Serbian transmission systems.
Romania has a well-developed gas network totalling approximately 40.000 km. The
National Transmission System (NTS - p > 6 bar) is State owned and considered of national
interest. Its length amounts to 11,140km. In Romania private ownership of high-pressure
pipelines is not allowed. Management of the grid is given to the State-owned Transgaz S.A.
through a concession. However, according to the law the NTS can be concessioned to any
other qualified domestic or foreign company.
The NTS that ensures also international transit is divided into 9 regional subsystems
interconnected through 15 nodes. It includes 8 regional dispatch centres, the national
dispatching being located in Bucharest. The maximum transmission capacity is estimated at
135 Mcm per day and 40 Bcm per year.
Romanian underground gas storages (UGS) facilities are operated and owned by Romgaz
through its subsidiaries Depogaz (predominant) and Exprogaz. The law provides for the
possibility of participating in new storages projects for non State-owned companies.
Structurally, parts of the distribution network, namely the north-western, north-eastern parts
of the country and the city of Bucharest, suffer from a drop in supply pressure in winter. During
the winter peak periods the gas supply even supported by the existing UGS does not meet
demand. Moreover the creation of new capacity is urgently needed, since the offtake of
imported gas is very uneven during the summer and winter periods and this of course does not
please Gazprom.
The total working capacity of the seven Romanian UGS facilities was increased during 2002
from 1.2 Bcm to over 2 Bcm by developing the Bilciuresti, Urziceni and Targu Mures facilities as
well as by converting the Ghercesti and Cetatea depleted reservoirs totalising 0.5 Bcm. It
should be mentioned that the work carried out improved the security of supply to all consumers.
No interruption of deliveries occurred during the winter 2001-2002 even when temperatures of
about 15Cwere recorded.
During the refill season of 2002, about 0.93 Bcm from Romgaz production, 0.64 Bcm from
Petrom, 0.45 from Russian imports were injected in the UGS facilities namely: Bilciuresti
(working volume = 650 Mcm), Urziceni: (150 Mcm), Balaceanca: (50 Mcm), Sarmasel (550
Mcm), Targu Mures (150 Mcm), Ghercesti and Cetatea. From this amount, 0.33 Bcm have
been allocated to Distrigaz Sud and 0.12 Bcm to Distrigaz Nord.
EXPLANATIONS
Suceava
Baia Mare
Oradea
Piatra Neam
Zalu
Cluj-Napoca
Iai
International transit pipelines

Transportation pipelines
Transit pipelines (future)
Gas fields
Associated gas fields
Compression stations
(transportation)
Compression stations
Gas adjusting stations
Storages
Future storages
Mrgineni
Srmel
Tg. Mure
Arad
Cetatea de Balt
Timioara
Media
Galai
Braov
Sinaia
Tulcea
Caransebe
Buzu
Piteti
Ploieti
Bilciureti
Urziceni
BUCURETI
Slatina
Blceanca
Craiova
Gherceti
Turnu Mgurele
Cernavod
Constana
BLACK SEA
Orova
In 2002 gas production amounted to 12.7 Bcm and accounted for 80% of the total country
gas needs. The complement was imported from the Russian Federation (3.2 Bcm in 2002). All
of the natural gas supplied was sold on the Romanian market. The biggest natural gas
consumer was the industrial sector whose share amounted to about 45% followed by the
electricity and heating sectors, which represented 30%. The main industrial consumers are
Termoelectrica, and the chemical industry.
Natural gas consumption by sector

in Romania (Bcm)
Year
1999
2000
2001
Households Commercial
2.80
2.70
2.60
0.60
0.60
0.70
Industrial
Raw
Electricity Other TOTAL
(excl. raw material
and
material)
Heating
4.50
2.20
5.70 0.20
16.00
4.70
2.70
5.40 0.80
16.90
3.40
3.50
4.70 0.90
15.80
Regarding the personnel employed in the natural gas field of activity, for the high as well
as for low pressure domains it exists technical schools: technical foreman schools, specific
high schools and universities, oil and gas colleges and universities in Medias, Sibiu and
Ploiesti. Within the companies formation and education centres for performing polyethylene
transmission networks has been created.
The equipment and device suppliers in the polyethylene field of activity perform trainings
for each equipment and device. The fitters, welders and all of the employed personnel who
work in the natural gas sector (both high and low pressure) are periodically verified and tested
by a committee appointed through the decision of the President of the ANRGN. The accepted
personnel will obtain an authorisation or license for the work categories they can perform,
design and operate regarding the infrastructure related to each work activity (production,
transmission, underground storage and distribution).
7.3.3 Local distribution companies (LCDs)

The Romanian distribution network for natural gas is characterized by a 29,209 km main
pipeline system that serves 1.5 million household customers and 6.000 industrial customers.
Distrigaz Nord and Distrigaz Sud are the dominant distribution companies covering about 95%
of the total natural gas supplied to the consumers. The two companies have empowered
Citibank Romania to negotiate syndicated loans of US$ 40 millions each for gas purchase.
These loans are considered for a 3-year period and will be guaranteed by the Ministry of Public
Finances.
Gas distribution is a natural monopoly. The limits of the supply areas of the gas distribution
companies are often defined by concession and demarcation contracts. Competition on this
level is thus excluded. State-owned companies and the local gas distribution companies are
enjoying monopoly rights in their supply area. Some of the local distribution companies
envisage or are distributing services other than gas distribution.
On the distribution and sale side in the free market there are 41 eligible large customers
connected directly to the gas transport network or to the distribution network. Their
consumption is over 5 Mcm/year/location.
Some private involvement in the gas distribution and marketing sector has started through
joint venture agreements. In November 2001, Ruhrgas, officially became a shareholder in
CONGAZ Constanta. Since then Ruhrgas holds 28.6% of the total shares of this company.
Romgaz, Petrom, and import companies such as WIEE, WIROM provide natural gas to the
distribution companies. Transgaz, natural gas common carrier, commercialises the volume of
gas representing the equivalent value of the transit services to Turkey. The gas is sold to
Distrigaz Sud, Distrigaz Nord, private distribution companies and some eligible consumers.
The share of investments in the supply gas chain is as following: 45% in the distribution
sector, 25% in the transmission field and 30% in the storage area. The distribution costs and
tariffs have increased by 25% during the last three years, due to the need for intensive
investments for the rehabilitation of the distribution networks.
Details of selected distribution companies are presented hereafter:
DISTRIGAZ Nord S.A. Tg. Mures is a distribution company that in 2000 was separated
from former Romgaz together with Distrigaz Sud. It includes 12 subsidiaries in 20 districts with
761 towns having gas distribution networks.
Features of the business activities:
about 16,500 km pipelines;
solvent customers: 570,000;
number of employees: 9,000;
volume delivered to households is about 2,5 Bcm/year;
33% of the volume supplied is imported.
DISTRIGAZ Sud S.A. operates currently 12,500 km (main and service), of which 650
kilometres are polyethylene made, there are 2018 gas regulating and metering stations and
257,189 regulator boxes. The Company has 500,000 customers. The total gas quantity
delivered to these consumers at the end of 2000 was 6.24 Bcm. DISTRIGAZ SUD S.A. has
10,000 employees, 18 administrative headquarters, and 88 production facilities, located
throughout the entire companys jurisdiction area.
The structure of 2000 gas purchase and supply is presented below.
GAS PURCHASE STRUCTURE 1993-2000 - DISTRIGAZ SUD
TH. CUBIC METERS
14000000
12000000
10000000
8000000
6000000
4000000
2000000
0
1993
1994
1995
ROMGAZ*
1996
PETROM
1997
IMPORT
1998
1999
2000
TOTAL
*From May 2000, it represents the natural gas production of Exprogaz + Depogaz.
TH. CUBIC METERS
GAS SUPPLY STRUCTURE IN 1993-2000 - DISTRIGAZ SUD

14000000
12000000
10000000
8000000
6000000
4000000
2000000
0
1993
1994
POPULATIE
HOUSEHOLD
1995
INDUSTRY
INDUSTRIE
1996
1997
1998
PREST
DISTRIB
SPECIALSERV
DISTRIBUTION
1999
2000
TOTAL
TOTAL
CONGAZ S.A. CONSTANTA, established at the end of 1998, whose core business is
designing and building gas installations, system networks, marketing and distribution of natural
gas. The Company, structured in three departments (Technical Investments, Technical Exploitation and Commercial) is licensed to carry out the following activities:
o
o
o
Distribution of natural gas in Constanta and Ovidiu;

Thermal Power production;
Supplying natural gas.
Vital Gaz Bucharest, is a company with experience in construction and civil engineering as
well as being specialised in installing gas pipelines. The company intends to penetrate a
market niche and develop in Romania local gas and water distribution networks. The enterprise
has won two major concessions for Vidra, Chiajna (Ilfov County) and Brasov (Prejmer, Bran) for
network construction and gas distribution. Vital Gaz s activity is split into two major areas: gas
and water. The concessions for gas supply are for an initial period of 49 years with an option to
extend for another 24 years.
The Vidra project envisages supplying up to 2,500 households with natural gas and,
at a later stage, a large number of greenhouses, and other industrial premises. It
involves the main laying of 39 km of network. 19 km of gas grid were completed during
2000 and another 10 km in 2001.
The project carried out in Brasov will allow supplying natural gas to up to 5,600
households in the villages of Bran and Prejmer and, at a later stage, commercial
premises. It involves the installation of 120 km of mains network. Construction of the
networks was completed in Bran in 2000 and in Prejmer by the end of 2001. The number
of potential households which will be supplied with gas under concessions in Vidra and
Bran is 11000.
Vital Gaz will bid for the forthcoming concessions for natural gas supply in Satu Mare
and Simleul Silvaniei in the North West of the country (approx. US$ 30 billion investment
in a period of 8 to 10 years). It is also reviewing other locations (near Bucharest and
Brasov 15,000 potential consumers) with suitable economic profiles.
The structure of the distribution market in Romania is resumed in the following table:
Company
Ownership
Headquarters
Sc Distrigaz S.A.
Sud
Sc Distrigaz S.A.
Nord
SNGN Romgaz S.A.
CONGAZ
100% state owned
Bucureti
Localities
supplied
hundreds
100% state owned
Tg. Mure
hundreds
100% state owned

Mixed (>50%
private)
Mixed (<50%
private)
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Media
Constana
1
2
Bucureti
10
Voluntari
Cmpina
Bucureti
Suceava
Hrlu - Iai
Cluj Napoca
Arad
Bucureti
Braov
Oradea
1
1
1
1
1
1
11
5
1
1
SNP Petrom S.A

Coviconstruct
Progaz
MM Data
Nordgaz
Gaz Nordest
CPL Concordia
Vest Gaz
Vitalgaz
Condmag (Timgaz)
Distrigaz Vest
7.4 Legal and Regulatory framework

Regulations in the natural gas sector appeared only in 1995 when Government Decision
No. 942 approved the Regulation for natural gas supplying. Even if this decision represented
a small contribution to the regulated process of gas supplying, it was an important step as it
gave control on supplies to the former Romgaz corporation.
Currently the legal framework includes:
Petroleum Law No.134/1995. Romania's new Petroleum Law came officially into effect
in February 1996. It provides the legal framework for the operation of both Romanian
and foreign companies. In particular, the Petroleum Law introduced open access in the
gas industry;
Law No. 463/2001 regarding all the activities of gas sector
Ordinance No. 60/2000 concerning the regulation of activities in the natural gas sector,
with subsequent modification;
Ordinance No. 41/2000 concerning establishment, organization and functioning of the
National Authority for Regulation in Natural Gas Sector (ANRGN), with subsequent
modification;
Law No. 213/1998 concerning public property and its legal conditions;
Law No. 219/1998 concerning concessions regime;
Government Decision No. 784/2000 concerning approval for a Regulation for granting
authorizations and licenses in the natural gas sector;
Government Decision No. 334/2000, concerning the reorganisation of the National
Society of Natural Gas Romgaz S.A.
Romania has ratified the Energy Charter Treaty and the Energy Charter Protocol related to
the energy efficiency and environment related issues. Along with the signatory countries of the
Charter, the Romanian State expresses thereby its strong intention to remove gradually the barriers
(technical, administrative and other), which could hamper the commercial development of the energy
sector.
To implement the above-mentioned and to respect its Helsinki Summit commitments the
Government issued two key ordinances regarding the gas sector, already mentioned, namely:
Ordinance No. 41/2000 and Ordinance No. 60/2000.
The legal framework regulating ownership within the natural gas sector - according to that part of the
Charter Treaty related to energy resources sovereignty states the following:
The petroleum resources located in the subsoil of the country and of the continental
plateau of the Black Sea are the exclusive scope of the public property and owned by
the Romanian State;
The National Agency for Mineral Resources is in charge of administering the
provisions of the law;
The National Gas Transportation System is part of the public domain of national
interest;
The national gas distribution grids with related installations, constructions and lands
are part of the local public domain of communes, towns depending on the
circumstances;
The goods, activity and services related to the natural gas transmission and
distribution sectors may be attributed under concession, and following specific laws.
These provisions are in line with the mandatory terms of the Charter, related to the scope
of gradual liberalization of commerce.
7.4.2 Opening the natural gas market

Starting January 2002 the gas free market has been open at 25% of the internal
consumption 2001. This share would increase to 30% in April 2003 and reach 35% by 2006.
According to the different steps new eligible consumers will be accredited.
At the end of January 2001 the decision of ANRGN President to differentiate between
captive and eligible consumers was issue and published. Since this date all gas suppliers are
allowed to sell to eligible consumers only. Withdrawing the trading licence would sanction any other
action. The first eligible consumers were approved in August 2001.
To become eligible, a consumer has to demonstrate an annual natural gas consumption of
at least 5 Mcm / location. In addition he has to satisfy several financial criteria, as for example
liquidity, liquidity of social capital, profit rate, share of export. For each criterion, points are allocated
and summed up. All applicants then are listed in a file in the order of their points achieved. Based on
the countrywide total consumption of the previous year and the applicable degree of liberalisation,
the applicants will be selected according to their ranking in the list until their cumulated projected
consumption matches the natural gas volume available for eligible consumers. This procedure is
done once a year. For the year 2002 the degree of market opening was set to be 25%, representing
a total volume of about 3.77 Bcm of natural gas available for eligible consumers.
7.4.3 Regulation
At the beginning of 2001 through a Governmental Decision all three regulatory bodies of the
energy sector, namely the National Authority for the Electricity Sector Regulation, the National
Agency for Mineral Resources, and the National Authority for Natural Gas Sector Regulation,
were put under the coordination of the Ministry of Industry and Resources.
The National Agency for Mineral Resources (NAMR) is Romania's regulatory agency
responsible for monitoring and coordinating all mineral activities. NAMR was established in
1995 and is subordinated to the Romanian government. It operates on the basis of the
Petroleum Law and several Government Decisions, and performs the role of regulatory body
with three major tasks:
To administer mineral resources, especially to prepare the bidding rounds for

licensing new exploration blocks;
To negotiate concession contracts;
To regulate the sector and propose prices and transmission tariffs to the Ministry
of Finance.
NAMR is responsible for applying the Government strategy and policy in research,
exploration, development and protection of mineral resources and controlling how these
activities are carried out.
Government Ordinance No. 41/2000 established the National Authority for Regulation in
Natural Gas Sector (ANRGN) as a public institution, extra budgetary, under the coordination of
the Ministry of Industry and Resources. All natural gas operators had to make contributions in
assets, cash and in kind to set up the organisation and launch the activities of ANRGN.
The reason for creating this institution was the necessity to set up a system of compulsory
regulations at national level in order to implement a more efficient, competitive, and transparent
natural gas market with secure supplies. Protection of captive consumers and environmental
issues were also to be taken into account.
The Agency, created in January 2000, is responsible for:
Issuing, suspending and withdrawing authorisations and licenses;

Establishing rules on prices and tariffs and approving prices for end captive
users;
Approving technical norms regarding construction and operation of facilities in
the natural gas sector;
Monitoring the compliance with competition rules;
Issuing Commercial Regulations, which include definition of contractual
principles and rules to organise relationship between the economic agents
acting in the gas sector, to solve disputes and prevent the abuse of a position
of superiority.
As far as commercial regulations are concerned, ANRGN has issued and published the
following official documents:
Frame-contracts for supplying natural gas for captive consumers (Decision of

president of ANRGN No. 1/2000). These frame-contracts take into consideration the
provisions of Government Decision No. 784/2000 for approving Regulations for
granting authorisations and licenses in the natural gas sector, that is to say the
obligation for the service provider to obtain a supplying license from ANRGN. Only
legal persons, licensed, could conclude contracts with third parties. Supplying framecontracts is organised by consumer categories namely: residential, industrial,
commercial and local heating consumers;
Frame-contract for natural gas sale-purchase for eligible consumers (Decision of

president of ANRGN No. 3/2000);
Regulation for natural gas eligible consumers accreditation (Decision of president of
ANRGN No. 2/2000)
The following drafts have also been approved by the Regulation Committee and published
after previous certifying by the Ministry of Justice:
Performance standards for supplying service;

Criteria and methods for calculating prices and tariffs in the natural gas sector;
ANRGN envisages issuing a Commercial Code of the gas sector containing a set of
regulations harmonised with the EU regulations, especially the Gas Directive 98/30 CEE 9.
Creating a coherent set of rules harmonised with the EU Acquis Communautaire is a key
priority for the ANRGN.
Regarding the technical regulations approved by ANRGN, and having a special impact on
supplying natural gas, the Regulation for managing the natural gas National Transport System
(SNT) could be mentioned (Decision of president of ANRGN No. 52/2001). This regulation
establishes the general principles for managing the SNT efficiently and safely. It also deals with
the TPA, and confidentiality of the data related to this latter.
The ANRGN is the competent authority for all secondary legislation covering the natural gas
sector:
Regulating prices and tariffs;
Granting licences and authorizations for production, transportation, distribution and
storage of natural gas;
Publishing binding frame contracts for the gas industry. Frame contracts have
been published in the official gazette for:
Gas sales to:
- captive industrial consumers
- captive residential consumers
- eligible consumers
Providing:
- transportation service
- distribution service
- storage service
Buying and selling natural gas (applicable for suppliers and distribution
companies)
7.4.4 Brief history on legal aspects of distribution networks

1 Jan. 1975 - The networks and facilities for natural gas distribution are transmitted from
the property of County Popular Councils to the Ministry of Mines, Oil and Gas (article 1 HCM
(Ministry Council Decision) No.1718/1974). ; the physical transmission of the assets has been
carried out on a special transmission protocol basis. On the same date - two distribution
enterprises (legal entities) have been set up (Bucharest and Targu Mures) under the authority
of CGM Medias (Central Headquarter of natural gas). The state-owned distribution networks
are moved under the administration of the new enterprises.
16 Jan. 1991 - The State-owned Romgaz R.A. is set up, which undertakes the assets and
liabilities of the former CGM (Government Decision No.16/1991). Both the two new distribution
enterprises become subsidiaries and consequently the State-owned distribution networks are
under the administration of Romgaz R.A.
In 1995 Following Government Decision No.16/1991, art.32 (now abrogated) Romgaz
takes in charge the distribution networks financed with private funds from the municipalities or
other private legal entities. The property of these distribution networks still belongs to the
individuals or private companies that financed it.
Aug. 1998 the National State-owned Industry Romgaz Joint Stock Company is set up
(Government Decision No.491 /1998). The old Romgaz is transformed and the two distribution
operators become subsidiaries with legal entities of the mother company. The public assets of
the former Romgaz are administrated but not included in the social capital of the new Romgaz.
Government Ordinance No. 60/2000, art.17 and Law No. 463/2001, item 19 establish that
"natural gas distribution activity is a public ownership service of national interest".
Aug. 2002 - The "Instructions of functioning of the Commission for concession activity in
electricity and gas " are approved by Ministry Order No. 361/07.08.2002. This Commission is
set up under the authority of the Minister of Industry and Resources. The distribution facilities
network is of national interest the conceding authority is the Romanian state through the
Ministry of Industry end Resources (Commission for concession activity for electricity and gas
distribution). Gas distribution networks and the relating assets belong to the public ownership of
local interest- conceding authority being the state by Local Councils.
7.5 Gas pricing policy

In a Letter of Intent (17 October 2001) the Government of Romania described the policies
that it intends to implement in the context of the request for financial support from the IMF. In
this document the authorities mentioned that the performance of public companies in the
energy sector was crucial to improving the overall financial discipline in the public sector and
achieving a reduction in the quasi-fiscal deficit.
Regarding natural gas, at the beginning of every quarter (the process was launched on
1 October 2001), the uniform end-user price will be adjusted so as to keep it at the level of
US$ 82.5 per 1000 cubic metres established in August 2001. The authorities will allow this
price to rise to at least US$ 90 per 1000 cubic metres (as of 1 January 2003) to bring it closer
to import parity level, currently at about US$ 130 per 1000 cubic metres. In the meantime it is
envisaged to amend the taxation system in the oil and gas sector. Technical work on the new
tariff methodology, which will lead to differentiation of prices for household and industrial users
will be carried out.
To improve the collection rate for the two gas distribution companies - Distrigaz Nord and
Sud - following the recommendations of the World Bank experts, authorities decided to
implement the following measures:
-
As a prior action, a system of escrow accounts was established in October 2001.

The system receives customer payments and distributes the proceeds between
suppliers and gas distribution companies.
In both gas distribution companies special task forces specially trained, chaired by
high-level management officials, are in charge of improving collections and reducing
arrears from the 20 largest non-payers.
Clear instructions have been issued to management in State-run utilities to use cash
on delivery, letters of credit, escrow accounts, and disconnections as measures to
improve collections. Moreover political interventions in favour of non-paying
companies are no longer accepted. The overall collection rates for the two gas
distribution companies will be quantitative performance criteria under the programme.
As a longer-term solution for the problem of non-payment, the Romanian authorities

will push forward with the privatisation of the gas distribution companies, Distrigaz
Nord and Distrigaz Sud. To achieve this objective, the authorities intend to hire a
privatisation adviser; approve a privatisation strategy for both companies; and
announce an international tender for sale to a strategic investor, in the near future.
7.5.2 End-user prices

ANRGN started implementing a new system of prices and tariffs for natural gas in 2001. The
first stage of implementation consisted of issuing the calculation methodology, based on Cost
plus method. The second stage, ending in October 2001, resulted in differentiation of prices
and tariffs in compliance with technical solutions for feeding the consumers. ANRGN has
identified three key solutions for feeding the consumers:
Directly from the national transmission system

Directly from production systems (gas fields) of the producers, using direct pipelines
and/or small dimension distribution grids
From the usual distribution systems
According to this system, final consumers are supplied with domestic and imported natural
gas at a unique price, approved by ANRGN. This final price is calculated as a sum of
acquisition price (for both domestic and imported gas) and regulated tariffs for transmission,
underground storage and distribution activities. The price structure for the final consumers is
the same for all types of consumers (residential and assimilated, economic, industrial agents,
power and heating producers, chemistry).
The acquisition price is determined as a weighted average price paid by the distribution
companies to the domestic producers and to importers. The parties negotiate these prices, as
well as the contracted quantities. - The internal gas price is negotiable, according to the
Petroleum Law, while the imported gas price is established according to EU procedures, and is
conditioned by the evolution of the crude oil price in the Mediterranean Sea basin, which
changes quarterly or semi-annually. Once the unique national price has been published starting
with August 2001, the cross subsidies ceased. The problems start when the share of the
imported gas in the gas basket exceeds 25%. In that case the regulated price is close to the
one proposed by the gas producer, which is itself below the production price.
The methodology for regulated prices and tariffs calculation was promoted by ANRGN in
March 2001, published in the Official Gazette and revised during 2002. The evolution of natural
gas prices for 2000-2001 is shown in the following table:
Natural gas prices for end-users for the period 2000-2003

Month-Year
Exchange rate (ROL/US$)
Households
US$/1000 cm
Industry
US$/1000 cm
Jan-00
14,500
62.07
62.07
Jul-00
Sep-00
Apr-01
Jun-01
Aug-01
Oct-01
17,720
20,500
28,189
28,189
29,300
30,774
62.07
62.05
45.12
45.12
82.50
82.50
Jan-02/Jan-03
33,350
82.50
62.07
62.05
85.00
85.00
82.50
82.50 (2)
68.75 (3)
82.50 (2)
68.75 (3)
2) Regulated price for captive consumers connected to the distribution systems
3) Regulated price for captive consumers connected directly to the transmission system.
Social prices are applicable to consumers (families or single persons) with low and very
low incomes that is to say under the limit of minimal income ensured through law No. 416/2001.
Linked with the fall in operating costs in the natural gas sector, a 25% discount of the regulated
price is granted. In addition free volumes are offered following the period of the year (100 cubic
metre/month between April and September and 300 cubic metre/month between October and
March).
7.5.3 Taxes
Currently, the taxes and levies applicable to the gas sector are the following:
The current VAT standard rate is 19 percent.
A tax on natural gas, amounting to 7.4/1000 m3 (this tax is included in the final
price invoiced to all consumers);
A tax on the mineral resources exploitation activity of 3% from the achieved gross
production value;
A profit tax of 25% on the taxable profit;
In accordance with the Petroleum Law, the royalty tax levied on the achieved gas
production. This is negotiated for each gas field. The present average is 5-8% of
production value.
Finally, the Regies are obliged to pay to the State budget 45% of the net profit
achieved.
7.5.4 Tariffs
The transmission tariff, postage stamp type applied by Transgaz for the gas delivered to the
local companies and to the eligible consumers is regulated by ANRGN.
A tariff for services is established for each UGS facility. The resulting average tariff
mentioned in the graph below amounts to 21.8 US$/1000 cubic metres. This way of setting
prices prepares open access for the eligible consumers to the UGS system.
USD/1,000 cubic meters
Evolution for service tariffs in natural gas sector
25,00
20,00
15,00
10,00
5,00
0,00
01/01/2000
01/04/2000
01/07/2000
01/10/2000
01/01/2001
01/04/2001
01/07/2001
01/10/2001
01/01/2002
01/04/2002
Transportation tariff
Storage tariff
Distribution tariff for consumers connected within SNT
Distribution tariff for eligible consumers connected within distribution
Distribution tariff for captive consumers connected within distribution
In April 2002: Transportation tariff: 6.9 US$/1000m3

Distribution tariff for eligible consumers connected to the distribution grid: 13,74 US$/1000m3
Distribution tariff for captive consumers connected to the distribution grid: 17.24 US$/1000m3
8. Natural Gas in Low Income Areas of South Africa

Despite the relatively few natural gas resources of South Africa, significant expansion of the
industry is expected because of the relatively large natural gas discoveries in Mozambique and
Namibia. The World Banks Public and Private Infrastructure Advisory Facility (PPIAF), in
coordination with the Central Energy Fund ( CEF ) of South Africa, undertook a study, initiated in
September 2001, to assess the possible markets in low-income areas and identify a limited number of
natural gas supply projects, along the new natural gas transmission pipeline from Mozambique to
South Africa.
Supplying natural gas from Mozambique includes the construction of a new natural gas
transmission pipeline from the Temane and Pande natural gas fields in Mozambique to Secunda,
near Johannesburg in South Africa. The Temane and Pande natural gas fields are situated on the
coast in the southern Mozambican province of Inhamane, approximately 550 kilometers from the
South African border. The transmission pipeline will be approximately 895 kilometers, of which
approximately 345 kilometers will be constructed in South Africa.
The South African government sees a number of environmental benefits from the introduction of
natural gas through this pipeline. It also wishes to promote the use of natural gas for small
commercial consumers and households in areas around the new natural gas transmission line,
particularly in the nearby rural areas and black townships. Consultants COWI of Demark were
selected to undertake a study for the World Bank, regarding the possibilities of introducing natural gas
use in South Africa, beginning with an appropriate Regulatory Framework conducive to such
development.
Until September 2001, there was no explicit legislation and regulation of gas supply in South
Africa. Sasols activities were regulated according to the general commercial and competition laws as
the sole producer of low BTU manufactured gas from coal, and Egoli gas, the local distributor was
regulated by the Johannesburg municipal authorities in compliance with the Constitution of South
Africa.
The lack of specific regulatory framework for the gas sector has been an obstacle to promoting
investments in the sector. After discussions and negotiations, the South African parliament passed a
Gas Bill on September 27, 2001 and promulgated by the President of South Africa in February 2002,
which regulates the natural gas sector. The Gas Bill includes special agreements between Sasol
(Gas) and the government about commercial arrangements, pricing, and market protection for Sasol
for a period of ten years after introduction of the Mozambican natural gas, or first gas in South Africa.
The Gas Bill and the Agreement can create several obstacles to natural gas expansion in South
Africa. For example, the bill and the agreement give Sasol very far-reaching commercial rights and
market access. The bill also gives the power for natural gas sector regulation to two different
authorities, the existing National Electricity Regulator and, a new institution, the National Gas
Regulator. This arrangement can cause impediments and uncertainty.
Possible conflicts between existing distributors and reticulators are built into the bill, since the
agreement obligates Sasol to produce gas from the Mozambican fields, construct the pipeline,
transport gas to South Africa, use the gas as feedstock in the Secunda/Sasolburg areas, and sell gas
to consumers, distributors, and reticulators in South Africa. The conflict is clear in Johannesburg with
reticulation and distribution in the same geographical areas, but could occur in other areas as well.
The Agreement is unclear regarding the obligation to supply distributors and reticulators from Sasols
existing pipelines. Sasol expansion plans are unknown and not defined in the Agreement.
The Agreement imposes a price cap on Sasol to prevent Sasol from obtaining an excessive profit
from its dominant market position in the first ten years after first gas. The Agreement specifies prices
for different market segments, including government-backed projects, small customers, and
greenfield and brownfield customers. The maximum prices are subject to indexation by various
combinations of the South African production price index, world market oil prices, and steel prices.
This mechanism for indexation has caused the maximum prices to increase considerably in light of
recent oil price increases, and the depreciation of the Rand against the US dollar and has somewhat
undermined the competitive position of natural gas. This document examines how new projects can
be set up to avoid conflicts with Sasols rights and obligations with competitive pricing whilst making
gas accessible to new underserved markets.
To identify possible natural gas projects, six areas were visited in the Lowveld and Highveld
regions near Johannesburg. Interviews were conducted with the local municipal and district
authorities, to identify where the town planning authorities expect housing and business development
to take place in the future, including working with the local authorities to obtain data and make
recommendations regarding potential markets for gas.
Using information from the government authorities Integrated Development Plans for the coming
years, specific development points were chosen in each of the three Lowveld areas. According to the
municipal governments, these development points would constitute the areas with the highest
population density, highest per capita income, and the fastest growth in new housing and businesses.
Since the development points were situated along the main roads of these areas, the introduction of
natural gas along a line next to a road, would be the technically ideal way of introducing natural gas to
the areas. The results from the surveys of these development points, also represent other Lowveld
areas, as they encompassed household, commercial, and medium/large-scale industry.
In the Highveld areas, around the cities of Middelburg and Witbank, the settlement of people is
concentrated in one or two major townships situated close to the existing gas pipeline, presently
supplying coal gas to large industries near the two towns. The survey was conducted to cover the
townships which are situated nearest to the present gas pipeline, in the Witbank area, kwaGuqa and
Ackerville, and Mhluzi in the Middleburg area. The results from the surveys can be generalized for
use in other Highveld areas, such as Johannesburg, Carolina, and Bethal.
The household surveys found that:
The average household size is 4.68 in the Highveld and 5.00 in the Lowveld.
Most households are headed by men.
The monthly income of most households is below ZAR 1,500-2,000.
The average percentage of households served with electricity is 90 %.
Electricity is the main fuel for cooking and hot tap water, especially in the Lowveld. The
Highveld areas also use paraffin and coal.
Electricity is used for heating.
Electricity represents 76 percent of the energy consumption in the Lowveld, with 18 percent
coming from paraffin and very little coal is used in the Lowveld.
Electricity represents 57 percent in the Highveld where 38 percent of the energy consumed
comes from coal, where most households have a open coal stove.
40-70 percent of the households have ovens.
30-80 percent of the households have room heaters. The number of room heaters is
considerably higher in the Highveld than in the Lowveld, because of colder winters and lower
temperatures in general.
Geysers (hot water heaters) are not as widespread as the other appliances; only in Mhluzi in
the Highveld do 50 percent of the households have one. In the Nsikazi and Nkomazi in the
Lowveld, only 10-15 percent have a geyser hot water heater.
For the use of natural gas for household purposes, three consumer types were identified: (i)
those who would use natural gas for cooking; (ii) for cooking and hot tap water; or (iii) for
cooking, hot tap water, and heating. Because of the differences in climate, the last consumer
type is only to be found in the Highveld.
In both the Lowveld and the Highveld, natural gas in the household sector will compete directly,
primarily with electricity. Based on present consumption rates, natural gas can generate 2,986 kWh of
electricity in the Lowveld and 8,680 kWh in the Highveld in lieu of electricity. Currently, the electricity
price for household is between ZAR 29 and 39 ZAR cents per kWh, depending on the area and
consumer type. Since many households already have electric appliances available, many consumers
may be unwilling to purchase natural gas appliances unless new appliances are supplied at a very
low cost or free of charge. The connection fee for natural gas is also prohibitive and coal prices for
electricity generation are more attractive. An alternative price of natural gas based on electricity would
not make natural gas competitive for consumers presently using coal as a primary fuel.
Household energy consumption has grown by 2-3 percent per year and is expected to continue at
that rate. The growth in new housing developments concerns the local, district, and central
governments of South Africa. The one percent yearly growth rate in new housing is expected to
continue, creating a need to develop alternative energy sources that would include natural gas.
The commercial survey in small and medium enterprises found that 80 percent of the commercial
enterprises had less than five employees. The survey also showed that the enterprises considered
electricity their main source of energy. The types of businesses interviewed included:
shops and supermarkets

cafes and restaurants
hotels and hostels
bakeries and dry cleaners
garages, welding and brazing places
day care centres
schools and hospitals
other.
In the commercial sector, the alternative fuels are primarily electricity, paraffin, and bottled gas.
The use of natural gas can directly substitute for bottled gas and probably paraffin as well at only
minor equipment conversion costs. As for electricity, new natural gas equipment will be neededbut
at least for some uses, the efficiency of natural gas equipment is much higher than is the case for
electric equipment. This can, however, only be assessed for each individual business.
Another survey on medium/large scale industries in the Mpumalanga region near the gas
transmission pipeline was conducted to identify projects that can benefit low-income areas close to
the gas transmission pipeline. The survey evaluated the potential of the following uses of natural gas:
natural gas as a substitute for existing energy sources

industrial combined heat and power based on natural gas
establishment of a new, independent power producer (IPP) in one of the areas to supply
electricity at a lower cost than the present ESKOM supply to the rural areas, or to supply
peak load electricity to the ESKOM grid.
Only industries in the Lowveld were identified to be of special interest to low-income areas.
Industries in the Highveld along the existing pipeline are already (coal) gas consumers. Each of the
identified industries in the Lowveld were visited and interviews conducted with the technical
management. The identified industries included two sugar mills, one which includes a refinery, two
manganese metal manufacturers, and one pulp and paper manufacturer. The total energy
consumption determined for each plant helped evaluate the potential for replacement with natural
gas and for combined heat and power production based on natural gas.
In general, the industries visited showed a clear interest in switching and using natural gas in their
production processes, because of its inherent qualities, if the pricing of natural gas could be
competitive to the alternative energy sources. The efficiency gains from a high BTU gas as well as
the comparative environmental advantages of using natural gas instead of coal, were also
recognized.
The option of generating electricity directly from natural gas could establish a market niche, and if
the electricity could be generated at a lower cost than the present ESKOM supply price, it might also
create benefits for low-income areas. Concepts for independent power production are :
Direct generation Gas turbine or engine supplying electricity to a specific low-income area
and having the number of operational hours corresponding to the demand pattern specific to
each area.
Direct generation Gas turbine or engine supplying electricity to a specific low-income area
and to ESKOM having a maximum of operational hours larger than the demand in the areas.
Direct generation for peak load Gas turbine or engine with a minimum of operation hours
supplying the ESKOM grid on hours specified by ESKOM.
The industrial and power markets were evaluated to determine the benefits of switching to natural
gas. In most cases, the benefit for low-income areas was limited or unviable, since many of the
industries produce their own power. For example, the sugar mills generate electricity, partially or
wholly, from waste bioproducts such as bagasse economically and efficiently. Each of them has the
possibility to become an independent power producer (IPP) in the future and sell their production to
the market. The manganese manufacturing industry could use natural gas in place of coal, which is
used as the main energy source, along with electricity from the ESKOM grid. The pulp and paper
industry uses five different types of energy and can use some of the waste bark to produce heat in a
waste-heat boiler. They are restrained from becoming IPPs, because of the current electricity pricing
structure and market in South Africa. ESKOM offers only the marginal cost (ZAR 0.025 per KWh) for
IPP-produced power.
The visits to the low-income areas of Mpumalanga gave the impression that the commercial and
public sector market along the pipeline, both in the Highveld and in the Lowveld, although limited
could offer some potential for development. This conclusion is also the main result from the
conducted survey.
In considering possible projects for the introduction of natural gas, the report describes the
suggested distribution and reticulation system layout and the efficiency of different combined heat
and power technologies. It provides cost estimates of items included in natural gas distribution and
reticulation systems, including end-user equipment, gas motors, turbines, and combined-cycle
installations. It also compares the investment costs of natural gas distribution in the different areas of
South Africa. Its main finding is that direct generation of electricity using natural gas will not be
economically viable, as long as low-cost coal is available. It is in the markets which value the specific
qualities of natural gas over coal-gas, such as its high heat content, health and environmental
benefits, that present and future natural gas development can effectively compete.
The study also identifies some key issues that need to be addressed before the projects move
forward, such as how the implementation arrangement should be organized and what forms of
financial support would be required or made available for gas projects. Local governments could also
clarify their goals for introducing the use of natural gas, where health concerns and environmental
impacts are clearly an issue. The key drivers for the local government include: lower energy costs for
the citizens in the area; extension of service delivery to the population; contribution of the project to
local economic development; and improved local environmental quality and mitigating related health
issues. Discussions with selected municipalities found that lower energy costs for the consumers is
the key objective for the local governments and thus their main criteria, for supporting and promoting
the introduction of natural gas in low-income areas under their jurisdictions.
The role of private sector involvement in developing the natural gas sector also needs to be
determined. Private sector involvement can raise additional capital and increase the overall efficiency
of the sector. The efficiency gains are likely to more than offset the increased costs of capital and
other payments to the private sector. Proper incentives for private sector involvement would have to
be established so that they align with broader societal goals and common goods. Adequate measures
would have to be set in place to counter information asymmetries so the public sector knows the real
costs of providing the services.
Gas reticulation projects may be organized in a number of different ways with the involvement of
the private sector. The key aspects will concern which party will have the right to make the decisions
regarding the timing and extent of the development of the gas reticulation scheme. The responsible
party could be local authorities, a private investor, or some combination of the two. The involvement
of the public sector as shareholder in the private sector contractor would be a way of apportioning the
risk between the parties. The risk to the parties involved would be determined by the project
financing.
This assessment also led to the identification of a number of institutional as well as financial
obstacles for the introduction of natural gas both for small power production, for distribution and
reticulation. The key barriers are: low expected financial return; investment financing; industrial and
commercial risks; lack of experience with gas reticulation schemes, and transaction costs. The overall
framework and the support that may be available from the national level, to promote such gas
reticulation schemes must first be established to send the right signals to the market and generate the
interest needed.
The key drivers for the national government to promote the introduction of natural gas in lowincome areas should be the promotion of activities in disadvantaged areas; the generation of carbon
credits; the improvement of the environment in the residential areas; the diversification of local energy
supplies; and the promotion of competition amongst different energy forms.
The Study concludes that there are at least three generic approaches that could be used with
regard to national involvement, in the development of gas reticulation schemes in low-income areas.
These are:
(1) Supporting an individual project to ensure that the project will be implemented,
(2) establish a general framework for administrative and financial support to such projects, along the
lines of an incubator model which could be duplicated or
(3) become less involved and consider the development of natural gas reticulation in the low-income
areas as part of the overall development of a gas distribution market.
These generic approaches were tentatively assessed in regard to the relative scores on a number
of relevant criteria, aimed at judging the desirability of various initiatives in promoting natural gas
development in low-income areas. The assessment concluded that, although unit cost would be
preferable, if general development in the gas distribution market were awaited, the single-project
support approach would be best for timing. The incubator approach achieved the best overall score. It
should be noted that the scoring is only concerned with relative scores, that is the scoring would say
nothing about the overall desirability of the outlined options. It is worth noting that the identification of
a cluster of four or five possible pilot projects along the pipeline corridor, close to the Pretoria and
Johannesburg areas, is one positive outcome of the Study. Of these pilots, one or two will be selected
for a full fledged market study as a first step towards bringing natural gas to low income consumers.
The identified areas are very close to the pipeline route and often are already supplied with low BTUgas by SASOL. Switching to higher BTU gas would not only bring efficiency gains to local industry
and manufacturing but meet higher health and safety standards for household use, by making natural
gas available for domestic uses, including heating in poorer households, in the Highveld in lieu of
coal. Cities targeted for the market study include Witbank and Middleburg which could provide the
two pilots and where domestic space heating by open-coal-stoves, has led to a high concentration of
lasting air pollution in the townships and a severe increase in respiratory diseases amongst the local
residents, whose social and economic cost is not fully evaluated. The market study would help
identify one or two pilot areas in the cluster, to be targeted for specific development. The market
study would also determine the willingness and ability to pay for gas as an alternative fuel to coal and
that targeted customers are also able to pay for the gas.
The Market Study would also determine from these pilots, what measures are needed to
overcome the main barriers to development of the natural gas sector in the poorer areas. Specific
measures to improve financial viability could include direct targeted subsidies, determining their level,
source, design and duration could be identified with local or national authorities. Different financing
options would also need to be developed including soft loans or grants for equipment and burner
switching to higher BTU gas. Gas distribution and reticulation schemes typically have large up-front
capital costs and a gradual build up of the market. Substantial loan financing will be required to
implement new gas reticulation schemes. The required financing will depend on the level and form of
available subsidies. Reducing or changing the allocation of risk would increase the projects
attractiveness to private investors. Building capacity, reducing transaction costs, and educating
consumers and installers would further enhance the viability of natural gas development projects. The
knock on effect on gas related employment opportunities such as billing and collection, equipment
maintenance and support services, leading to further local development of Small and Medium
Enterprises (SME) through the expansion of the natural gas grid to unserved townships, would be an
obvious added benefit to the targeted communities.
9. PROBLEMATIC OF SMALLER CUSTOMERS MARKETS DEVELOPMENT

9.1 Evolving role of the government in the gas industry
It is often considered that the "correct" role of a government is to focus on the needs of citizens and to
provide what individuals and business cannot. Government involvement in economic activities must
be driven by the needs of national development and the imperatives of social equity.
In the specific field of energy the following topics (the list is not exhaustive) at least should be
addressed by governments:
Provide infrastructure for private sector-driven economic development,
Ensure that all citizens have access to basic services such as water, communications and
energy,
Modify market outcomes to provide for a more equitable distribution of production and of
the benefits and costs of externalities,
Develop domestic resources and local economies
Considering the life-cycle of the gas industry, the following stages may be identified, as for other
industries :
Introduction or embryonic stage
Growth stage
Mature stage
Decline or more appropriately "decontrolled" stage.
Governments should permanently adapt and re-evaluate their role in accordance with the maturity of
the market.
Introduction stage
Growth stage
Maturity stage
Decontrolled stage
Characteristics
Few competitors
No or little regulation framework
No or little infrastructure
Local and limited market
Monopolistic entities
Role of government
The government should be prepared to
act both as investor and as regulator.
Most of the projects are not selfsupporting and need some help
especially in financing and regulation.
The potential investors are looking for
some reward for taking risks, investing
money and expect a fair return and a
secure pay-back period. In some cases,
due to the lack of private investors, the
government would have to be the first
investor.
High return on the projects
Foreign and/or private investors are
Increasing private and foreign attracted and consider a commitment in
investment
the development of the gas industry.
Clear regulation
The result is that the government is
Price regulation
expected to promote a clear pricing
Development of infrastructures
structure that allows transparent pricing
Regional market
and competition.
Intense competition
The government will look for increasing
Fewer projects
competition and a decrease in prices. It
Decreasing rate of return
will foster and encourage competition
Strong competition
and will look to improve end-user
benefits. The trend is that monopolies
are tending to disappear, profiting direct
competition.
Deregulation
No government intervention is needed.
Eroding margins
The industry and end-users are mainly
Market segmentation
expecting, that the market operates
fairly and that the competition is not
distorted. The market is free.
As we can see, the role of the government is evolving. But the general trend is that governments
are increasingly turning to outside and/or private investors to meet their countries' growing energy
needs. At the same time, they are switching from the position of infrastructure developer and
regulator, to that of competition instigator.
In conclusion, we consider it essential that governments should act in order to:
Create an enabling environment for private investment;
Segregate the functions of sector regulation and operation;
Help make sector entities fully autonomous;
Establish a regulatory framework;
Rationalise prices;
Reduce system losses;
Improve efficiency;
bearing in mind that they must evolve from an investor and regulator role to an efficient market
promoter role.
Government role
Market scale
Mature
Growth
Decontrolled
Embryonic
Time
Cameroon
Brazil Argentina
Poland
Romania
Here after there is a short description of the varied roles that governments play in the
development of the natural gas sector of the countries selected for this report.
Argentina
The natural gas sector has been privatised and deregulated since 1993. Six private firms account
for about 85% of natural gas production. Three private companies carry out gas transportation. The
downstream sector is organised into eight geographical areas, each of them being assigned to a
distribution company that have exclusive right to develop the distribution network.
Law 24076 enacted in 1992 set a regulatory framework and an independent body, ENARGAS
has mandate to adequately protect consumer rights, support competition and encourage investment
to ensure long-term supply.
Before the crisis Argentinas natural gas market, in the hands of the private sector was close to the
competitive model. Since devaluation and halt in debt payments have been declared in January 2002,
a reversal in economic policy is under way that could erode political support for free-market reforms.
The government is reinserting itself into numerous areas of via the introduction of a dual
exchange rate, capital controls and unilateral changes to the contracts of privatised utilities.
Brazil
In the recent years, the Brazilian government has begun reforms to accelerate discovery,
production and use of natural gas in order to enhance the diversity of the energy mix using the most
environmentally benign of the fossil fuels. The gas sector represented 5% of the total energy
consumption in 2000 and its legal and regulatory framework refers to the petroleum sub-sector.
The Brazilian government encourages domestic and foreign investment but the absence of a gas law
has created some uncertainty and insecurity, which deter potential investors. A specific legal
environment would formally set out the regulatory mandates, develop the concept of utility and
establish the obligations and rights of the industry stakeholders.
In 1999, as part of the Brazilians governments National Privatisation program, a gas concession
area in the south eastern state of Sao Paulo was granted to a consortium comprising of BG Group
and Shell.
Cameroon
The Cameroonian authorities have decided to create an environment favouring the development
of the natural gas and to stimulate activities related to its exploration and production. The New Gas
Code that is being introduced aimes to encourage investment through a simple, clear and stable legal
framework; and to protect large customers to facilitate the expansion of the gas market beyond
industrial projects.
The new legal regime institutes a Gas Regulator who under the responsibility of the Ministry in
charge of Hydrocarbons oversees the implementation and application of the new rules for the gas
sector.
Poland
Polish Energy Law, which came into force in December 1997, and related executive ordinances
take largely into account the requirements of the EU legislation related to the energy industry,
including natural gas. This law was amended on July, 24, 2002 in order to meet all the Gas Directive
requirements. Executive Ordinances are in preparation process.
On 29th May, 2001 the Government adopted the Guidelines for the Privatisation of the Gas
Sector in Poland The privatisation will include distribution companies and the exploration-production
company separated from POGC. The sale of a minority stake through a public offer is adopted for
privatising the exploration-production company. Regarding the the distribution companies their shares
will be first partly sold to strategic investors, later on object of a public offer and quoted on the
Warsaw Stock Exchange.
Romania
The comprehensive legal and regulatory framework related to the gas industry includes mainly
the Ordinance no. 60/2000 concerning the regulation of the activities in the natural gas sector and
the Ordinance no. 41/2000 related to the National Authority for Regulation in Natural Gas Sector
(ANRGN).
In June 2000, the Romanian government approved the reorganization of Romgaz, the stateowned gas utility, in order to comply with European Union regulations and to continue the
liberalisation of its energy sector. Following a Government Decision Romgaz was restructured into
five companies. In June 2001, two of them were merged into a single entity called S.N.G.N.
ROMGAZ in charge of exploration, production and underground storage activities. All companies are
subordinated to the Ministry for Industry and Resources. Starting with 2002, the Government intend
to launch the process of privatisation focusing on the distribution companies.
As of 1 May 2002, the free market (25%) is covered by 41 large eligible consumers whose take
off is over 5 Mcm / year / location. In April 2003, 30% of the market will be accessible to additional
eligible consumers.
9.2 Impact of an economic crisis on the energy sector.

For almost a decade the currency board in Argentina was considered a great success.
Nevertheless this country was forced to abandon the currency board arrangement after experiencing
a difficult situation. From this period of economic upheaval one can draw lessons for transition
economies.
By adopting a standard currency board arrangement, a country gives up the privilege of
conducting an independent monetary policy. This regime usually implies a hard peg to a reserve
currency, full backing by foreign reserves of the central banks liabilities denominated in national
currency, no central bank intervention on the financial markets and no central bank lending to the
government or to the banking sector. As a result, economic policy has no tools to influence GDP
growth, which is essentially driven by external demand and capital inflows. In this situation the shock
absorber effect provided by an adapted monetary policy is missing and all external disturbances have
to be cushioned by the real economy.
A rising external demand coupled with a surge of FDI inflows implies first, output growth for
meeting increased demand and secondly an expansion of foreign reserves which leads to boosting
economic activity through a fall in domestic interest rates. Similarly negative external shocks will be
amplified and bring about a downturn in the economy.
In Argentina after the introduction of the currency board in 1991, monetary stabilisation was
achieved and growth strengthened considerably, stimulated by a combination of capital inflows and a
relatively weak peso pegged to the dollar. Things started to change after 1997 when the economy
was hit by a series of external shocks starting with the Asian crisis and continuing to the present
global slowdown. The inflows of capital gradually dried up and moved into reverse. In addition, in
recent years the economy was adversely affected by the substantial appreciation of the dollar (and
hence the peso), which resulted in deteriorating competitiveness. The government then started to
experience problems with the servicing of the public debt (denominated in dollars and dominated by
short-term maturities); these problems were aggravated by the fact that the task of fiscal coordination
was complicated because local governments contracted a large share of the public debt.
The economy fell into a deep depression, as even very high interest rates did not success in
attracting external funds. Due to the aggravation of the situation, the risks perception of the potential
investors changed and their confidence was eroded. The severity of the fiscal problems, the looming
debt crisis plus the absence of timely policy responses from the authority were major factors in the
general crisis.
The impact of this situation on a highly capitalistic industry such as the gas industry has been very
strong and private natural gas companies operating within a competitive market have been
particularly challenged by Argentinas financial crisis.
Beginning in January 2002 when the currency board was abandoned and the peso devalued
(29%), utility companies acting in the country started registering losses. As the authorities decided to
freeze the tariffs and said the companies must bill their clients in pesos, the situation worsened
leading many of them to announce sizeable losses or debt default in 2002. Foreign firms envisage to
limit their engagement in Argentina because the devaluation of the peso has compromised the
economic balance of agreements signed at the time of privatisation.
9.3 Gas supply

Among the countries selected for this study Argentina is a net exporter (to Brazil, Chile and
Uruguay), Cameroon could export gas to its neighbours; Romania and to a less extend Brazil and
Poland have domestic production so they have to import only a part of their consumption.
Currently in the South America the most important natural gas reserves are located in Argentina
and Bolivia within the Mercosur and in the Venezuela and Trinidad and Tobago in the north. In both
areas energy integration is implemented and networks of gas pipelines and cross-border power
transmission lines expand. As countries, which are mostly dependent on hydropower such as Brazil,
Chile and Columbia, intend to develop gas fired power plants several pipeline projects linking
production zones with consumption centres are envisaged and will create an integrated regional
market for natural gas. In addition a Brazilian LNG terminal would complete the system.
The way these projects will develop depends on the economic situation of the countries acting on
the regional gas markets and subsequently on adequate investments but also on the gas discoveries
carried out in South America as a whole, because it has not yet been extensively explored for gas.
Gas producing countries should install structures favouring a sustainable development. In some
economies having the bulk of the budget revenues coming from hydrocarbon sector it has not been
necessary to develop efficient banking and fiscal systems intended to collect savings and granting
credits. It is very difficult for a country that benefits from this type of revenues to success in
diversifying its economy. Implementing a classical liberalisation policy is necessary but not enough.
Key actions such as liberalisation of sectors having an export potential, clear separation of public and
private sectors, restructuring of banking and fiscal systems, and implementing series of political and
economical reforms are needed to favour the development of a competitive non-petroleum economy.
The import dependence of central European countries is likely to rise from about 65% to 85% by
2010. The problem of import dependence is compounded when countries have to rely on a single
outside source of gas. For historical and geographical reasons, almost all the gas imported in the
central European countries, to supplement domestically produced gas, comes from the Russian
Federation.
So far, the Russian Federation has been a secure and reliable supplier of natural gas to both
central and eastern as well as western European countries. Since deliveries began thirty years ago
there has been no major interruption of gas supplies. The conclusion of long-term gas contracts with
clear supply and offtake obligations reduces uncertainty and is seen by central European countries as
a way to enhance security of supply. But despite the reliability of Russian gas supplies, the desire of
these countries to diversify their sources of supply is understandable. It is an attempt to minimize
risks through diversification because unintended accidental disruptions can occur. Moreover
diversification of gas supply/routes also helps to realise the full potential of the gas market. The
ongoing process of raising end-user gas prices to economic levels in the area is likely to help supply
diversification.
All components of the gas chain have responsibilities or influence in the security of supply, in
particular customers themselves. The nature of gas utilisation, the functioning of the market, the type
contracts, and the level of prices determine the gas demand.
The security of supply has a global cost including: costs related to take or pay clauses, to
storage, to transmission overcapacity etc: The gas prices have to reflect this cost, in order to allow
the consumer to make rational decisions. Electricity-driven gas demand should lead to adequate
tariffs probably more complicated than the present ones. In the same way tariffs will have to
remunerate the avoided costs if any.
The gas companies shall maintain a market structure allowing balance between all short term
and all long term. Long-term contracts remain a basis for minimising the risk for the various
operators but secondary markets and spot markets should allow matching efficiently supply and
demand on short term. In an open market, large consumers should have the economic choice to sell
their gas or their transmission capacities back to the market, thus increasing the supply available to
others.
Some utilisations of the natural gas create new opportunities with high added value (in terms of
energy efficiency, protection of the environment) and minimal impact on the short-term security: air
conditioning, gas for vehicles. The development of such new markets should stimulate new gas
supply projects with a positive impact on long-term security. On the other hand, new offers such as
multi-energy offers, storage services, forward and future should contribute to a demand side
management enhancing the short-term security of supply.
9.4 Gas pricing

The gas prices, particularly to households, are below the economic level in almost all transition
economies. Moreover the ratio of industrial to households prices does not correspond to that
observed in developed market economies. The difference between current prices and economic
prices is covered by subsidies. The long-term objective of the necessary pricing reform should be to
remove price distortions. The correct (energy) gas prices provide market signals that motivate
consumers to use gas efficiently, particularly in the residential sector. Because of low gas prices and
non-payment of bills gas producers and distribution companies often incur commercial losses.
Consequently necessary maintenance, investment and modernisation do not take place. Price reform
would allow the sector to become profitable, which would attract domestic and international capital.
The population should be informed of plans to reform gas prices in a timely and effective manner.
It is important to explain why the reform is necessary and beneficial for society and the economy as a
whole. People need to understand that the price of all products, including energy related ones,
should reflect production and distribution costs as well as a reasonable profit to cover the cost of
capital. Consumers should also be persuaded that prices reflect only those costs that are related to
the supply of the energy service in question and that the relevant costs are as low as possible.
It should also be made clear that prices will be raised gradually and that the most vulnerable
segments of the population will be protected. Key issues that policymakers must address include
establishing criteria for determining eligibility for support and the mechanism for providing that
support. The regulatory body responsible for pricing should take care that the logic behind pricing
and the frequency and timing of price changes are widely known and understood. Predictability of
prices is necessary to make it easier for utilities and consumers to plan ahead.
Government interventions in the (energy) gas sector may constitute sources of subsidies to
producers or consumers such as direct financial support (e.g. transfers, accelerated depreciation
allowances) or indirect administrative initiatives (trade instruments, price controls). Consideration of
subsidies and their reform must take account of taxes since they offset the effect of subsidies on
price.
In many instances subsidies are counter-productive because the costs of distortions they
generate outweigh the benefits.
Subsidies harmful effects are listed here after:
Subsidies often lead to higher consumption and waste, exacerbating the harmful effects of
energy use on the environment;
They can place a heavy burden on government finances, worsen the balance of payments
and weaken the potential for economies to grow;
To the extent that they reduce returns on investment and cash flows, they can undermine
private and public investment in the gas sector;
They do not always end up helping the people that need them most.
The primary goal of subsidy reform, therefore, should be to minimize the harmful effects while
maximizing the benefits by changing the subsidy mechanism and/or reducing the overall size of
subsidies. Eliminating subsidies completely is justified when they are clearly harmful to the
environment or impede economic development and trade while bringing minimal social or local
economic benefits in the long term.
Energy-subsidy reform needs to be undertaken as part of a broader process of economic and
institutional reform. This is especially important in the transition economies. Economic reform, aimed
at restructuring the energy sector and the economy as a whole, should involve placing more
emphasis on the market, removing trade barriers, encouraging private and foreign investment and
reorganizing state enterprises. In the long run, competition can help to reduce energy supply costs
and, therefore, prices, which would ultimately help to reduce the need for subsidy. Institutional reform
involves reorganizing public structures and bodies in order to improve governance of the energy
sector. Sustaining financial discipline in the public budget and state enterprises, including
enforcement of payments, is a vital component of economic and institutional reform. Non-payment of
electricity, gas and district heat bills, an implicit form of subsidy, remains a major problem in some
transition economies.
There may nonetheless be a good case for retaining subsidies in specific instances, especially
where they are aimed at encouraging more sustainable energy use. One could mention measures to
improve poor or rural households access to modern, commercial forms of energy. But the way in
which a subsidy is applied is critical to how effective it is in meeting policy objectives and its cost.
10. LESSONS AND CONCLUSIONS

The main feature of the gas sectors activity is that decisions related to the future have to be
taken and huge investments realised. Consequently the development of the gas industry has to be
conceived according to a long-term policy perspective and in a stable macroeconomic environment.
Stability and growth imply a careful fiscal policy in the long run and a favourable investor climate to
attract Foreign Direct Investment. Choosing a monetary regime as the currency board which,
supposes a loss of degree of policy freedom lead to evaluate potential long-term risk in case of
external shock and assess whether the long-term benefits of this arrangement justify the implied longterm costs.
If, by political decision, the competition is introduced in the gas market by reorganising and
transforming it, markets actors involved that is to say gain chain operators and consumers, should be
able to work within a stable, transparent, and reliable legal framework covering all the related
domains concerned by the gas business. The secondary legislation to implement this legal framework
has to be created and exhaustive. A really independent Regulator should be responsible for efficiency
and transparency of the market, monitoring of tariffs and compliance with competition rules. He
should also solve disputes and prevent abuse of a dominant position.
The most important initial step in reforming gas pricing is to move away from an approach based
on ability to pay philosophy towards one based on cost of service. Nevertheless the introduction of
cost-based tariffs should be seen as a transitional move.
In the long run, the goal should be to move to market-based pricing though the introduction of
competition in the wholesale and retail supply. In this way, the free market would determine the price
of the natural gas, with price being free to rise and fall in response to scarcities and surpluses.
Market mechanisms provide a system of price adjustments to signal where resources are required
and where they are not.
Governmental authorities have to find an appropriate balance between reliance on the market
and intervention to address social and environmental policy goals. These stated goals have to be met
at minimum cost using efficient processes involving taxes and subsidies. There is no single right
approach or model to designing or reforming subsidy policies. Every country needs to take account of
national and local circumstances. These include the countrys own policy objectives and priorities, its
stage of economic development, market and economic conditions, the state of public finances and
the institutional framework. Experience shows that subsidy programmes and their reform should meet
the following key criteria: well-targeted, efficient, soundly based, practical, transparent and limited in
time.
The expansion in gas demand for power generation can be explained by the convergence of
several factors: opening-up and liberalisation of the gas and electricity markets, lower investment
costs and shorter lead times for the construction of gas-fired power units, rapid technological
efficiency improvements of gas turbines, and heightened concerns about the environment. This trend
will result in a growing convergence which may occur in two directions: gas producers going
downstream into gas-based power generation or power generators looking for their own gas
procurement base. This type of projects leads to envisage a specific approach including regional
integration of both gas and electricity networks.
The central and eastern European and CIS countries have a unique historical opportunity to
reduce the overall energy intensity of their economies and improve the efficiency of energy production
and use. They are currently in the midst of transforming their economies and implementing broadbased reforms at both the macro and sectorial levels, including the rehabilitation and modernisation of
their energy infrastructure and facilities. Energy saved can delay the need for new additional sources
of energy supplies, including imported energy, and thereby enhance energy security. For the
economies in transition, this is an economic as well as an environmental imperative.

Report of Working Committee 10: "Gas and Developing/Transitional Economy Countries"

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Report of Working Committee 10: "Gas and Developing/Transitional Economy Countries"

Uploaded by

Copyright:

Available Formats

22nd World Gas Conference June 15, 2003 Tokyo, Japan

Report of Working Committee 10

Rapport du Comit de Travail 10

3. REPORT OF STUDY GROUP 10.2

Domestic Market Development

Deregulation and privatisation of services

Regulation and pricing in gas business in developing/transitional economies

WOC 10 and SGs

Members / Contributors 2000-2003

WOC10 Chair. in 2000

Report of Study Group 10.1

The Blue Stream Project;

the Blue Stream Project :

The ASEAN Pipelines Seen from Gas Importing Economies :

The Pipelines Projects to Croatia:

The International Gas Pipeline Russia-Turkey:

7 The Gas Supply Contract

The International Gas Pipeline Russia-Turkey:

Le gazoduc international russo-turc : le Projet Blue Stream .

Fig. 1 Overall View of the Pipelines Routes

Max Depth = 2,150 m

2. Technical Description of the Project

Table 1 - The "Blue Stream" Pipelines

The Turkish onshore section

2.2 The Russian On-Shore Section

2.3.2 The Pipelines

Internal pressure containment;

External pressure resistance;

Geotechnical, geomorphological and bathymetric characteristics of the regions traversed by the

The Pipeline Installation

Pipeline Integrity Analyses

Russian upper slope pipe partially spanning;

Russian lower slope pipe in contact with the seabed;

Turkish slope pipe embedded.

Pipeline Repair During Construction

2.4 The Turkish On-Shore Section

Compressor Station: the requirement of an intermediate compressor station will be

3. The Scheme and Sources of Financing

under the SACE coverage for an amount up to 278 million US$;

3.3 The off-shore section

Note: numbers are rounded

Structured Finance Scheme

The project is fully financed by BOTA equity.

4. The Project Participants

6. The Turkish Gas Market

* Starting date mentioned in PSA.

6.3 The Turkish Gas Infrastructures

7. The Gas Supply Contract

8. The Gas Transportation Contracts

9. Conclusions and Suggestions

Co-ordination between upstream and downstream activities (resulting in uncertainties on the

Permits (difficult and slow to be procured);

Fiscal aspects (slowness in obtaining tax exemptions).

9.2 Experience and Prospects

The Italian and Japanese financial support;

The capability to completely solve new and challenging technical problems;

9.3 Economic Impact on the Countries Involved in the Project

the implementation of gas supplies to meet Turkeys energy demand;

as the implementation of international gas projects involves the participation of several

to use strict tender bases for choosing every contractor/supplier.

ASEAN Pipelines Seen from Gas Importing Economies

Les gazoducs de lASEAN

ASEAN Pipelines Seen from Gas Importing Economies